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 humayon@humayondar.com