The Islamic community has different views regarding the interest and income generated from lending and investment. While the whole world is working towards generating profits, Islamic law forbids any income generated from loans or investments. The term used for the concept of the pursuit of such gains is Riba.
In the previous article, we answered one question is trading forex haram or halal. Read this article to get familiar with Riba and the reason behind practicing this belief.
What is Riba in Islam?
Riba or “sin of interest in Islam” refers to lending and depositing money to earn interest. Literally, Riba’s name meaning refers to excess, growth. Riba in translation represents the concept of exceeding, or increasing and more often “usury”, or unjust, and point to exploitative gains made in trade or business. Islamic religion prohibits such gains and hence Riba is forbidden in the community, even if the interest rates are low.
Although Riba is the notion of Islamic Banking, its scope is not limited to just the charging of high interest. The barter of goods that are not equal in terms of value and quality also comes under this concept. In broader terms, an unequal exchange of money or goods, where one has to pay or give more than what they get is Riba. This concept is easier to understand through interest.
Many religious concepts in the Islamic traditions are based on Sharia Law. All the beliefs are derived from the Islamic scriptures, Hadith and Quran, and Riba is one of those beliefs. There are two main reasons behind the prohibition of Riba:
- To make sure that any type of exchange is free from any illegal and unequal means.
- They have made unfair and one-sided exchanges illegal so that there is no misuse of wealth.
The Islamic religion believes in encouraging people to be more helpful and charitable. This will help in creating a community that is not self-centered. Instead, they are kind towards others. If people in the world only think about their profit, it will create a society that is full of resentment and doubt. Islam aims at removing such hostile feelings from society. To work towards this objective, the Shari’ah Law forbids Riba so that people do not lend money to earn interest, rather be charitable and lend money without charging interest.
If there is no interest or income allowed, then how do people generate income?
The answer is Murabaha. It is a financing system widely used in Islam. It is a cost-plus financing structure where parties at both ends of the transaction agree upon a selling price that includes both the cost of the asset and the markup. Instead of the interest, the markup (Murabaha) becomes the income, which is referred to as a credit sale and legally allowed by Islamic law. When there is a sale or purchase of an asset, the owner is not fully transferred until the buyer has paid the full payment.
Why riba is prohibited in Islam?
Riba is prohibited in Islam because it keeps poor people poor and rich people rich. Riba is considered socially destructive by religious scholars, sociologists, economists, and the whole Islamic society due to the social inequities that riba promotes and enables.
Riba has been a topic of discussion amongst the Islamic community. There is confusion between people regarding Riba, if it is entirely prohibited by the Shari’ah law and is considered punishable, or if it is only the idea of interest that is despised. Many may interpret the law as the prohibition of the entire concept of interest gains, while some believe it is just the higher- interest rates that are considered usury. In any way, it is believed to be exploitative under Islamic law.
There is a wide scope of interpreting Riba. The rationale behind Riba being exploitative can be interpreted in many ways. One such justification is given by a contemporary scholar who believes that lenders should at least get the time value of the money they lend. If not the excessive interests, they must be paid enough interest so that they can cover up the inflation.
There is a history of struggle revolving around Riba amongst Muslims. Many have struggled economically as they are morally bound to follow the laws laid down by their religion. At one point in time, there were some moderations made to lessen the strictness of this law and let people become economically independent. However, the moderation lasted only for a shorter period.
A book written by Giles Kepel, Jihad: The Trail of Political Islam, explains how some Islamic jurists tried to interpret this law in a way that does not oppose the rules of the Quran and at the same time take a step towards the modern economy where effective investment is defined by generative interest. This was a need of the hour as, in the 1960s, many Muslim countries became a part of the world economy.
However, the fallback from the law was only short-lived as, in the 1970s, the ban on Riba was reinforced, prohibiting all lending aimed at interest generation.