Introduction:
The rule concerning Riba has been expressed in both Quran and haddith.In Quran there are several verses condemning the evilness of riba. Reported by ibn e Abbass (Sahih Bukhari Hadith 6.67) the last verse of Quran was about Riba.
Quran clearly prohibits Riba but because Prophet Muhammad passed away without explaining it, As It is reported by Umar ibn Al Khatab, "I wish that the Prophet had not been taken from us until he had given us a satisfactory explanation of Riba.'' so this is still a controversy issue among Muslim jurists and scholars, Whether the term Riba and interest or usury are the same in meanings or different.
But majority of Contemporary Muslim scholars are agree that Riba Interest or usury is the same in meaning and implementation. It has been further classified in two main categories such as Riba Al-Fadl and Riba Al Nasia and there are arguments that one might be allowed and one not. However due to limitation of work we would keep ourselves confined to the general definition of Riba, which is the undue advantage on behalf of other which is forbidden
Definition of Riba
The grammatical meaning of the noun Riba is Yarbu_rubuwwan-riba, means grow and increase. Riba is translated in English as usury or interest but It has much more broader meanings. In simple term it can be defined as advantage obtained by a lender as a condition of loan. The literal meaning of riba is addition,expansion,or growth.In sharia'a context Khalil (1990) states, " refers to the premium that must be paid by the borrower to lender with the principal amount as a condition for the loan or for the extension in its maturity''
Chapra (n.d.) defiened Riba as any unlwafull addition ,by way of interest to a sum of money or good lent by one person or body of persons to another''
2.2 PROHIBITION OF INTEREST
Interest (Riba) has been condemned by, all the Holy Scriptures of the world in one way or other. Quran and Bible have warned us against its usage. For example, in the Holy Quran, ALLAH Most High says, "That which ye lay out for increase through the property of (other) people, will have no increase with Allah: But that which ye lay out for charity, seeking the countenance of Allah (will increase): it is these who will get a recompense multiplied" (Yusuf Ali, 30:39, 2000). In another verse, "That they took riba (usury), through they were forbidden and that they devoured men's substance wrongfully - We have prepared for those among men who reject faith a grievous punishment" (Yusuf Ali, 4:161, 2000). Moreover, "O ye who believe! Devour not usury doubled and multiplied; but fear Allah, that ye may (really) prosper." (Yusuf Ali, 3:140, 2000).
"Those who devour usury will not stand except as stands one whom the evil one by his touch hath driven to madness. That is because they say, 'Trade is like usury.' But Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge). But those who repeat (the offence) are companions of the fire, they will abide therein (forever)" (Yusuf Ali, 2:275, 2000). "O you who have attained faith! Remain conscious of God, and give up all outstanding gains from Usury, if you are (truly) believers" (Yusuf Ali, 2: 278, 2000). One of the most popular translations of meaning of the Quran translates the meaning of verses (Yusuf Ali, 2:278-279, 2000), thus, "O ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are Indeed believers", "If ye do not, take notice of war from Allah and His Messenger: but if ye turn back, ye shall have your capital sums; Deal not unjustly, and ye shall not be dealt with unjustly."
It is not only in Islam that such strict verdicts have been issued for interest but infect every major religion Judaism, Christianity and Hinduism, whose followers constitute two third of the world's population, have also done the same. The Bible disapproved of interest severely and did not recognize any distinction between usury and interest (Hasting, pp. 551, 1957). Individuals who took interest were wicked and could not, be allowed in communion or Christian burial according to the Third Lateran Council (1179) (Hasting, 1957). The Talmud compared the moneylender to a murderer and the Mishnah disqualified him from giving evidence in a court of law (Hasting, p 558, 1957).
There are several verses in Bible, which clearly condemn the presence of interest both in lending and borrowing The term used for Usury (interest) in Bible is Neshek, which is infect much stronger than the word used in Arabic meaning to strike a serpent.
Even in the present world many of the great economists, if not totally against the interest were definitely of the favour that it should be kept to minimum. It would be surprising to note that Adam Smith who is recognized as the father of free market capitalism was strongly in support of controlling usury (Jadlow, pp. 1195-1200, 1977). Though he opposed the prohibition of interest but was of the view that this ceiling of interest would ensure that those low risk borrowers who under take socially beneficial investment would not be deprived of funds (Smith, pp. 339, 1937). Keynes was of the view that rule and custom and moral law should be used to keep the interest rate down (Keynes, 1936).
