Electronic copy available at: http://ssrn.

com/abstract=1579324



The Riba-Interest Equation and Islam:
Reexamination of the Traditional Arguments





Mohammad Omar Farooq



Associate Professor of Economics and Finance
Royal University for Women




Final version is forthcoming in:
Global Journal of Finance and Economics,
Vol. 6, No. 2, September 2009, 99-111
Electronic copy available at: http://ssrn.com/abstract=1579324
Introduction
1

From a modest beginning of Islamic banking in early 1970s, now there are Islamic banks or
financial institutions in 70 countries, including some where Muslims are not the majority. With total
capitalization of $200+ billion as of 2000,
2
Islamic banking/finance [IBF hereafter] movement may
be in an enviable phase, as conventional western institutions are aggressively working to
dominate this otherwise-religious niche.

The crux of Islamic banking is freedom from Riba, which is commonly equated with interest.
3
The
relevance and Islamicity of IBF movement rests on the claimed prohibition of interest in Islam.
Riba is categorically prohibited in the Quran.
God has permitted trade and forbidden riba. ... God will deprive riba of all
blessing, but will give increase for deeds of charity.
4

O believers! Devour not riba, doubled and multiplied; but fear God that ye may
prosper.
5

There is no controversy that Islam prohibits riba - or some types of riba.
6
However, the meaning
and scope of the concept have generated impassioned controversy, especially on whether riba
and bank interest are to be considered equivalent. The focus of this essay is not on whether
interest is riba, a topic that often gets bogged down with legalistic and scriptural references.
Rather, it is on the relevance and merit of traditional arguments offered for prohibition of interest.
Is there an Ijma' (consensus)?
The issues pertaining to riba-inerest equation are vitally important for Muslims who want to live by
Islam, with conviction that nothing prohibited (haram) by God is made permissible (halal) and
nothing permissible is made prohibited. There is significant confusion and ambivalence among
Muslims about this issue. The literature that equates interest with riba is voluminous and
overwhelming, and may lead to the conclusion or impression that some consensus exists over
this issue.
7

The reality is anything but. Muslim scholars and jurisprudents have been prone to claim
consensus quite liberally. The label ijma inspires awe among faithful Muslims. However, the
existence of multiple schools of jurisprudence (Fiqh) is not an evidence of, but lack of, consensus.

1
The author gratefully acknowledges the feedback on some specific aspects of this paper from
Nobel Laureate Milton Friedman.
2
Warde, Ibrahim. (2000), Islamic Finance in the Global Economy, Edinburgh University Press,
pp. 1-2.
3
Saleh, Nabil A. (1996), Unlawful Gain and Legitimate Profit in Islamic Law: Riba, Gharar and
Islamic Banking, Cambridge University Press, pp. 47-48.
4
The Quran/2/al-Baqarah/275-276.
5
The Quran/3/Ale Imran/130.
6
Several leading companions of the Prophet (Ibn Abbas, Usama ibn Zayd, 'Abdullah ibn Mas'ud,
Urwa ibn Zubayr, Zayd ibn Arqam) "considered that the only unlawful riba is riba al-jahiliyyah. Saleh, op.
cit, p.27.
7
Siddiqui, Shahid Hasan. (1994), Islamic Banking: Genesis & Rationale, Evaluation & Review,
Prospects & Challenges, Royal Book, Pakistan, p. 15.
There is not even a consensus on the definition of Ijma. Imam Ahmad ibn Hanbal, founder of one
of the four sunni schools, reportedly asserted: "Whoever claims consensus is a liar."
8

Equating interest with riba is the prevailing, orthodox position. However, that position, and any
claim of a consensus should be treated with circumspection.
9
Just as the voice of advocacy for
IBF is becoming overwhelming, there are also contrary voices.
Abdullah Yusuf Ali [d. 1953] equated, not interest but, usury with riba and wrote: My definition (of
usury) would include profiteering of all kinds, but exclude economic credit, the creature of modern
banking and finance."
10

Among others who have rejected the simple Riba-interest equation is Muhammad Abduh [d.
1905, Rashid Rida [d. 1935] and Fazlur Rahman [d. 1988].
11
Some have taken a more critical
position against the equation: Syrian scholar Marouf al-Daoualibi in 1930s, Egyptian jurist al-
Sanhuri in 1940s, and mufti of Egypt Shaykh Tantawi in 1989.
12
Tantawi declared that interest on
certain interest-based government investments was not forbidden riba. ... Later he went even
further, saying that interest-bearing bank deposits are perfectly Islamic, and more so than
'Islamic' accounts that impose disadvantageous terms on the customer."
13

Even among the classical scholars, definition and interpretation of riba leave significant room for
difference of opinion. According to Imam Ibn Hanbal, riba al-jahiliyyah, an exploitative, predatory
type of increase in debt is the only type prohibition of which is beyond any doubt."
14

Despite the availability of fatwas (religious edicts) from the truly few shari'ah experts, the IBF
literature so far has not convincingly removed lingering doubts about the equation. On the other
hand, those who have argued against this equation have not made their arguments clearly and
convincingly to help common Muslims determine it on their own.

