The Differences between Riba and Interest

The word ‘riba’ as appearing in Holy Quran is translated in English as
‘usury’ by some translators and as ‘interest’ by few. In Arabic
language, it literally means an "increment” or “excess" but in essence
it means unfair advantage or unethical gain, which is prohibited by Allah
(swt). For instance giving RS. 4800 for change of a RS. 5000 currency
note would be riba, even though there is neither interest nor
increase. Usury is not only unfair advantage but also excessive and
wicked charge of interest and is condemned by Bible and Quran as also
other faiths.

The Muslim economists, bankers and insurers who have intensely studied
Quranic verses and hadiths find that among most of the ulema (clerics
of Islam) and jurists of Islam considerable misunderstanding and
misconceptions are found about banking interest and insurance. Quran
like Bible prohibits usury and refers it as a kind of Riba.

Conventional Bank Interest and Profits

Banks provide a variety of financial services much different than the
greedy and professional moneylenders and pawnbrokers of ancient times.
Governments and laws lay down stringent requirements for their solvency
and paid up capital and monitor and regulate their operations.

When the bank pays you interest on your deposit they pay you out of
their overall profits. When the bank charges you interest on the loan
they charge it as the substitute for profit that they would otherwise
make by investing in share market, real estate etc. Al Azhar's verdict
for paying pre-determined profit (interest) is apparently based on the
principle of pooling the overall profits of the bank on all types of
investments plus their own flat fees for account handling, lockers,
guarantees, monetary transfers etc. instead of the cumbersome and
expensive procedure of sharing profits and losses under each
transaction of debt separately. But Al Azhar's plea for Qarze Hasana
(loan without interest or obligation to repay) to the poor and needy,
is not commercially viable and only philanthropic and charitable
institutions could do that or the government can do that on the lines
of social security benefits for poor in US and Canada.

Bank interest rate about equal to or less than likely profit on
investment of the same amount as loaned cannot technically or logically
be regarded as taking unfair or unethical benefit and thus it cannot be
treated as usury/riba.

It may be noted that under the Shariah compliant modes of financing one
often ends up paying higher profits to the lender than the regulated
bank interest and the reason is said to be that risk of loss is there
for the lenders. In view of the modern risk appraisal methods for
granting loans and the laws that protect the interests of the borrowers
and lenders it can safely be said that modern banking as regulated by
the laws is serving the needs of the business and consumers in much
better way and more economically than any other method in history.

The Islamic theological research committee of Egypt's Al-Azhar
institute - seen by many as the philosophical center of the dominant
Sunni strand of the faith - has in the recent past voted 21-1 to
approve fixed interest rates or pre-determined rate of profit..

But orthodox ulema do not agree and forcefully rejected the Al Azhar
verdict. It would be recalled that the judgment of Shariat Bench to
abolish the interest dealings in Pakistan was not allowed to be
implemented by the Supreme Court of Pakistan and it was directed that
first the problem of inflation and reduction in purchasing power money
be found. Despite lapse over 5 years there is no solution and the
principal value of money as compared with gold, wheat and various
other commodities continues to regress.

Interpreting Verses of Holy Quran

004.161: That they took usury, though they were forbidden; and that
they devoured men's substance wrongfully;- we have prepared for those
among them who reject faith a grievous punishment.

The words "devoured men's substance wrongfully" indicate unethical gain.
Logically nominal bank interest can not be deemed to be devouring men’s
substance wrongfully.

002.278: O ye who believe! Fear Allah, and give up what remains of your
demand for usury, if ye are indeed believers.

002.279: If ye do it 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.

In verse 2.279 the words 'Deal not unjustly' refer to exploitation

003.130
YUSUFALI: O ye who believe! Devour not usury, doubled and multiplied;
but fear Allah; that ye may (really) prosper.

PICKTHAL: O ye who believe! Devour not usury, doubling and quadrupling
(the sum lent). Observe your duty to Allah, that ye may be successful.

SHAKIR: O you who believe! do not devour usury, making it double and
redouble, and be careful of (your duty to) Allah, that you may be
successful.

In verse 3.130 the words doubled and quadrupling are important in
arriving at the definition of Riba. Does it mean that until the riba
reaches the level of double and manifold it can be taken? Probably not
but it does indicate excessive charge.

The Nature of Usury at the dawn of Islam

In the following extract from Imam Malik’s Mutawat the practice of
usury as prevalent at the dawn of Islam is described.

Book 31, Number 31.38.84:

Malik related to me that Zayd ibn Aslam said, "Usury in the Jahiliyya
was that a man would give a loan to a man for a set term. When the term
was due, he would say, 'Will you pay it off or increase me?' If the man
paid, he took it. If not, he increased him in his debt and lengthened
the term for him “

Malik said, "The disapproved of way of doing things about which there
is no dispute among us, is that a man should give a loan to a man for a
term, and then the demander reduce it and the one from whom it is
demanded pay it in advance. To us that is like someone who delays
repaying his debt after it is due to his creditor and his creditor
increases his debt." Malik said, "This is nothing else but usury. No
doubt about it."

Please note that the above hadith does not distinguish between loan of
cash or goods.

Malik spoke about a man who loaned one hundred dinars to a man for two
terms. When it was due, the person who owed the debt said to him, "Sell
me some goods, whose price is one hundred dinars in cash for one
hundred and fifty on credit." Malik said, "This transaction is not
good, and the people of knowledge still forbid it."

Malik said, "This is disapproved of because the creditor himself gives
the debtor the price of what the man sells him, and he defers repayment
of the hundred of the first transaction for the debtor for the term
which is mentioned to him in the second transaction, and the debtor
increases him with fifty dinars for his deferring him. That is
disapproved of and it is not good. It also resembles the hadith of Zayd
ibn Aslam about the transactions of the people of the Jahiliyya. When
their debts were due, they said to the person with the debt, 'Either
you pay in full or you increase it.' If they paid, they took it, and if
not they increased debtors in their debts, and extended the term for
them."

Please note that the length of terms is not indicated but there is historical evidence that in those days the period varied from season to season and did not usually exceed one year or so for which almost 50% to 100% or even more increase is excessive. Further it appears that repayment of loan in
installments was rarely practiced.

Shah Nawaz Khan, ACII (London) retired as Executive Director of State Life Insurance Corporation of Pakistan and dealt with queries of Islamic Ideological Council about life insurance business.. For the past 15 years his articles have been appearing in Insurance Journal of Pakistan. You can email him <shah1936@yahoo.com>

For details of many of his article please visit:

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