Money, Riba, Usury and Interest
By Shah Nawaz Khan 
Retired Executive Director of State Life Insurance Corporation of Pakistan

Islam is “Din-e-Kamil” a perfect religion. Islam is also “Din-e-Fitrat”, a religion of the nature as its laws and commandments are in conformity with laws of nature. Islam is a complete code of life for salvation and welfare of mankind in this world and afterlife.  Famous English writer H.G. Wells (1866-1946) wrote: 

“Islam established in the world a great tradition of dignified fair dealing and created a society more free from wide spread cruelty and social oppression than any society had been in the world before”. 

Nature of Riba: The word ‘riba’ as appearing in Holy Quran is translated in English as ‘usury’ by many translators and as ‘interest’ by few. Literally ‘riba’ means “excess or addition”. The punishment (burning in the fire in hell) for usury is mentioned in Surah # 2 Al-Baqarah - verse 275 
after the verses advising charity and spending in the way of Allah. In verse 276, it is shown that Allah has blighted usury and made alms giving fruitful. Verses 278 & 279 order giving up what remains from usury or else have war with Allah and his messenger. Verses 280 to 283 of Surah 2 are also relevant to loans and agreements.

Nature of Riba is described and prohibited in Surah # 3 Al -i- Imran in verse 130. A painful doom is indicated in the verse 161 of Surah # 4 Al Nisa for those who take usury as also  those who devour people's wealth by false pretenses.

In Surah # 30 Ar Rum - verse 39, it is indicated that charity is rewarding manifold and usury has no actual increase.

When delivering the last sermon at Hajjatul Wida, the Holy Prophet abolished all usury.

Although usury is condemned in Christianity and Zionism, in 7th century it had become a lucrative business as poor and needy could not find any other way except to acquire goods on credit from greedy traders on exorbitantly high rates of interest. It was a cruel exploitation of the needy that was abolished by Islam. 

Hundreds of articles and books have been  published during the last century. The majority view of the experts, scholars and Ulemas (at home and abroad) remains that the interest as employed in the modern banking and financial institutions is "riba" which is forbidden in Islam. 

The view of very small minority is that banking interest is not riba and must be regarded as the price paid for use of money and a business deal. 

Before you form your own view after studying the verses of Holy Quran and Hadith please consider the following example.

Zaid acquired a loan of RS. One million from his friend for building a house. At that time the gold was worth RS. 50 per gram. The loan was treated as 20, 000 grams of gold and it was agreed that every year Zaid would give 1000 grams of gold and the loan would be repaid in 20  years. Examined in the light of different fatwas there is no element of Riba in this agreement and it is admissible under Sharia. 

On the same date Bakar is sanctioned a Loan of RS. One Million by a bank on the interest rate prevailing at the time and he has to pay the annual installment of RS. 90, 000. Thus in 20 years he would be paying over RS. 18 Lacs for a loan of RS. 10 Lac and the excess of over RS. 8 Lace is considered RIBA by many. (The annuity of RS. 90, 000 per annum would accumulate to much bigger amount than 18 Lacs depending upon the interest earned by the bank.) Supposing this was interest free loan for RS. 10 Lace with annual installment of RS. 50, 000 for 20 years, how the lender would be compensated for loss of purchasing power of money under the installments paid? Will it not be unjust? In verse 279 of surah 2 the need for justice for both the borrower and the lender is prescribed. Some people opine that an agreement under verse 2/282 can include compensation for use of money and that cannot be regarded as riba but this view is not accepted by the majority.  Is FSC is likely to accept this view in future? Some hope so.

Now let us examine the predicament of Zaid. He is experiencing the increase in the price of gold every year. In the 20th year his last installment of 1000 gram of gold would alone cost him RES. Lac in gold purchase and he ends up by paying over 35 Lacs in gold purchases to redeem his loan, which was worth only RS. 10 Lacs 20 years ago and the excess of 25 Lacs that he spent on gold cannot be regarded as Riba as what he has paid back is 20, 000 grams of gold. 

This example leads most of the people well versed with Islam and economics to believe that the provision for loss of purchasing power of the rupee cannot be regarded as riba as we are following "a managed paper currency system" without any backing of gold or other commodity which by itself a usurious practice. Only when the bank interest rate exceeds the real rate of inflation it  becomes riba. and abolishing banking interest before adopting the commodity backed currency system would be like putting the cart before the horse. When we understand the difference between the Monetary systems prevailing in the old days and the modern age, and how the Modern Monetary System can be regarded as exploitative, we can appreciate the logic of this conclusion. 
FIAT MONEY (PAPER CURRENCY WITHOUT ANY 
BASE) BY ITSELF IS NEW FORM OF RIBA as explained later.

Of course under the fiat system of money the banks and financial institutions can adopt the Gold conversion system as Zaid did for their loans and advances and other transactions but its administrative cost is quite great and control is also problematic. 
In many Western countries the Governments regulate the interest
rates and do not allow the banks to charge interest beyond the
prescribed limits.

The Shariat Appellate Bench of the Supreme Court on Dec 23, 1999, had upheld the judgment of the FSC, and directed the government to eliminate all forms of interest-based banking by June 30,  2001. On an appeal  the date was extended to Ist July 2002. But later on a review petition by United Bank on the instance of the Federal Government, the Supreme Court stayed the order of the Shariat Bench and directed the Shariat Bench to re-examine the issue of RIBA and how the problem of business use of money and inflation can be solved. So the issue is not finally settled in Pakistan but in many other countries Interest Free Banking is flourishing.

The view of very small minority is that banking interest is not riba and must be regarded as the price paid for use of money and a business deal.

This example leads most of the people well versed with Islam and economics to believe that the provision for loss of purchasing power of the rupee cannot be regarded as riba as we are following "a managed paper currency system" without any backing of gold or other commodity which by itself is a usurious practice. Only when the bank interest rate exceeds the real rate of inflation it  becomes riba. and abolishing banking interest before  adopting the commodity backed currency system would be like putting the cart before the horse. 

When we understand the difference between the Monetary systems prevailing in the old days and the modern age, and how the Modern Monetary System can be regarded as exploitative, we can appreciate the logic of this conclusion. 
 
 

Quaide Azam when inaugurating the State Bank  of Pakistan in 1948 had clearly advised to modify banking practices in accordance with Islamic ideals. And the State Bank and the subsequent Governments must be held accountable for their failure to follow the Quide's advice.

• Bring hardship to the masses by direct or indirect devaluation of currency or fluctuation in exchange rates.

• Harm financial interests of the masses or group of countries.