Margaret Kennedy (pp. 44-46, 1995), a German professor at University of Hanover, one of the most vocal contemporary critics of interest believed, "interest….act like cancer in our social structure." Modern socio economic reformists such as Douglas (1924), Fischer (1933), Simons (1948), etc were all of the view that it was completely wrong to give banks the monopoly to the creation of money or credit creation process. In addition, to charge interest on money which at first place, have been created out of nothing, having suffered no cost or sacrifice was nothing less than immoral or fraudulent activity.
Economic Impact of Riba
This strong view against Riba is not just that these religions or philosophers were against Riba but in fact it is not beneficial for the society and the economic impact of an interest based system can be very severe. Some of the aspects of riba have been discussed below
Riba as unearned income
Analysis of the literature has indicated that the first objection against interest is that it is the unearned income and no labour has been put to earn this income. The latern council of 1515 clearly expressed such a view of church. Islam also holds a similar view for the prohibition of interest by saying that money cannot be created by money unless it is put to some labour as money itself has no intrinsic value it is just seen as a contravention for realizing the value of good in real exchange (Kazrian, pp. 51-56, 1993). It might be that Aristotle had the same image in mind when he said "a piece of money cannot beget another and this is the rationale Ahmed use to argue why Islam "permits trade yet forbids usury" (Bank, al Baraka). As in case of interest, you do not have to put any effort and the rate is fixed. According to a research scholar Azeemuddin (2009, pp. 17), "the interest on loan is intra -active where the growth measurement agent is single thus a growth of similarity and hence an incursion in the divine domain."
Thus, it can be said that Usury marks a distinction between money being used as a means of instrument for the store of value, as a means of exchange or as a social commodity in itself or in other words not a means but an end in itself. Where latter is the case it disturbs the honest process of living by earning by one's own effort and compromises the true dignity and full reward of labour. This is what Keynes felt according to his Biographer Skidelsky (pp. 55-65, 1992), "that at some level too deep not acknowledged by mathematics that 'love of money' as an end not as a means is the root of the world's economic problem."
Riba as an Exploitation of Needy
Another allegation against interest is its exploitative nature, and it has been condemned in every time and every religion. The Judaic biblical passages in Exodus and Leviticus depict the same meaning (Judicia, pp. 20-26, 1971). In Indian tradition, it is evident from this twentieth century quote, "It is usury the rankest the most extortionate most merciless usury, which eats the marrow out of the bones of the marrow (cultivators) and condemns him to life of penury and slavery" (Jain, pp. 26-28, 1929). In Quran, various verses depict the same theme as well. Usury not only exploits the poor but in fact, it is the exploitation of a lender by the borrower because as in the pre-Islamic times, the lenders exploited the rich traders or entrepreneurs. Even in the modern world, the third world debt crises that even Pope John Paul II (Pope John Paul, pp. 79-88, 1989) acknowledges in his Sollicitude Rei Socialis, when he states, "Capital needed by the debtor nations to improve their standard of living now has to be used for interest payments on their debts."
As a means of Unequal Distribution of Wealth
Another disturbing impact of interest is that it results in unequal distribution of wealth making rich richer and poor poorer in more badly conditions. Kennedy (1995) that relates to Germany in 1982 best portrays this phenomenon in some of his empirical work. She shows that while the poorest 2.5 million households paid net DM 1.8 Billion in interest, the richest 2.5 million received (net) DM 34.2 Billion. As described by (Choudhury, pp. 57-63, 1992), "Interest in any amount acts as transferring wealth from the asset less section of the population." The effect of this is much greater on poor and the gain to the richer people as with each payment of interest, their marginal utility loss increases, and this in turn, results in the overall utility of the economy. This is the reason; it is one of the strongest arguments against usury. In fact, we can say that any system claiming to be better than this should results in the better distribution of wealth.
Riba as a means of Economic Instability
It is important to note that according to New York times, the Federal Reserve has reduced the interest rates twelve times in the last three to four years, decreasing interest on inter-bank loans to lowest of 1.25% in last 40 years. In addition, in spite all its efforts, Federal Reserve has not been able to motivate investment volume. In contrast, high degree of interest rate volatility creates uncertainty in investment market dragging entrepreneurs to short-term contracts. This result in steep rise in short term borrowing that plays an important role in destabilising financial markets. As in the words of Milton Friedman, "the reason for turbulence in the financial market is the erratic behaviour of interest rates" (Friedman, pp. 89-97, 1982). Even Keynes, the campaigner for interest-based monetary policy, admits the fact, "the rate of interest is not self-adjusting at the level best suited to the social advantage but constantly tends to rise too high" (Keynes, pp. 33-37, 1936).
