past periods.
Musnad Ahmad)
Consider a simple loan example;
A person borrows Mrf50, 000 at 10% interest for a
period of 10 years. The annual repayment is Mrf8,137.27. The
total interest payment over 10 year period will be Mrf31,372.67.
A person who borrowed Mrf50, 000 would end up paying
Mrf81,372.67 as repayment (interest plus the principal). There
is a 63% increase between amount borrowed and amount
repaid.
It is to be noted that modern banks charge usually a
percetage higher than the rate in this example. The compounding
frequency can also differ from bank to bank and sometimes
from loan to loan (Some more examples are illustrated later in
this article).
RIBA
The term Riba literally means increase, addition or
growth. However, it is not every increase or growth, which is
prohibited Riba. The technical meaning of Riba in Shariah is
the premium that must be paid by the borrower to the lender
along with the principal as a condition for the loan or for an
extension on its maturity. The term Riba is mentioned twelve
times in four Surahs of the Holy Quran, all in the opposite
sense to trade and charity. Islamic shariah identifies two types
of Riba; Riba An-Nasiah and Riba Al-Fadl.
Riba Al-Nasiah
This form of Riba is called as Riba Al-Quran. The
word nasiah is derived from the word nasaa, which means
to postpone, to defer or to wait. Technically, Riba An-nasiah
means bringing to the lender a fixed increment after an interval
of time, or extension of time over the fixed period and increase
of credit over the principal. In simple terms, it can be explained
as the time that is allowed for the borrower to repay the loan
in return for an addition or a premium. Therefore, it
means the interest paid on (or gained by) loans as practiced by
conventional banks today. This form of Riba is prohibited in the
Quran in 30:39, 4:160-1, 3:130 and 2:275-281. The hadith of
the Prophet (may peace be upon him) states (translation);
Narrated from Jabir said that Allahs messenger
(may peace be upon him) cursed the accepter of interest and
its payer, and one who records it, and the two witnesses, and he
said: They all are equally guilty. (Muslim, also in Thirmidhi and
79 2008
The injunctions of Quran on prohibition of Riba
An-Nasiah are dealt in detail later in this article.
Riba Al-Fadl
Islam promotes justice not only through elimination
of exploitation resulting from interest but also through
provisions of rulings on any form of dishonest and unjust
exchanges in transactions. These types of unjust or exploitive
activities are encompassed in Riba Al-Fadl, also called Riba
Al-Sunnah or Riba Al-Kahfi. In Islamic Shariah, it refers to
the Riba encountered in hand-to-hand purchases and sale of
commodities. However, my focus in this article is not on Riba
Al-Fadl, but rather on Riba An-Nasiah.
(Translation) Abu said Al-Khudri (Allah be pleased with
him) reported Allahs messenger (may peace be upon him)
as saying: Gold is to be paid for by gold, silver by silver,
wheat by wheat, barley by barley, dates by dates, salt by salt
and like by like, payment being made hand to hand. He
who made an addition to it, or asked for an addition, in fact
dealt in usury. The receiver and the giver are equally guilty.
(Muslim, also in Thirmidhi)
Although there are only six commodities mentioned in this
hadith, a vast majority of scholars are of the opinion that it is
of general application and is not confined to the six commodities
mentioned.
In another hadith it is narrated (translation):
Abu Said reported: Bilal (Allah be pleased with him) came
with fine quality of dates. Allahs messenger (may peace
be upon him) asked him: Where did you buy them? Bilal
replied: I had inferior quality of dates and I exchanged two
sas (of inferior quality) with one sa (of fine quality) as food
for Allahs messenger (may peace be upon him). Whereupon
Allahs messenger (may peace be upon him) said: Woe! It is
in fact usury; therefore, dont do that! But, when you wish
to buy dates (of superior quality), sell (the inferior quality)
in a separate bargain and then buy (the superior quality).
(Muslim, also in Musnad Ahmad)
It is considered Riba by way of excess over and above the quantity
of the commodity advanced by the lender to the borrower. These
types of barter transactions were very common during the pre-
Islamic era. People would exchange goods for goods, and it was
the practice of the poor to borrow a certain quantity of cereals
from the rich in the village with an assurance to repay them with
a larger amount later. ( to be continued )
 WHY INTEREST IS PROHIBITED RIBA?
AN ECONOMIC PERSPECTIVE
Ismail Nizam
SUMMARY
[The article begins with a brief introduction which states the
shariah standpoint on the issue of Interest-Riba equivalence
as a dispute settled in the history of Islamic scholarship. It
also provides a snapshot of the Ummahs awareness on the
subject of Riba and its prohibition in primary sources of
Islamic Shariah. This Ummatic level awareness is followed by
a short, yet true description of our societys attitude towards
Islam, interest and Riba. The reasons for Riba consumption in
our society are highlighted. The whole article is focused on a
single form of interest, i.e, interest on loans. Other forms of
interest are deliberately excluded from the discussion. Individual
concepts within the title are discussed and clarified before the
elaboration on the subject as a whole. The terms interest and
Riba are explained as concepts in both theory and practice with
examples. The details of Riba prohibition are explained with
authentic Shariah sources. It distinguishes the kinds of loan
that is encouraged from that which is forbidden. Finally, the
subject as a whole is discussed by providing economic evidences,
and facts. The question in the titled is answered with economic
arguments, logic, and facts. The key points are summarised in
the conclusion, and the needed future effort on this subject are
described briefly].
INTRODUCTION
The issue of Interest-Riba equivalence is now
undisputed among Islamic scholars. It is a dispute that was
settled a long time ago in our Islamic scholastic history. It is
arrogance to go around confusing the issue. The Ummah would
probably have heard the statement interest is Riba . Majority
of Ummahs populace is also likely to have come across with
Quranic verses and Hadith of Prophet (may peace be upon
him) on the prohibition of Riba and punishment for those
who violate the prohibition. As a result, freeing banks from
interest (Islamic banks) is a growing trend in various places of
the world. However, there is not a single Islamic bank in our
society. The whole economy is built on Interest based banking.
Our people are generally faithful to religion. The reason why our
people are not moving away from interest is not because they do
not love Islam, nor because of disregard to the Quranic verses
on Riba prohibitions. There are primarily two reasons. Firstly,
our people are not well educated on this subject. Secondly, they
are in confusion due to the critics of Interest-Riba equivalence.
As a result, there are unanswered questions in their mind.
Why is interest considered to be Riba? What alternatives do
Islam provide? If these questions can be answered with proper
evidences, logic and facts, it will, Inshaa Allah, be an important
first step towards Islamic banking.
In this article, I will try to answer the question in
the title from an economic perspective as indicated in the title.
Prior to answering the question, there is a need to explain few
concepts. A person cannot agree to a statement that interest is
Riba without knowing the meaning of interest and Ribaa
pre-requisite for knowing the similarity. The term interest
throughout this article is taken to mean only loan interest. My
focus is not on other interests, for example interest on deposits.
CONCEPTS EXPLAINED
INTEREST
Interest can be defined as (investorwords.com) the fee
charged by a lender to a borrower for the use of borrowed money,
usually expressed as an annual percentage of the principal; the
rate is dependent upon the time value of money, the credit risk
of the borrower, and the inflation rate. Here, interest per year
divided by principal amount, expressed as a percentage, is also
called interest.
The two major forms of interest in the financial world
are simple interest and compound interest. Simple interest is
calculated on the original principal only. Accumulated interest
from previous periods is not used in calculations for the
following periods. Compound interest is calculated each period
on the original principal and all interest accumulated during
2008 80