In the name of Allah, the Most-Merciful, the All-Compassionate

 

"May the Peace and Blessings of Allah be Upon You"

 

   Bismillah Walhamdulillah Was Salaatu Was Salaam 'ala Rasulillah

          As-Salaam Alaykum Wa-Rahmatullahi Wa-Barakaatuh

1) Riba in Islam: Non-equivalence of interest and Riba

 

INTEREST is popularly defined as “price” of capital or more precisely as return, income, profit or dividend accruing to this important factor of production. Since capital happens to be the most heterogeneous category as well as a time-based factor, its rate of return namely interest rate has a wide diversity and a multiplicity.

Riba prohibited in the Holy Quran in clear terms refers to all types of illegal income and illegitimate earnings from sources such as corruption, bribery, fraud, and exploitation, rent-seeking and so on.

A comparative analysis of the two basic concepts namely interest and Riba as defined above could lead to a host of arguments establishing their non-equivalence. In the context of the on-going debate on the issue, nine important arguments are summarised in the discussion that follows.

First, interest is basically a measure and a barometer. In its broadest sense, it represents the premium which a borrower has to pay for using a specified amount of loan for a given period of time. Contrarily, Riba is primarily a malady or a social aberration which is measured by the degree of exploitation in any dealings and transactions between the two parties. In a specific sense, market interest rate can be used as a measure to judge that between a lender and a borrower which party has been exploited and by how much.

Second, interest is a parameter of the economic system, reflecting the reward of the services of a factor of production i.e. capital. Riba, on the other hand, is a phenomenon reflecting social imbalance or unequal exchange between contracting parties. If “interest” is abolished in the strict sense of the word, the society would lose one primary pricing parameter along with the allocative efficiency associated with all pricing parameters such as wage rate, rent and profit. When Riba is abolished, the community moves towards social harmony because it tantamount to elimination of the basic sources of economic imbalance, or “expropriation of surplus value” by a specific class in the community.

Third, interest is a rate or a datum, while Riba is a structure and a manifestation. Interest is the rate of discount which equates the prospective yield of investment equal to the present cost of the project in which investment is made. Riba at the micro-level reflects the element of undue advantage in one particular transaction or one activity while at the macro-level it is indicative of the aggregate or social “exploitation” plaguing the community.

Fourth, interest is one of the legal norms deployed in the conduct of all legitimate business as it is an integral constituent of all loaning transactions. Riba, on the other hand, represents all deviations from the normal business conduct. It is the sum total of all illegitimate activities or illegal earnings associated with such activities. Elaborating the contents of verse 39 of Surah Al-Rome, Abdullah Yusuf Ali defines Riba as “any increase sought through illegal means, such as usury, bribery, profiteering, fraudulent trading, etc. All unlawful grasping of wealth at other people’s expense is condemned” as it represents Riba.

Fifth, interest is a value-neutral yardstick which is used in measuring the fluctuations in the supply and demand for loadable funds or the relative scarcity of capital stock. Logically, high interest rates are associated with capital scarce economies and low interest rates with capital abundant and industrially mature countries. On the other side, Riba is a value- oriented concept because it is the generic name given to the “surplus value” enjoyed by one class at the expense of the other. Riba is not a function of capital stock; rather it is determined by the nature of the socio-political system and the ethic-religious values and norms practised by a community.

Sixth, interest being a contractual obligation, is linked to the future payment of debt. As the nuclear element of financial superstructure, it sustains the entire banking and loaning industry. Riba, contrarily, represents the violation of contractual obligations and the associated illegal profits and earnings. Riba is generally the outcome of the weakness, ignorance or lack of bargaining power of one transacting party which is abused by the other.

Seventh, interest is universally recognised as an important policy instrument of monetary management, price control and wealth distribution while elimination of Riba is a policy oriented target. All civilised societies, including the Islamic, are committed to eliminate all forms of Riba or social injustice but no civilised community would opt to abolish an effective instrument like interest. If elimination of interest is accepted as an objective, the resulting confusion between instruments and objectives could bring about tremendous loss of efficiency and equity.