Orthodox rationales for prohibition
To examine traditional arguments for the prohibition of interest, we have selected two polemical
sources, Yusuf al-Qaradawi and Sayyid Abul Ala Mawdudi, for the following reasons: (a) These
two authors have enumerated a list of arguments against interest. (b) Modern IBF movement has
been deeply influenced by contemporary Islamic movements, where both authors are held in
highest regard. In pertinent literature it is assumed that interest is riba and that the rationales for
prohibition of interest are well established. Such literature has seldom examined the traditional

8
Quoting Ibn al-Qayyim. I'lam al-Muwaqqi'in, pt. 2, p.179.
http://ourworld.compuserve.com/homepages/Abewley/usul5.html.
9
Farooq, Mohammad Omar (September 2007). The Riba-Interest Equivalence: Is there an Ijma
(consensus)? Transnational Dispute Management, Vol. 4, No. 5.
10
Ali, Abdullah Yusuf. (1988), The Holy Qur'an: Text, Translation and Commentary, 2nd ed.,
Tahrike Tarsile Qur'an, n324.
11
Saeed, Abdullah. (1996), Islamic Banking and Interest: A Study of the Prohibition of Riba and
its Contemporary Interpretation, E. J. Brill, p. 43.
12
El- Gamal, Mahmoud (2000). "An Economic Explication of the Prohibition of Riba in Classical
Islamic Jurisprudence," Proceedings of the Third Harvard University Forum on Islamic Finance,
Cambridge, pp. 31-44.
13
Vogel, Frank and Hayes, Samuel III. (1998), Islamic Law and Finance: Religion, Risk and
Return, Kluwer Law, Hague, p. 46.
14
Vogel and Hayes, pp. 72-73; also see Farooq, Mohammad Omar (2007b). Stipulation of
Excess in Understanding and Misunderstanding Riba: The Al-Jassas Link, Arab Law Quarterly, Vol. 21
No. 4. pp. 285-316.
arguments or rationales from a critical perspective.

Before continuing with these authors two more modern works are worth mentioning, neither of
which I used as a source for the "traditional" polemical arguments. The first is by M. Umer
Chapra.
15
This work is for readers more familiar with economics, as its arguments are based on
western economic experience and thoughts. Chapras work appears quite modern to the
believers who embraced the riba-interest equation. However, its superficiality in some respects
becomes evident when one notes his incorrect citation of some major western references.

For example, Chapra invokes the rationale "economic stability": interest causes instability,
implying that interest-free economy would be less unstable.
16
Modern interest-based economies
have shown susceptibility to instability. However, where is the evidence that business cycles in an
interest-free economy would be smoother? If it could be empirically demonstrated that interest-
free economies would be better performing in terms of (1) needs fulfillment, (2) full employment,
(3) equitable distribution and (4) economic stability - the four universally-cherished humanitarian
goals identified by Chapra - the pertinent discourse would qualitatively increase. However,
experience of the countries committed to the interest-free direction does not empirically
corroborate the relationship that Chapra postulates. Moreover, Chapra's use of western
references to buttress his points is misleading. He quoted Nobel Laureate Milton Friedman in
support of his "economic stability" argument.
17

In response to a personal query, Friedman wrote in two emails
18
to this author: "The op-ed that
was quoted in the article you sent me does not provide any support whatsoever for the zero
interest doctrine. ... it is simply out of context. ... I do not believe there is any merit to the
argument that an interest-free economy might contribute toward greater economic stability. I
believe indeed it would have the opposite effect."
Some Western economists blame interest rates for contribution toward instability.
19
However, the
misleading part of Chapra's use of such sources is that rarely (if at all) such western economists,
including Friedman, make such arguments to propose elimination/prohibition of interest, per se.
Another recent, comprehensive work is by M. Nejatullah Siddiqi, where he explicated the
rationales for prohibition of bank interest, listing the following reasons for prohibition of interest
(riba): It corrupts society, implies improper appropriation of other peoples property, causes
negative growth, demeans and diminishes human personality, and is unjust.
20

Siddiqis flawed logic can be identified by simply examining, for example, his first point that riba
corrupts society. While riba-based transactions are unjust and thus may have corrupting influence
on society, corruption-related literature does not identify interest as a pertinent determinant. Most
Muslim-majority countries rank high in the Corruption Perception Index (CPI) of Transparency
International. But no one has identified interest as a determinant of corruption. As we will see,
Siddiqi's enumeration is generally not much different from the earlier ones by al-Qaradawi and
Mawdudi, and is equally polemical and empirically unsubstantiated.

