Interest (Riba) - the myth and reality

The most common definition of interest is that, “it is a fee paid on borrowed assets. It is the price paid for the borrowed money, or, money earned by deposited funds.” It is the return earned on an investment or the fee charged by the lender for the use of borrowed funds. The rate is usually expressed as an annual percentage of the principal and the rate is dependent upon the time value of money, the credit risk of the borrower and the inflation rate. Assets that are sometime lent with interest include money, share, consumer goods through hire purchase, major assets such as aircraft, and even factories in finance lease arrangements. The interest is calculated upon the value of the assets in the same manner as money. In simple words interest can be thought of as “rent of money”.

Interest is compensation to the lender for the risk of not being paid back, and for forgoing other useful investments that could have been made with the loaned asset. These forgone investments are known as the opportunity cost. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to obtain them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. The amount lent, or the value of the assets lent, is called the principal. This principal value is held by the borrower on credit. Interest is therefore the price of credit, not the price of money as it is commonly believed to be.

It looks pretty simple and self explanatory but yet in the Muslim world it is being plagued with controversy with many believing that it contradicts the Shariah. The controversy of permissibility or prohibition of the interest rate started in the colonial times, in the 19th century onwards, when banking institutions came to the Muslim world. The controversy first raged in Egypt. It is said that the Grand Mufti of Egypt, Muhammad Abduh, had permitted interest on postal savings though the fatwa issued by him is not available now. Today, many still ask if bank interest is prohibited in Islam. Most of the jurists maintain that it is not permissible, and Muslims should not accept interest on their bank deposits.

There are many religious scholars and economists who believe that interest (Riba) is not permissible in Islam because of the fixed return and the fact that there is no physical effort involved in it. This theory is only limited to interest earned from banks and not other forms of income which are earned without making any physical efforts like house and land rent, rent of machinery, rent of car, fixed return on investment etc.

Many religious scholars have termed not only such interest but also working in banks as forbidden (Haram). They have spread this believe in such an influential manner that many people now refrain from working in banks or financial institutions. They would prefer staying jobless, to working in banks or working on petty salaries instead of the handsome amount being offered by the banks. Primarily because their minds have been fine-tuned in such a way, that they consider earning a few far better than to earn more from an institution working where is supposedly believed as not permissible in Islam. While their theory is dead right, its application to only banks is questionable but if its application is in broader spectrum than it is laudable.

The hum word that is being most commonly used for interest is Sood which in Arabic means black color. Interestingly this word have no existence in Quran with reference to interest, instead there is word “Riba” in the Holy Book. The simplest meaning of the word ‘Riba’ is disproportionate profit. The proportionate profit is allowed, while disproportionate profit is forbidden, and this should be calculated by the basic common sense. And the decision about is left upon the human being, common man. It is a fact that every person knows and has a fair idea in his heart about what is right and what is wrong. Suppose, the purchase price of a commodity is Rs.5 but the shopkeeper sells it for Rs.15, he is earning disproportionate profit which is Riba. On the other hand, a shopkeeper is said to be earning a proportionate profit when, he sells a commodity for Rs.15 having purchased it at Rs.12.

The bigger picture of it can be; you need Rs.10,000 and the money lender lends you that on a condition that you will return the amount in ten months time and on top of it pay him Rs.1,000 every month in addition to Rs.10,000. In this case the principal amount will remain unchanged even though you are paying Rs.1,000 per month. All this will become a laborious and somewhat never ending task for the borrower. This Rs.1,000 per month against Rs.10,000 is disproportionate profit, Riba. And for some reason if you won’t be able to pay Rs.1,000 for one month, he will simply add one more month in the stipulated ten months time. If the nonpayment continues a little further and the amount stacks up, the lender will simply come to your house and demand the money. In the event of you failing to pay him the due amount he would start taking things away from your house. The intention of the lender was such from the very beginning to trap the borrower and get the benefit from him. The intention is also a very important factor of Riba, in fact it is the basis of it. In comparison to this when you get loan from the bank, the bank charges a certain percentage per annum on that amount as interest. The amount of interest is added in the loan, which is to be paid off in installments over the course of the term. This transaction cannot be termed as Riba as the bank is not getting any undue benefit from the borrower.

When you deposit money in bank, the bank informs you that you will receive 6% per annum profit on the deposited amount which roughly comes to about 0.5% per month. Let’s say you have deposited rupees hundred thousand, you will get rupees five hundred per month and rupees six thousand in a year with this percentage. If you are getting rupees five hundred per month against rupees hundred thousand from the bank, it is not disproportionate. No doubt there is one ethical element definitely present in this transaction; that you should be spending your money all by yourself and you should not have silently invested it somewhere. This contract can also be called silent investment.

The bank does not pay you interest out of their own pocket by keeping your money with them. They invest that money in running businesses and make profit from it, out of which a nominal percentage is given back to you. In nutshell, it is not that odd; the bank, the depositor and the third party all get a share of income.

It was not such a big issue but General Zia ul Haq created one by introducing the profit and loss sharing – non interest banking system. Though only the name got changed and the rest of the procedure remained the same but it was a great deception on his part and indeed a derision of Islam. He was responsible for spreading this erroneous belief throughout the world. Since that day till now we are all dwelling around this widely held tittle-tattle and blindly putting it in practice. No one really bothered to research on the subject. No one ever tried to question the theory.

Instead of carrying out research, Muslim intellectuals and economists came out with the concept of Islamic banking in the latter part of the 20th Century. A number of Islamic banks were set up in the Muslim and non-Muslim countries with a large Muslim population. In fact their practices are also questionable and fall in the domain of Riba as they charge extra money or high mark up in the name of Islamic banking which is unjust and disproportionate profit.

In a nutshell, Riba is nothing but disproportionate profit, demand and something of this kind and the person is largely aware of it consciously or subconsciously. It is not possible that a person commits Riba and remains unaware of it.

For example, a person buys a goat for rupees one thousand and nurture it for one year. After one year he sells the goat for rupees ten thousand and earns a profit of rupees nine thousand but since he had invested a year on it the profit earned would not be come under the clout of Riba. On the other hand, if a person purchases weed for rupees five hundred and sells the same for rupees five thousand. The profit he has earned on the sale of weed is disproportionate - Riba, because in this transaction he has done nothing in terms of personal effort and hard work. This Riba is termed as Haram (forbidden) and that is why it is being said that Allah Will erase it.

People deposit money in the banks because they know there amount will be more secure than it is in their houses. Banks not only keep the deposit but also give a very proportionate return as well. It is not justified to term this transaction as Riba. The opposite of Riba is Sadqa (charity) and Quran Has compared it with Riba. Although Sadqa (charity) is disproportionate but when it is given or taken no one seeks personal gains from it. When you give something as Sadqa (charity) the primary consideration is the resolution of problem. Suppose you have rupees five hundred thousand and out of which you give rupees fifty thousand as Sadqa (charity) thinking that the rest of amount will become safe. Even though it is disproportionate but you have not asked anything in return and Quran Has liked it.

As a matter of fact, donating Sadqa (charity) will result in an increase while Riba will affect a decrease.

The system of Riba is a personal thing and every individual is liable to making his own judgments that also content his heart both consciously and subconsciously. There is no need for the government to intervene in this matter by making laws, rules and regulation – this is not their job. If there is a fault in someone’s intention, he will be responsible for it not the government. So why waste time on the matters that really don’t concern them.