Banking based on riba
We use a simple example to explain interest and its connection to debt-based system. For instance, 500 units of paper money have been forwarded to borrowers on profit sharing basis. The maximum all the borrowers would have to pay would be 5oo units and no opportunity exist for a bank to make money but with a 10% interest the amount to be repaid would be 550 and it makes the system commercially viable. However, this stipulation directly leads to what is the most disturbing feature of interest-based system. If the repayment at the end of year is 550 and there is still 500 available where would the extra 50 would come the answer is obvious it will have to be created either under the state or the banking system making it obvious why a repayment of debt leaves a society in a greater debt. If the banks created sufficient money to repay yesterdays debt, we enjoy a healthy or inflationary economics and if they do not recession or deflation will eventually arise.
Islamic solution to the potential threat of riba:
Islam on the other hand condemns this interest-based system and provides its own version to mitigate the problems generated by the debt based system. It not only condemns riba as a term but as a true sense prohibit exploitation in every sense. Islam on the contradictory to interest based system introduces profit and loss sharing which require both the financier and the entrepreneur to equitably share the profit as well as loss. It follows a basic principle of 'no risk, on gain. It does not view money as a substance, which can be bought or sold for profit. By denying money the role of commodity Islam ensures that financier, generate money only by purchasing equity share in business by introducing his capital. This only one change in concept helps in ensuring that money flows to that venture which is more viable rather than to projects, which offer the greatest collateral. The result of this is greater economic growth and better distribution of wealth generated.
Islam favours the production through participation, increased consumption rather much lavish spending or collecting money (or near money) by affluent for savings/investment. Abu Darr companion of the Holy prophet was of the opinion that it was not proper for a Muslim to accumulate wealth beyond his family need. He asserted that the surplus over genuine expenses should be spent by the rich to improve the life of their less fortunate fellow beings (Chapra 1982 pp 212) In this way, Islam tells the way towards improvement of spending thus raising level of living of poor and middle class people.
Objectives of Islamic Economic system
Islam covers every aspect of human life, whether it is his individual life or his mutual life, it provides specific set of rules and guidance for each aspect of life, and expects the humans to follow them whether it is regarding wealth creation, use of wealth, or other contractual agreements. In addition, these set of rules are quiet strict and bit different from other forms of rules and laws followed by others. Islam is the religion whose sprit is social. It does not prescribe individual salvation but rather strive for salvation by serving the humanity. It tends to create peace and harmony, justice and equality, and restoration of human life through purification of inner soul known as Tazkiya Nafs.
Islamic Instruments of financing
Islam does not only define objectives of its Islamic economic system but also explains the acceptable modes of transactions by which those well-defined objectives can be achieved. Some of its important modes of transactions are discussed below.
Musharaka
Musharaka is an important mode of financing. It is known as partnership where the institution and client pool in their assets and share in the business profit or loss according to the agreed condition. In cases where small clients lack cash, then their machinery, labour, or rent of the building is considered as the share. This is the most flexible and useful mode of financing and has a great potential to reduce poverty creating jobs and results in fair distribution of wealth by providing the skilled workers the necessary stage to groom
Mudarabah
Mudarabah (profit and loss sharing), is applicable to both deposit and lending side. On the deposit side, provider receives money from depositors, invests this money, and shares any profit or loss with the customers. On the lending side, the provider lends the entire capital to the entrepreneur, and the entrepreneur shares the profit or loss earned with the provider. This mode can result in reducing poverty unemployment, and achieving maximum utilization of resources as both the parties would be participating actively as the provide will have to monitor their investments and borrower more closely to ensure truthful reporting of profit and losses. Depositors will have to choose their institution more carefully to ensure their money is invested prudently.
Murabahah
Murabahah is the Islamic version of equal profit where no one is hurt or damaged during business transactions. Murabahah is a cost-plus contract in which a client, wishing to purchase something like equipments or goods, requests the Islamic bank to purchase the items and sell them to him at a cost plus declared profit. By this technique a party needing finance to purchase, gets the necessary finance on a deferred payment basis. The finance provider does the purchasing of the required goods and sells them on the basis of a fixed markup profit. Thus the need for finance of the one in need is met.