15
Chapra, M. Umer (1992), "Prohibition of Interest: Does it make sense?" pp. 38-41
http://www.zb.eco.pl/zb/161/economy.htm.
16
Chapra (1985), Towards a Just Monetary System, Islamic Foundation, UK.
17
Friedman, Milton (1982), "The Yo-Yo U.S. Economy", Newsweek, 15 February, p. 72.
18
December 12, 2005; December 16, 2005.
19
Dar, Humayun and Presley, John. (1999), "Islamic Finance: A Western
Perspective," International Journal of Islamic Financial Services, Vol.1 No.1, pp. 3-11.
20
Siddiqi, Mohammad Nejatullah. (2004), Riba, Bank Interest, and The Rationale of Its
Prohibition, Islamic Development Bank, Visiting Scholars Research Series.
Let me return to the two authors, al-Qaradawi [1926-] and Mawdudi [d. 1979]. Al-Qaradawi
merely reproduced arguments given by Fakhr al-Din al-Razi [d. 1209], a towering Islamic scholar
of the 13th century, indicating that rationales for prohibition of interest are a settled matter.
Notably, the rationales were articulated by fallible human beings. The Qur'an does not offer any
detailed list of arguments. Only one rationale is identifiable from the Qur'an: exploitation/injustice
(zulm).
21
Prophetic narrations do not provide any additional rationale.

Rationales according to al-Qaradawi/al-Razi
According to al-Qaradawi: The strict prohibition of interest in Islam is a result of its deep concern
for the moral, social and economic welfare of mankind. Islamic scholars have given sound
arguments explaining the wisdom of this prohibition, and recent studies have confirmed their
opinions...." Then, al-Qaradawi refers to and quote al-Razi's four arguments: (1) Unfair exchange
(taking something from a party without giving him something in return); (2) economic argument:
an idle class argument; (3) moral argument: Undermining of charitable attitude among people;
and (4) social argument: wealthy-lenders/poor-borrowers, a disparity leading to exploitation and
undermining of human kindness and charity.
22


Notably, the pertinent issues about interest involve commercial transactions, not non-commercial
(or charitable) transactions, a distinction generally not maintained in the traditional arguments
against interest.
Now let us examine al-Razi's arguments, articulated by al-Qaradawi.
First: The taking of interest implies appropriating another persons property
without giving him anything in exchange, because one who lends one dirham for
two dirhams gets the extra dirham for nothing.
23

One can argue that, in trade, taking something from someone without giving something in
exchange is haram (prohibited) in Islam. However, the argument is misleading and erroneous.
For non-charitable transactions, both parties are aware that lending and borrowing are based on
lenders profit motive. Here the lender is foregoing the purchasing power for a specific period.
Why would a profit-orientated lender lend at zero interest or return?
While some argue that inflation premium is justified,
24
IBF proponents generally contend both
nominal and real interest are prohibited. Interestingly, except in a zero inflation economy,
sustainability of which is not a realistic proposition, an interest-free transaction would entail some
redistribution of purchasing power. Interest-free loan transactions should not involve gain or loss
by either of the parties. So, taking into consideration the time value of money, in case of the extra
dirham, it is the agreed compensation to the forgone purchasing power for the fixed duration. The
lender is getting interest for transferring something; it is not something for nothing.
The IBF literature generally denies that Islam recognizes time value of money. "In Shari'ah, there
is no concept of time value of money."
25
Some argue that time value of money as pertaining to

21
The Quran/2/al-Baqarah/279.
22
Al-Qaradawi, Yusuf. (undated), The Lawful and the Prohibited in Islam, Hindustan Publications,
India, pp. 265-266.
23
Ibid., p. 265.
24
Zineldin, Mosad. (1990). The Economics of Money and Banking: A Theoretical and Empirical
Study of Islamic Interest-Free Banking, Almqvist & Wiksell International, Stockholm, pp. 50-51.
25
Usmani, Muhammad Taqi. (2002), An Introduction to Islamic Finance, Kluwer Law, Hague,
p.xvi.
deferred sales is allowed in Islam, but that is different from the case of loans. Others even
suggest that there should not be any profit-motive on the part of Muslims, seeking service from
Islamic Banks.
26
Such view is nave, and contrary to the Islamic approval of profit motive.
Regardless, whether it is denied at the polemical level, the Islamic financial institutions [IFIs
hereafter] at the operational level have not been able to avoid time value of money. Cost of short-
term and long-term financing from such institutions does differ, which is a clear evidence of time
value of money.
27

Interestingly, IBF proponents often cite the growing interest of western banks in Islamic banking
as an important achievement.
28
However, denying the time value of money in theory, but
embracing it in practice helps to partially explain the western interest. These conventional banks
are not necessarily convinced about the claimed superiority of IBF,
29
but their perspective is they
don't find any substantive difference between their conventional banking and the current practice
of Islamic banking, which has shifted away from profit-loss sharing/Risk-sharing-based
transactions.
30
With basically comparable performance of Islamic banks,
31
it is just another vast
untapped market for the western banks. They also have formidable competitive advantage in
terms of credibility, experience, and capitalization.
32