Eighth, interest being a scientific ‘tool’, its usefulness and applicability relates it to positivism and pragmatism while Riba as a social phenomenon falls in the normative realm of theology and ethics. Because of these fundamental differences in the domains to which they respectively belong and the absence of criteria and standards common to both science and ethics, equivalence between interest and Riba cannot be established even, as a ‘prima facie’ case or on an ‘ad hoc’ basis.

Ninth, there are perceptible differences between interest and Riba in terms of their scope and mapping. Interest is germane to capital whether money or real while Riba is more extensive and comprehensive in scope as it can apply to any mode of payment and transactions. Thus Riba pertains not only to capital but also to wage payments, rent accruals and profit charges. Under this topology, an industrialist or a landlord who pays his workers less than their “due” share of wages, a businessmen or trader who fails to pay the taxes due to him and a doctor or a lawyer who charges “abnormally high fees” are all indulgent in the practice of Riba.

Furthermore Riba and interest can be differentiated from the point of view of dispensability. Riba can be eliminated from the society by conscious policy actions, but interest being a price of a factor of production namely capital, cannot be eliminated from the economic system. “Capital without a price” or “free capital” does not make any economic sense. That explains why none of the Islamic countries including Saudi Arabia, Pakistan, Iran, etc., has succeeded in removing interest from the economy even through the names like “mark up”, “rate of profit”, “rate of return on capital”, ”commission” and “profit-loss sharing” have replaced the simple “interest”. But it is high time for the jurists to shed the thin veneer of self-delusion provided by this practice of changing the nomenclature of interest and to accept that interest being the yield (return) on capital cannot be abolished under any circumstances.

Interest as a scientific concept or idea has grown along with development of banking and institutional credit and this has led to a gradual demise of “usury” which is one manifest form of Riba. Analogously, if interest is abolished, it must inevitably lead to a resurrection of the evil of “usury”. The observations on this issue made by Adam Smith in his chapter magnum opus “The Wealth of Nations” published in 1776, are highly instructive and perceptive:

“In some countries the interest of money has been prohibited by law. But as something can every-where be made by the use of money, something ought everywhere to be paid for the use of it. This regulation, instead of preventing, has been found from experience to increase the evil of usury; the debtor being obliged to pay, not only for the use of money, but for the risk which his creditor runs by accepting a compensation for that use. He is obliged, if one may say so, to insure his creditor from the penalties of usury.” (An Inquiry into the Nature and Causes of the Wealth of Nations, Volume I, Liberty Classics, Chapter IV, Page 356)

The author, Aqdas Ali Kazmi, holds a PhD in Economics from Boston University, USA, and has earlier served State Bank of Pakistan, CBR and Planning Commission. Courtesy: Dawn Daily

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2) What the Qur'an teaches: Qualities of the faithful

 

In the name of God, the Lord of Grace, the Ever Merciful

Whatever you are given is but for the enjoyment of life in this world, but that which is with God is much better and more enduring. (It shall be given) to those who believe and place their trust in their Lord; who shun grave sins and gross indecencies; and who, when angered, will forgive; who respond to their Lord, attend regularly to their prayer, conduct their affairs by mutual consultation, and give generously out of what We have provided for them. (Consultation, Al-Shura, 42: 36-38)

 As explained last week, true belief in God has a great effect on human life. To place one’s complete trust in God is something such a belief entails, but the Qur’an gives prominence to this quality: “(It shall be given) to those who believe and place their trust in their Lord.” This is indeed the first practical manifestation of believing in God’s oneness. A believer knows God’s attributes, believes in them all and is certain that no one does anything unless He wills and nothing occurs without His sanction. Hence, his trust in God is complete. Everything he does or refrains from doing is aimed at winning His pleasure. Such a feeling is necessary for everyone. It enables man to stand with his head raised high, feeling inner certainty, reassured, fearing no one, able to withstand adversity, full of contentment in times of ease. Yet this feeling is far more necessary to a leader who is eager to fulfill his responsibilities.