Salam
Salam refers to the sale of commodity whose delivery would be at future date. Thus, it is a sort of transaction where cash is transferred to the seller in advance so that he can meet up his expenses. This sort of financing is quiet helpful for the farmers so they can have money in advance for their cultivation to meet up the expenses and buy pesticides
Ijara
Ijara is similar to a conventional lease. The bank buys the asset for the borrower and then leases it out with a rental fee. The bank maintains ownership of the asset during the life of the ijara and must provide for its maintenance. The borrower does not have the option to purchase the asset, except in the case of a Ijara wa Atina, where this is stipulated at the start. The ijara is mainly used for customer financing of cars, housing and equipment.
Muzar'ah/ Agricultural Finance
In muzara'ah the bank finance the farmer to product the crop or can provide land. The harvest is shared among bank and farmer on pre determined ratio.
In conventional banking the bank charge a fixed interest on loan provided for the sake of farming. The book by Qureshi on Islam and the Theory of Interest (Qureshi l946) looked upon banking as a social service that should be sponsored by the government like public health and education and agriculture.
Qard-e-Hasana (Benevolent Loan or Interest Free Loan)
This is a loan extended on the basis of goodwill, and the debtor is only required to repay the borrowed amount only. However, the debtor may, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditorQarz ul Hasana is the essence of Islamic banking. It is what actually Islamic banking depicts interest free loan for poor farmer's students and other members of society on easy instalments.
Zakat:
Islamic economy always puts full employment as the first priority. Also, Islam is a religion which degrades and prohibits unwanted or unnecessary consumption. for both of these two reasons, one could say that consumption loans are not a big issue, but if a family or an individual found him or herself in need, there is always the Islamic tax on fixed assets (Zakat) to provide for any consumption or human need. Zakat is a 2.5% tax on fixed assets. It is paid annually to people in need. Zakat is a practice in which every Muslim who enjoys excess wealth must pay to fulfil the Islamic obligations.
Conclusion:
Islam does provide a very comprehensive solution to have a just and prosperous society without the evilness of riba.
In his article prohibition of interest, does it make sense? Chappra (n.d.) states: "It may be seen that greater reliance on equity financing has to be an indispensable part of the strategy of any system which wishes to actualize the humanitarian goals of need fulfilment, full employment, equitable distribution of income and wealth, and economic stability. The reason why capitalism has not been able to realize these goals effectively is not because its goals are not humanitarian or the people in capitalist countries do not have the will and the resources needed for this purpose. The primary reason is the conflict that exists between its goals and its strategy. The goal are humanitarian, originating from its religious past, while the strategy is social-Darwinist, based on the concept of survival of the fittest. It relies primarily on the rate of interest for allocating financial resources. This gives an edge to the rich and leads not only concentration of wealth but also a rise in conspicuous and wasteful consumption. This hurts the realization of goals. It also contributes substantially to the prevailing instability in the international financial markets.''
Taji al-Din(n.d.) suggests : "the reason is the restriction in circulation of wealth to the circle of those who already have it. Lenders would not provide loans to those they believe are unable to repay; thus such wealth would be restricted to those able to service the debt. The effect on society is to confirm the accumulation of wealth among those who have it, and so to increase the gap between the rich and the poor.
Islam is religion of peace just and fairness we can conclude on the basis of literature discussed above that interest is the main evilness of the conventional economy and modern banking system. Unequal and unfair distribution, consumption and utilization of economic resources creates huge gap between rich and poor. Increasing Rate of interest is a big hurdle for economic growth of needy people or organizations. And Riba is pivot around which whole financial system revolves. In order to gain fair economic growth it is vital to eliminate riba from currnet financial system ,as Shariah also prohibits Riba in all of its form. Islamic economic system promotes compassion and it discourages self-centeredness. Islamic Shariah promotes Charity and forgiveness. Profit-sharing is promoted by shariah. The banking system given by Islam is the best in the world and solutions and rules given in Quran and Hadith are the right and according to the needs of the time and these should be followed.
For the Islamic financial system to function perfectly and produce all the benefits mentioned, the participants of the Islamic financial system have to be Islamic, they have to adopt the Islamic way of life, and reduce the lavish and wasteful expenditures. Strive for truth, justice, and having passionate attitude towards their fellow brothers.