The interest of western banks did not begin after seeing the success of the IFIs. The relationship
between these conventional banks and IBF movement goes further back. "The international
banking system was also instrumental in the very creation of Islamic banks."
33

Second (argument): Dependence on interest prevents people from working to
earn money ... The value of work will consequently be reduced in his estimation,
and he will not bother to take the trouble of running a business or risking his
money in trade or industry. ... This, from an economic point of view, is
unquestionably a weighty argument.
34

There are several problems with this argument. First, there is confusion about modern lending
arrangements, where lending institutions mobilize savings from savers/depositors and channel
such savings to the borrowers. These institutions do have to work. They employ a lot of people,
and function often in highly competitive environment. While risk associated with individual
transactions varies, banks in the business of financial intermediation do face business, financial
and other risks.
Second, the context of modern commercial banking has changed fundamentally since the days of
al-Razi of the 13th century, when modern banking system did not exist. The primary sources of

26
Haron, Sudin and Ahmad, Norafifah. (2000), The Effects of Conventional Interest Rates and
Rate of Profit on Funds Deposited with Islamic Banking System in Malaysia, International Journal of
Islamic Financial Services, Vol.1 No.4, pp. 3-9.
27
Zaman, M. Raquibuz and Movassaghi, Hormoz. (2001), "Islamic Banking: A Performance
Analysis," The Journal of Global Business, Vol.12, No.22, pp. 31-38.
28
Iqbal, Munawar and Molyneux, Philip. (2005), Thirty Years of Islamic Banking: History,
Performance and Prospects, Palgrave, p. 58.
29
Aggarwal, Rajesh and Yousef, Tarik (2002). "Islamic Banks and Investment Financing," Journal
of Money, Credit and Banking, Vol.32, No.1, pp. 93-120.
30
Farooq, Mohammad Omar (2007a). Partnership, Equity-Financing and Islamic Finance:
Whither Profit-loss Sharing?" in Review of Islamic Economics, Vol. 11, Special issue, pp. 67-88.
31
Samad, Abdus and Hassan, M. Kabir. (1999) "The Performance of Malaysian Islamic Bank
During 1984-1997: An Exploratory Study," International Journal of Islamic Financial Services, Vol. 1 No.
3, pp. 3-12.
32
Vogel and Hayes, op. cit., pp. 6-7.
33
Warde, op. cit., p. 108.
34
Qaradawi, op. cit., p. 265.
capital for banks are demand and time deposits. Demand deposits come from people irrespective
of their financial status. Time deposits are usually from older, retired, and risk-averse savers.
They seek guaranteed or safe return. It is a need that covers, again, people of all financial
backgrounds. These older people neither can seek "earned" income nor can be expected to take
risk.
Third, the IBF movement originally began with identifying Mudaraba and Musharaka [profit-loss-
and risk-sharing partnerships] as the primary modes of operation, arguing that Islam believes in
profit-loss-sharing (PLS and thus, risk-sharing).
35
However, most IFIs have given up or
marginalized the PLS/risk-sharing modes, and have turned to the predominant mode of
Murabaha, a mark-up mode as well as other debt-creating modes that allow them to ensure risk
avoidance almost altogether in their transactions
36
and earn relatively high return. "The average
cost efficiency ... is 74%, whereas average profit efficiency ... is 84%."
37

These banks have found PLS modes inoperable in the modern context.
38
Thus, quietly they have
disengaged from the PLS modes and fallen into murabaha syndrome: "the strong and consistent
tendency ... to utilize debt-like instruments" particularly in external financing.
39
Murabaha was
originally recognized in Islamic law as a type of sale only. IBF movement adopted and adapted it
as a mode of financing "only as a device to escape interest."
40
Islami Bank Bangladesh Limited
(IBBL) reports: "The first action that deserves immediate attention is ... (that) Islamic banks, step
by step, have to be converted into profit-sharing banks by increasing their percentage share of
investment financing through PLS-modes."
41
However, since the beginning of banking activities in
1983, the bank has not invested any amount in any project on the Mudaraba mode of
investment.
42

Siddiqi asserted during the 1980s: "For all practical purposes this [mark-up system or Murabaha]
will be as good for the bank as lending on a fixed rate of interest."
43
The same viewpoint was
echoed by the Supreme Court of Pakistan (1999).
44
OICs Islamic Fiqh Academy repudiated the
synthetic murabahas, and called for its minimization and replacement by PLS products.
45

So, what's the solution the IFIs have resorted to? The IFIs continue to talk about Mudaraba and
Musharaka, but use what is operable, i.e. Murabaha and other modes with pre-determined
incomes or outcomes. Unfortunately, "the predominance of the murabaha represents a challenge
to the very notion that Islamic finance would provide an alternative to interest-based conventional

