Summary of 8.12 “Prohibitions of Riba (Interest) I”

The previous program continued the broad topic of production and productivity in Islam.’ After going through many program which showed Muslim’s attitude towards science and technology.’ We touched on some of the specific measures in an ideal economic system where there is a great deal of incentive or inducement for productivity.’ We said that this could be done in a variety of ways.’ One was land use and we indicated how Islam encourages reformation of land and to make use of it.’ The condition for keeping the land was to make it productive and useful to the community at large.’ Secondly, we began discussing the prohibition of interest in Islam as one of the things which induces productivity rather than curtail it.’ We started by saying that it is a myth to consider interest to be a precondition to any type of advancement in the economic system.’ We started looking at it from the point of view of Islamic Law and how it is clearly and unequivocally forbidden for the Muslim in the Quran and the Prophetic Tradition.’ We indicated that Islam was not the only faith which prohibited interest or usury.’ We also indicated that this prohibition is not restricted to excessive interest but any interest small or large.’ We indicated what the false analogies are that people make between trade and interest and we indicated why these are not exactly the same.’ Finally we said that the prohibition is not only in the matter of consumption loans but also in production loans because this kind of interest was already known and used when the Quran was revealed.

8.13”” Prohibitions of Riba ‘Interest’ II

Host: ‘What are the types of interest which were prevalent in pre-Islamic days?

Jamal Badawi:

Muslim jurists and historians divide them into two broad categories.’ One category of interest dealing that was prominent in the pre-Islamic days is called Riba al Nassia which means, as explained by Ahmad and Fakhr al Razi, is someone lending you an amount of money for a given term and when the term comes and one is not able to pay the lender says he will delay the loan for another year but one has to pay an extra amount.’ Similarly, if I sell you one item and say it is worth $1000 and you don’t pay it in the specified time so I say that I will delay the payment due date for a few months but that you have to pay me 10% extra.’ This type of interest is clearly and unequivocally prohibited in Islam.’ The second major category is called Riba al Buu’e which relates to the exchange of commodities or buying and selling.’ The most objectionable type which is analogous to the first case, which is absolutely prohibited, where one exchanges on commodity for another.’ For example I give you a certain amount of wheat and ask that when you return it you give me more and we are assuming the the items are of the same quality.’ This has lead to some confusion in the minds of some jurists.’ Some say that this is not as clear cut as the lending of money.’ Some even refer to a saying of the Prophet which emphasized the first type of interest but not this one.’ Some, but not many, including Ibn Abbas said that this type is not as clearly forbidden as the first one.’ However the great majority of Muslim Jurists feel that there is not much substantial difference between the two because as the Prophet indicated in one saying narrated in Bukhari and Mulsim when he talked about the exchange of commodities he insisted that it should be equal and anyone who asks for more is committing Riba.’ The other reason why I feel the majority opinion is more than justified is that if we open the door to some of it being permissible and some not people will open a back door to go around the law.’ For example if one wanted to avoid interest and wanted to borrow $1000 all I can do to beat the system is to buy 2 ounces of gold and lend it to you and when you pay it back you give me 2.5 ounces.’ This is playing tricks and instead of lending you money I am lending you gold and asking for more gold later on.’ This is why the Prophet said exchange must be of the same amount if it is the same type of quality.’ The question may arise if one wants to exchange a commodity of different quality.’ For example if I have a higher grade of wheat and you have a lesser grade of wheat then when we exchange these commodities what will happen?’ The solution is clear as the Prophet recommended.’ In order to avoid any doubt or any backdoors the best way would be to sell the good quality wheat and then one can turn around and buy the lesser quality wheat.’ Money here is used as the medium of exchange which would allow for justice and equity.

Host:’ Some jurists take a more lenient view for the use of interest, why is this?

