There are several categories of muslims in Pakistan: (1) non-practicing (liberal); (2) indifferent; (3) ordinary; (4) practicing; (5) intelligentsia; and (6) conservative. The vast majority falls under the categories 3 and 4, while the first two and the last two categories are in a minority, individually as well as collectively. While the first three categories are least interested in Islamic financial issues like the prohibition of riba (interest), the last three categories are interested in the issue but do not adequately understand this important prohibition. All the categories share one thing – confusion on the definition of riba.
Confusion on what riba stands for is ubiquitous. Most imams and khateebs of mosques would not be able to elaborate it further than saying that it is “sood” (Urdu for interest). Even some great Islamic scholars from the various schools of thought in Pakistan would not be able to differentiate between the prohibited riba and the permissible trade.
Many of those educated people who claim to understand riba opine that interest paid and charged by banks is not prohibited. For them the raison d’être of the prohibition of riba is exploitation of the weaker party to a loan, ie, the borrower. Even some scholars think that charging interest is acceptable in inflationary environments.
It must be clarified here that the raison d’être of the prohibition of riba is not exploitation in its general form and meanings but a specific injustice that arises from inequality of payments. To understand this point fully and appreciate what is prohibited in Islam, it is important to define the prohibited riba first. In a transaction between two parties, when an asset (commodity, currency or even shares of a company) is exchanged with an asset of the same genus in unequal quantities, whether on spot or with deferment of payment from one party, the difference in quantities exchanged is considered as riba, which is prohibited in the Holy Quran. This is the definition of riba, which is in line with the opinions of jurists of all times, from the first generation of Muslims to the present times. There are several points to be noted in this definition.
1. Riba happens when one asset is exchanged in unequal quantities in a contractual arrangement. Thus, if Omar exchanges one kilogram of wheat with Ali who in return pays two kilograms of wheat to Omar, the transaction involves riba. However, there is no riba in trading. A trade is a transaction between two parties whereby one party exchanges an asset (eg, a commodity) for another asset (eg, money) paid by the other party. In a trade, at least two assets are involved; one is considered as an object of sale and the other is considered as price. There is no incidence of riba in trades even if the assets are exchanged in unequal quantities. Thus, if someone exchanges one kilogram of wheat with someone who pays two kilograms of dates in return, the transaction is a legitimate trade.
2. Riba is a quantitative concept. In economics, we say that it is a nominal concept and not a real concept. Islam favours quantity (numbers, weight, size etc) over quality, taking an objective view in order to minimise disputes in transactions. Thus, if someone exchanges two ounces of 18 carat gold with another person for less than two ounces of 21 carat gold, the transaction involves riba.
3. Riba is not just about the time value of money, ie, it is not correct to assume that riba takes place only in transactions that involve payments (by at least one party, ie, a borrower) to exchange 110 rupees of old currency notes for 100 rupees of new currency notes. This is something many people do on the joyous occasion of eid, attempting to give eidi in new currency notes to children. This is an obvious example of a spot transaction involving riba.
4. Given that riba is a quantitative concept, it is not acceptable for a moneylender to receive from a borrower more than what he lent because inflation increased during the loan period. Therefore, indexation of loans is not acceptable in Islam.
5. It must be emphasised that a pure exchange of money for money is acceptable in Islam only on a spot basis and in exactly equal amounts. Lending money in the form of qard hasan is acceptable as an act of charity, ie, allowing the borrower to use the money for a period until he is able to return it. No charge for the use of money is allowed in Islam.
These are only a few main points about riba, the prohibition of which is one of the strictest in Islam, as the Holy Quran equates charging and paying interest to entering into war with Allah and his Prophet (may peace and blessings of Allah be upon him).
The writer is a shari’a advisor to a number of banks and financial institutions and can be contacted at [email protected]
your whole article, a complex academic analysis, seem misconception and confusing for a lay man. pl tell people whether national saving schemes /certificates, stock exchange business and other fixed income deposit schemes are riba and if so what is alternative for those millions widows, retired personnel, sick /disabled who run their kitchen out of these saving / investment schemes.
This article raises more questions than it answers. Based on the points alone, the Islamic thing to do with any extra income is to just consume it right away and maybe keep some under the mattress or perhaps buy gold and land (which increase in value due to short supply but don't do anything productive or create jobs). This is what most people do anyway in this country. So i guess we should be pleased about our low level of saving; it is because we are Islamic.
@m. aslam ch
this article does a bit of touching the subject….but largely bull for the common man for whom it is likely intended.
yes….. tell the common man what he wants to know about all the issues listed above and insurance schemes….they will be better informed on these daily issues.
tell the fresh IBA or LUMS graduate whether he can get a job in bank, whether he can do stocks…stop this beating about the bush.
The subject of RIBA is quite a divisive subject and is confusing for many people as is apparent from the above comments. I have tried to give a very brief account of the problem — so much more can be written about it in greater detail. Mine is a précis. In the interest of your readers you should find space to enable your readers to think aboutbthis important subject.
It is not the Quran that has defined RIBA as any increase over the principal, it was the scholars 1200 years when there was no banking to compare with. Apply the verses Al rum 39 , AlImran 130 and AlBaqarah 275 to 280 and 282 . RIBA is vividly described as exploitative, rapacious, doubling and redoubling your property, seeking to take over the borrower's property and contrasted with charity in which is great merit . Itbis advisable to remit the RIBA and the principal altogether.
Do alitle maths–at 50 % 1000$ becomes 8600$ in 5 years while at 10% bank interest it is only 1610 at compound interest. The difference is quite clear.
Banks allow one to invest whatever little we save whenever we can to keep money in use giving us and the country's economy a profit. Banks cannot exploit it's customers– it does not gain by taking over a failed business or a house to block it's capital.AlBaqarah talks about giving and taking credit indicating that business was being carried on as before with the preexisting rules.
Perhaps many people do not know that AlAzhar university, a prestigious Islamic centre, issuedva fatwa in 2002 that banking as at present constituted was permissible and was not RIBA and previosly declared government and other saving bonds acceptable.
(AlBaqarah verse 282 above)
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