35
Iqbal and Molyneux, op. cit., p. 28. Khan, M. Mansoor and M. Ishaq Bhatti (2008),
Developments in Islamic Banking: The Case of Pakistan, New York, Palgrave Macmillan, p. 45.
36
Vogel and Hayes, op. cit., p. 141.
37
Hassan, M. Kabir. (2005) "The Cost, profit and X-efficiency of Islamic Banks," 12th Annual
Conference of Economic Research Forum, Egypt, 19-21.
38
Saeed, op. cit., pp. 76-95.
39
Yousef, Tarik. (2004), The Murabaha Syndrome in Islamic Finance: Laws, Institutions and
Politics, in Henry, Clement and Wilson, Rodney. (eds.), The Politics of Islamic Finance, Edinburgh
University Press, pp. 63-80.
40
Usmani, op. cit., p. 41.
41
Islami Bank Bangladesh Limited. (undated), "Concept and ideology: Issues and problems of
Islamic banking," http://www.islamibankbd.com/page/ih_12.htm.
42
Alam, Mohammad Nurul. (2000), "Islamic Banking in Bangladesh: A Case Study of IBBL,"
International Journal of Islamic Financial Services, Vol.1 No.4, pp. 28-42. Also, see Farooq, op. cit.,
2007b.
43
Siddiqi, Mohammad Nejatullah. (1983), Issues in Islamic Banking, Islamic Foundation, UK, p.
139.
44
Supreme Court of Pakistan. (1999), The Text of the Historic Judgment on Interest.
45
Vogel and Hayes, op. cit., p.143.
financial systems."
46
Siddiqi put it more bluntly: A financial system built solely around these
modes of financing can hardly claim superiority over an interest-based system on grounds of
equity, efficiency, stability and growth.
47
He did not envision the predominance of such debt-like
instruments. In a more recent work, he cautioned: "As a result of diverting most of its funds
towards murabaha, IFIs may be failing in their expected role of mobilizing resources for
development of the countries and communities they are serving."
48

Things have fundamentally changed relative to the originally-postulated principles of Islamic
finance, and despite the criticisms or lack of the desired shariah-compliance, murabaha (and
other, mostly debt-like instruments) continue to be the mainstay of IFIs. Usmani, a leading
shari'ah expert, makes a stunning revelation:
"[Islamic] philosophy cannot be translated into reality unless the use of
musharakah is expanded by the Islamic banks. ... [T]here are no visible efforts to
progress towards this transaction even in a gradual manner, even on a selective
basis. ... [T]he basic philosophy of Islamic banking seems to be totally
neglected."
49

Yet, even though PLS/Risk-sharing mode has been virtually abandoned, quite deceptively, "(PLS)
dominates the theoretical literature on Islamic finance."
50
Indeed, observations of some authors -
such as, The IBF Model is primarily based on equity-sharing or PLS instruments, namely,
Mudarabaha and Musharakah
51
- might constitute misrepresentation, because the model actually
based overwhelmingly on non-equity-sharing or non-risk-sharing modes (murabahah, ijarah, etc.).
Thus, the second polemical argument of al-Qaradawi involving risks, as explained above, now
stands on its head.
Moreover, "no fixed rate of return", a long-standing dictum of IBF movement, has also been
abandoned. Iran, a country that has officially committed itself to interest-free economy and
banking now has fatwa for public borrowing on the basis of a fixed rate of return.
52

Third (argument): Permitting the taking of interest discourages people from doing
good to one another, as is required by Islam. If interest is prohibited in a society,
people will lend to each other with good will, expecting back no more than what
they have loaned.... (This is the moral aspect of the prohibition).
53

Except in case of charities, this argument is misplaced and erroneous. This might also imply that
people in the interest-based societies have diminished goodwill toward others and they don't do
as much charitable acts. However, there is no pertinent empirical corroboration.

46
Yousef, op. cit., p. 64.
47
Siddiqi, 1983, op. cit., p. 52.
48
Siddiqi, op. cit., 2004, p. 75; also see Farooq, Mohammad Omar (2008). The Challenge of
Poverty and the Poverty of Islamic Economics, Journal of Islamic Economics, Banking and Finance, Vol.
4 No. 2, pp. 35-58.
49
Usmani, op. cit., p.113.
50
Dar, Humayun and Presley, John (2000), "Lack of Profit Loss Sharing in Islamic Banking:
Management and Control Imbalances," International Journal of Islamic Financial Services, Vol. 2, No. 2.
pp. 3-18.
51
Khan and Bhatti, op. cit., p. 45.
52
Ariff, Mohamed. (1988) "Islamic Banking," Asian-Pacific Economic Literature, Vol. 2, No. 2, pp.
46-62.
53
Qaradawi, op. cit., p. 266.
Fourth (argument): The lender is very likely to be wealthy and the borrowing
poor. If interest is allowed, the rich will exploit the poor.... (This is the social
aspect of the prohibition).
54