Jamal Badawi:

We are not going to discuss the point of political pressure put on some jurists to give the verdict that their particular oppressive government may demand.’ This may be the case in some situations.’ Even if we assume good intention and lack of pressure, I think as Prophet Muhammad (PBUH) indicated that his Ummah will never have a unanimous view on things that are wrong.’ So there may be some humans who slip or make mistakes here and there even with good intentions but not the majority.’ Some leniency may be the result of some jurists who may be well trained in Islamic Law and Teachings but they may lack reasonable understanding of economics and how the economic system operates.”’ If we go to a jurist like that and one tells him that it is impossible for our country to progress if they strictly follow the rules of interest and if he gets the impression that it is impossible then he may use the rule in Islamic Law that allows for things if one is forced.’ This assumption is wrong in itself which were all discussed by Sheikh Abu Zahra.’ Again there is no reason why interest should be absolutely necessary for an economic system.’ There are better alternatives to interest.’ Some people may say that if one doesn’t take interest one’s money would be idol and lose value.’ No one said that Islam agrees with leaving money idol.’ It is not the idea of investing the money and getting income from it but rather how one invests it and whether there is sharing in prophet and loss or a set interest.’ Even among the rare jurists who may have taken a lenient attitude towards interest after expressing their opinion got strong rebuttals from other jurists and realized their mistake and kept quite and did not argue their side which is equal to withdrawing their position.’ In a relatively more recent case a person who published this view, particularly savings in the post office, it was reported that before his death he reversed his position on the topic.’ An honest Muslim would not try to seek a mistake by a jurist and take it while full knowing that it is not right.’ One has to look into the evidence and into the fact that it has been strongly rejected by the strong majority of jurists.’ It is quite impossible that God would forbid us from something that is absolutely essential for our lives (example: if God tells us not to eat).’ It is then impossible that the command not to deal with interest would contradict with basic survival and needs of human beings.

Host:’ Why has Islam prohibited interest?

Jamal Badawi:

The Prohibition of interest in Islam ins unequivocal there are no ifs ands or buts.’ If God knows our needs as humans and who reveals these teachings for the overall welfare of the individual, society and the world at large has forbidden this then there must be an awfully good reason even if we can not find them.’ First of all, the attitude of taking and giving interest is an activity which seems to reduce the feelings of compassion and sharing in society and tend to foster the attitude of greed and even exploitation.’ Someone may ask what about loans used for production?’ First, when an economic system is largely based on interest one will end up having a few individuals or institutions who have tremendous or disproportionate power.’ These are the ones who control loans and money.’ These individuals who are in control would not be motivated to be productive with their money in ways that benefit society because their wealth is already made.’ In this case they can be idol and just let money beget money which should not be the case which causes them to become disproportionally rich.’ When a few individuals get to this point it spills into the political system because industrial complexities and would exert political pressure to guaranty the protection of their particular interest.’ This can lead to political corruption.’ Second, as a principle that is both ethical and practical called ‘Alghulm bil Ghurum’ which means if a person is subjected to profit they should also be subjected to the possibility of loss.’ If a person can get large profit he should also be prepared to accept low profit depending on the achievement of the particular venture or enterprise.’ The ethical and practical side is not found when dealing with interest because when money is lent out the interest guaranties this amount regardless of the profit the enterprise makes and if it looses one must still get paid and if there is profit one does not get more profit.’ This is contrary to Islamic philosophy that people should equally share in profit and loss.’ The other aspect that relates to a verse in (2:275) which likens those who deal in interest as one who is touched by Satan.’ The possible translation of this could be the psychological torment and anxiety that people who deal with interest are subjected to.’ Anyone who has a house and their mortgage when up for renewal and how they were anxious about their interest rates going up.’ Many companies go bankrupt because the creditors are not willing to give them a chance.’ When one lends money to companies they don’t care what happens to the company because all you are concerned about is getting your loan back plus the interest that has accumulated.’ In this case if a company runs into some difficulty and if you are a share holder you wait to see what happens, if you are a creditor you don’t care how much damage happens to society and who gets his slip as a result of this and how much losses the company incurs when they sell their assets at very low prices so long as you get your money back.’ This again creates this difficulty and may be responsible for many cases of bankruptcy of viable enterprises which if were based on equal sharing of profit and loss could have survived and weathered the difficult period.’ Another aspect is that when loans are made available this way one will feel like they can take any loan they want if they are willing to pay the interest (exuberant or small as it may be).’ This may be an excess on expenditure on the part of the consumer.’ Many people do not behave wisely because they know they can get the loan.’ Many economists refer to this fact and how people are up to their ears in debt.’ The ease of money availability may cause people to make unwise decisions in consumption.’ Furthermore, when one has a few people controlling wealth, if they need money they borrow it from others, and others have no control as to the way the business is run; we find that there causes disproportionate power flow to fewer institutions which is no a very democratic approach.’ The point is that beside all of these difficulties and there are definitely better alternatives.