  “Who shun grave sins and gross indecencies.” Purity of heart, which ensures that behavior is free of grave sin and indecency is a product of sound faith. It is also a necessary requirement for wise leadership. No one can maintain purity of heart and then indulge in grave sins and gross indecencies. A heart that lacks purity is totally unsuitable for leadership: Its guiding light is obliterated by sin. Faith heightened the sensitivity of the first generation of Muslims enabling them to attain supreme standards. It qualified them to provide a leadership of unprecedented and unequalled qualities. They remain the model to be emulated by later generations.

 God is fully aware of man’s weaknesses. Therefore, He has set the mark that qualifies people for the position of leadership at shunning grave sins and gross indecencies, not ordinary ones. His grace ensures that minor sins will be overlooked. This is an act of grace that He bestows on us which should arouse our feeling of humility before Him.

 “And who, when angered, will forgive.” This quality, mentioned immediately after the implicit reference to God’s forgiveness of man’s errors and sins, encourages an attitude of mutual forbearance and forgiveness between people. It highlights a characteristic of believers, which makes them forgive when something angers them. Again we see the Islamic approach to human weakness. It does not require man to do anything beyond what he is capable of. God knows that anger is a natural human reaction and that it is not always bad. Feeling angry at something committed against God, faith, truth or justice is commendable and can bring about good results. Therefore, Islam does not forbid anger or consider it a sin. It recognizes it as a natural feeling, thus preventing conflict between man’s religion and nature. However, it takes man by the hand to help him overcome his anger, encouraging him to pardon and forbear. It further makes such forgiveness one of the important qualities of believers. It is well established that the Prophet was never angry at anything related to his own person. His anger, when it occurred, was only for God’s sake and was overpowering. Yet such a high standard was set by Muhammad (peace be upon him) who attained a high standard of greatness. Hence, God does not make this a standard that believers should attain to, but rather sets it as an ideal to strive for. What they are required to do is to forbear and forgive when angry, rising above the desire to retaliate, as long as this remains within the personal sphere.

  “Who respond to their Lord.” They remove all impediments that prevent such response. These impediments are within the human soul, created by one’s desires, aspirations and ambitions. When all these impediments are removed, man finds the way to God smooth and wide open. His response is then free of any restraint or impediment.

 The type of response is then shown in detail. The first aspect is that believers “attend regularly to their prayer.” Prayer is given great importance in Islam. It comes second only to the first rule of faith, which is the declaration of one’s belief in God’s oneness and in Muhammad as God’s Messenger. Prayer provides the bond between man and his Lord, and gives a practical example of human equality, with worshippers standing shoulder to shoulder in rows, with no distinction whatsoever between them.

 Perhaps this is the reason why prayer is immediately followed, in this instance, by the quality of consultation within the Muslim community, giving it precedence over the payment of zakat which is normally mentioned together with prayer. Thus, believers “conduct their affairs by mutual consultation.” As it is phrased, the statement makes consultation a characteristic that pervades every aspect of their lives. As we have already said, this is a Makkan statement made long before the establishment of the Islamic state. This means that this quality is characteristic of the Muslim community in all situations, even though no state or government had as then been established. In fact, the state is only a natural by-product of the Muslim community and its intrinsic qualities. The Muslim community incorporates the state and together they ensure the implementation of the Islamic code of life both at individual and society levels.

 For this reason, consultation was an early quality of the Muslim community and applied to a far greater area than the political arena. It is an essential aspect of Islamic life and a distinctive quality of the community entrusted with the role of leading mankind. Needless to say, it is a fundamental quality of sound leadership.

 

-Adil Salahi:

 Compiled, edited and adapted by Khalid Latif

 

 

 

 

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