Wealthy-lender/poor-borrower is an untenable stereotyping. In the institutional context, savers,
who are not necessarily rich, are also lenders to the depository institutions. Indeed, until savers
have sufficient capital to invest in the capital market (bonds, stocks or mutual funds), many
younger or not-so-well-to-do people stick to the savings accounts of banks. Based on US data,
top 1% income class constitutes 44.1% in stocks/mutual funds investments; next 9% class
constitutes 40.4%; and bottom 90% class constitutes 15.5%. In terms of bank deposits (all
categories included), top 1% provides 21.7% of bank deposits; next 9% provides 35.5%; and
bottom 90% provides 42.8%.
55
Thus, such stereotyping is not supported by the changed reality of
our modern times. "Today ... debt is not necessarily associated with poverty."
56

There is another important twist to this argument. Either required to maintain certain level
of reserves with the central banks or due to lack of appropriate investment opportunities,
many IFIs, including Islamic Development Bank, do deposit their funds in interest-bearing
accounts, even in foreign countries. This is based on fatwa of shari'ah-compliance based
on the rules of necessities (darurah).
57

IBF movement also was expected to contribute toward broader economic development. However,
many IFIs, similar to the case of Egypt, have shown a bias toward the urban and the rich.
58

Usmani echoes: "the Islamic banks ... should have given preference to the products which may
help the common people to raise their standard of living. ... This area still awaits attention of the
Islamic banks."
59
These incisive comments of Usmani are not from the earlier decades of infancy
of 70s/80s, but reflect recent periods of the 21st century.

Rationales according to Mawdudi
Now let us turn to the arguments given by Mawdudi.
The main reason why Islam abolishes interest is that it is oppression (zulm)
involving exploitation. The second ... is that it transfers wealth from the poor to
the rich, increasing the inequality in the distribution of wealth. A third reason ...
is that it creates an idle class of people who receive income from accumulated
wealth. The society is deprived of the labour and enterprise of these people.
60

From a rational perspective, unlike the problems of international debt affected by political factors,
the exploitation element in modern commercial lending is unclear. Usually, based on mutual
agreement, a financially capable and creditworthy party borrows either for profitable ventures or
for personal needs, and the banks lend at a competitive rate, subject to applicable regulations. In
modern economies, savers or depositors of all financial backgrounds are the providers of funds to
banks. In that sense, these savers/depositors are lenders or providers to the depository

54
Al-Qaradawi, op. cit., p. 266.
55
Wolff, Edward N., (forthcoming), Changes in Household Wealth in the 1980s and 1990s in the
U.S., Working Paper #407, Levy Economics Institute, 2004., Table 6.
56
Saeed, op. cit., p. 29.
57
Vogel and Hayes, op. cit., pp. 38-39.
58
Warde, op. cit., p. 174.
59
Usmani, op. cit., p.115.
60
Ahmad, Khurshid. ed., (1980), Studies in Islamic Economics, Islamic Foundation, UK, pp. 253-
254.
institutions. The exploitation argument here lacks either any polemical merit or empirical
foundation. Of course, some financial services (including credit cards) may involve
exorbitant/predatory rate of interest, which can be too risky for borrowers, especially if based on
variable or teaser rates. The excesses of exploitative, interest-based transactions, operating in an
unregulated environment, should be covered by riba and thus Islamically prohibited.

Second,interest contributes to income inequality is an unsubstantiated, polemical argument.
What the western countries have achieved in terms of rising above mass poverty and higher
standard of living, notwithstanding their negative aspects and impacts, is more important than the
income inequality issue. Indeed, interest "transfers from the poor to the rich" in an interest-based
society is an erroneous argument, because as explained above, most individual investors, during
their advanced age, seek less risky investments and cant be expected to become profit-loss
sharing entrepreneurs.
The lender-borrower profile and relationship in the modern context of institutionalized financial
intermediation have fundamentally changed particularly after the industrial-capitalist revolution in
the 17th/18th centuries. The rationale for prohibition based on exploitation argument is not
supported by the contemporary reality. Traditional arguments also call for PLS and avoidance of
fixed rate of interest. However, as critics of the industry argue, with the support of economically
and financially lucrative fatwa (religious edict) industry, there is no dearth of shari'ah scholars or
board to supply the relevant fatwa to offer debt-like instruments that are interest-free but in name.
In cases of Islamic financial engineering, the rule of necessity (darurah) is being invoked all too
frequently. Even investing excess funds in interest-bearing accounts abroad has also been made
shari'ah-compliant. In many cases critics are pointing out that the shariah boards are sometimes
serving as 'rubber stamps' for the banks management."
61