Host:’ What is the difference between interest and partnership?

Jamal Badawi:

There are two basic differences.’ First, when one gives something by way of a loan one is guarantied the interest payment plus the principle without participating in profit and lose.’ In a partnership one equally participates in profit and loss.’ If a company makes 20% prophet one makes 20%, if they make 5% one makes 5%, if the company has no prophets one makes no prophet and if the company has a 2% loss you will have a 2% loss.’ This is essentially different from a loan even if they lose they still have to pay principle plus the interest.

The second difference is that the control of the destiny of society is skewed.’ If one lends money he has no control whatsoever.’ If one has a share which is a form of partnership one has the right to be elected to the board of directors and in a sense the person shares in the decision making process.’ This can be called industrial democracy or production democracy which produces charing instead of putting power in a few people’s hand.’ There is a larger base in very crucial decisions which effect the community.’ Loans with interest are not the same as a partnership.

Host:’ Since Islam doesn’t encourage money to be sitting idol but given the prohibition on interest what are the alternatives?

Jamal Badawi:

Some people give the false impression that because Islam prohibits interest that it is against development and that everyone should keep their money which is a false notion.’ First, Islam encourages trade.’ The verse we sited in the previous program said that God made trade permissible and lawful.’ A person can invest on his own and if he does not have the capacity or enough funds he can opt for partnerships where they share in profit and loss.’ Third which some may call a sleeping partnership which is when a person has access to money but doesn’t have the skill to participate in the venture.’ This type of partnership is known as Kirad, which is when one agrees to contribute capital while the other partner contributes support and expertise and profit and loss percentages are agreed upon.’ There is nothing wrong because the profit and loss is shared by both and there is equity in the distribution of income.’ If this is not possible Islam is not against buying shares but as long as they are common shares and not preferred shares.’ Also the shares have to be in companies that are not prohibited like companies that make wine or deal in interest as their basic business.’ So shares in the smallest amount can allow one to be a partner in a company.’ If one wants to invest in something that is more liquid there are mutual funds or investment banks.’ These banks or institutions collect money from people who want to invest and then invest it in lawful investments that Islam allows and at the end of the year they share in the profit of the investments.’ This allows for entry and exit of different investors.’ In fact in some countries cooperatives have been operating very successfully especially with farmers being providing them with capital needed for production, looking after the sales to avoid exuberant chargers by middle persons and then deduct items such as seeds, rental equipment and so on.’ There are a variety of ways by which investments can be made.

Host:’ Some claim that interest is better than the alternative that you suggest because it gives people allot more flexibility at different degrees of risk?

Jamal Badawi:

Suppose one doesn’t want to take any risk at all one can save some money.’ Suppose one wants to take a small degree of risk one can buy shares in companies that do not give high returns but is reliable and might have a modest appreciation.’ If one is interested in high degrees of risk plus gain or lose 25% one can buy from a company that is a high risk company.’ If one wants a combination one can have a mixed portfolio.