Furthermore, the expression "shari'ah-compliant" is often misleading. To be shari'ah-compliant,
murabaha requires that seller must take possession of the product before it can be sold to a
buyer. However, the critics argue that most IFIs routinely violate this provision, sometimes with
fatwa from their respective shari'ah experts based on the position that possession does not have
to be physical or real, rather constructive possession is alright or adequate. So, by shari'ah-
compliant generally what is meant is that it is considered acceptable by a board of shari'ah
experts that is handpicked and employed by these institutions, often with quite a high level of
monetary compensation.
Referring to many constraints for an infant industry, Usmani reveals: some of these IFIs "have
not been able to comply with all the requirements of shari'ah in all their transactions."
62
However,
any such disclosure or disclaimer by the IFIs is virtually non-existent. Now the shariah board of
Lariba bank, with Qaradawi as one of the experts, has issued a fatwa that: "there is no objection
to using the term 'interest' as an alternative to the term 'profit' or 'rate of return'."
63

The emerging power alliance of wealth and shari'ah scholarship" is noteworthy. The
shariah experts, just a few people in the industry, who are generally from rather modest
economic background, are courted and patronized by the industry through luxury air
travel, private jets, five-star hotel accommodation, exposure to media and people of
higher socioeconomic strata. The opportunities of the fatwa industry have brought about
real change in the lifestyle of many allied ulama. ... ... Many of them are now accused of
being bankers' window-dressers and of over-stretching the rules of shari'ah to provide

61
Warde, op. cit., p. 227.
62
Usmani, op. cit., p. xviii.
63
Lariba Bank. http://www.lariba.com/fatwas/qaradawi.htm.
easy fatwas for the new breed of bankers.
64
This is the only area of Islamic law, where
shariah experts can amass serious worldly riches.
65
While the evolved orthodox position
about riba was not necessarily tainted by worldly considerations, the contemporary IBF
discourse around the riba-interest equation does note the debate on 'fatwas for sale' ...
'fatwa wars', etc.
66

Of course, neither all shariah-experts can be stereotyped, nor the entire IBF movement be
stereotypically dismissed for such concerns. There are experts well known for integrity and even
as overconservative
67
However, while this new alliance can be beneficial to bring the otherwise-
traditional ulama from their mold that is out of sync with the modern times, the alliance of wealth
and scholarship, in regard to determination of shari'ah-compliance, is a matter of grave concern.
Muslim history has not been immune to the "court ulama" in service of the tyrannical status quo,
in contrast with the noble ulama, often shunned or even persecuted by the contemporary political
authorities. The case of the failure of Bank al-Taqwa is illustrative of some shari'ah boards
running amuck. When the bank showed an annual loss of 23 per cent of principal, the board gave
the necessary cover to the malpractices and fraudulent reporting.
68


Riba-interest equation: A myopic reductionism
Traditional rationales for the prohibition of interest may not hold, but there is a larger issue of
exploitation that seems to be missed by the traditional position. Islam's position regarding justice
is unequivocal and universal. It sets the highest standard in this regard. O believers! stand out
firmly for justice, as witnesses to God, even as against yourselves, or your parents, or your kin,
and whether it be (against) rich or poor.
69
Islam is against exploitation of humans by other
humans. However, Islam has become a victim of legalism, where form has overtaken the spirit
and substance.
70

Ironically, while anti-exploitation, Islamic rhetoric is commonplace in the literature, no specific
empirical or focused studies on exploitation is listed in bibliographic works.
71
What role did
interest play in British East India Companys successful mission to turn South Asia into a colony
and exploit for more than two centuries, or in causing or facilitating international exploitation in the
age of globalization? Through preoccupation with the interest-exploitation connection, the IBF
movement has entrapped itself into myopic reductionism. Driven by the quest for power and
profit, global financial and corporate powerhouses that also play a vital role in worldwide
exploitation
72
have become patrons of the Islamic banking industry. IFIs do not complain about
such exploitation, because their focus is ironically on rendering the world interest-free, not

64
Kahf, Monzer. (2004) "Islamic Banks: The Rise of a New Power Alliance of Wealth and
Shari'ah Scholarship," in Henry, Clement and Wilson, Rodney. (eds.). The Politics of Islamic Finance,
Edinburgh University Press, pp. 17-36.
65
Matthews, Owen. (October 31, 2005), "How the West Came To Run Islamic Banks,"
Newsweek.
66
Warde, op. cit., p. 227.
67
Iqbal and Molyneux, op. cit., p. 109.
68
Kahf, op. cit., in Henry and Wilson, note #18, p. 35.
69
The Quran/4/an-Nisa/135.
70
Farooq, Mohammad Omar (2009, forthcoming). Toward Our Reformation: From Legalism to
Value-Orientation in Islamic Law & Jurisprudence, International Institute of Islamic Thought, Herndon,
Virginia, USA.
71
Ahmad, 1980, 115 pages; Khan, Muhammad Akram. (1983), Islamic Economics: Annotated
Sources in English and Urdu, Islamic Foundation, UK, 221 pages.
72
Bakan, Joel. (2004), The Corporation: The Pathological Pursuit of Profit and Power, Free
Press.
exploitation-free. Also, notably, many oil rich Arab countries, founded and thriving on tyranny and
exploitation, have been the primary source of capital for the IBF movement.
The Qur'an is against concentration of wealth in a few hands.
73
However, "The ownership
structure of the Islamic financial industry is highly concentrated. Three or four families own a large
percentage of the industry."
74

Due to the reductionist preoccupation with the riba-interest equation, the IBF movement is
vulnerable to be subsumed by the global capitalist enterprise. Naqvi
75
(1981) asserted: "the
abolition of riba is one ... element of a comprehensive Islamic reform to establish an exploitation-
free economic system"
76
and warned "against thinking in terms of mechanical substitution of
profit for interest." In his view, the abolition of riba is not powerful enough by itself to engineer a
smooth transition from an interest-laden economic system to an exploitation-free Islamic
economy."
77

Comfortable with political tyranny, patronized by wealthy rentier classes in the Muslim world, and
increasingly managed by the global financial powerhouses, the IBF movement is more than
vulnerable to be confined in the realm of rhetoric against exploitation, or worse, inadvertently may
even become an instrument of exploitation.
Conclusion
Fixed or guaranteed rate of return, at least for public debt, is no longer un-Islamic. Profit/loss-
sharing and risk-sharing, as inoperable, are now marginalized, if not discarded. What was
shunned before, murabaha for example, as permissible but undesirable, is now the mainstay of
IFIs. Murabaha-syndrome is so serious, even some leading IBF advocates and experts consider
it a crisis of identity of the IBF.
78

Thus, not only the traditional arguments for prohibition of interest, even at the polemical level, do
not hold (and are almost abandoned at the practical level), but also the IFIs have virtually
eliminated any substantive distinction between Islamic and conventional banking, attracting and
facilitating aggressive participation of western conventional banks in the Islamic arena.
79

So, why is it easy to understand the rationales for the prohibition of riba, but not for the blanket
prohibition of interest? Why do the traditional arguments for prohibition do not hold up? Why have
the evolving IFIs marginalized the equity-based, risk-sharing modes and have embraced debt-like
instruments as their mainstay? Why are these institutions still concentrating on short-term
products, where the long-term products are more important for economic development? Why
does the IBF movement increasingly need to resort to Hiyal (legal stratagem) to claim shari'ah-
compliance? Why are the conventional western banks becoming backers and financiers of this
"Islamic" movement?
Some common explanations offered by the IBF are: (a) the problems and challenges are part of
its learning curve, and (b) IBF can't operate in its essence in a society and environment that is not
Islamic. However, in my view another explanation is more relevant and applicable, which is

73
The Quran/59/al-Hashr/7.
74
Iqbal and Molyneux, op. cit., p.122.
75
Naqvi, Syed Nawab Haider. (1981) Ethics and Economics: An Islamic Synthesis, Islamic
Foundation, UK.
76
Naqvi, op. cit., p. 124.
77
Naqvi, op. cit., p.153; emphasis is Naqvi's.
78
Iqbal and Molyneux, op. cit., p. 125.
79
Vogel and Hayes, op. cit., p. 292.
explored here. It suggests that the blanket riba-interest equation is not tenable from Islamic
viewpoint and, maybe, that explains why the traditionally-offered rationales for prohibition of
interest do not hold up, which also helps explain why so many Muslims remain confused and
even unconvinced about Islamic banking and finance. Through the riba-interest equation, IFIs are
in greater need to resort to legal stratagems to maintain an Islamic veneer and to adopt things
(e.g., fixed rate of interest; or a mark-up that is indexed, pegged, benchmarked to the interest
rate) that they have otherwise rejected as Islamically unacceptable.
Interest can be riba (and thus prohibited in certain situation), especially if it has an exploitative
element or dimension. Indeed, in such case, a more relevant equivalent of riba is usury. Also, the
relationship between riba and exploitation/injustice is evident, but not in case of commercial bank
interest (in a competitive environment and under government regulation to especially protect the
borrowers). In any case, if one is to generalize prohibition of all interests (commercial and non-
commercial, nominal and real), then there has to be more convincing rationales. Furthermore, the
discourse has to be elevated from a polemical level to a more substantive level, supported with
empirical works/studies.
Finally, while the traditional rationales for prohibition of interest are indicative of an apparent anti-
exploitation concern, the intellectual and theological framework, within which this discourse is
framed, does not demonstrate a commensurate understanding of exploitation in the
contemporary world. Islamic scholars of finance and economics should go beyond the
reductionist obsession with freedom from interest, and perhaps become engaged in a
more substantive and critical discourse focusing on freedom from riba as well as exploitation.