Table of Contents
Introduction
Interest is one of the crucial elements in dealing with transaction in banks and financial institutions. If one is pressed for funds, applying for loans will be one of the first prime choices to solve this type of issue. Of course, there will be interest involved. The role of interest has become so prominent in financial world and it is not possible to not getting involved with any transactions or loans without interest. Looking at the world nowadays, there are tons of financial products that has the element of interest in it such as credit cards, personal loans, home loans and conventional insurance. Without realizing it, one can easily join in the bandwagon of piling debts and poverty.
However, in Islam, interest is completely prohibited. Prohibition of interest or known as riba is, no doubt, the most distinguished feature of Islamic economics. It is considered a heavy sin to do riba and Muslims who practicing it will be punished in hereafter, as stated by the Quran itself in several verses. Although God forbid the believers in practicing riba, just like the prohibition of taking alcohol or gambling, it doesn’t appeal that much to the attention of Muslims since it is normalized in conventional banks and financial institutions. Granted, some might have known about the prohibition of riba, yet quite a handful, or majority of people still keeping the practice ongoing. The lack of understanding and knowledge about riba itself has making it harder for every Muslim individuals to get rid of this embedded elements in their everyday life.
The normalisation of riba should not happened if only every Muslim knows the downsides of doing riba. It does not only affects them individually, but also may affects the society and economy if it’s not removed from the transactions. It is important for everyone, including the Non-Muslim to understand what is riba and the types of it and of course, why it is banned in Islam and the importance of the prohibition of riba.
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Concept and Background of Riba
Generally, interest is known as an excess above what is due or expected. (Merriam-Webster Dictionary 2019, interest entry). In the language of Latin, Riba or Interest is derived from the word Interesse which means compensation for a debtor’s defaulting (Lexico Dictionary 2019, interest entry). In Arabic, the term Riba is an equivalent to the term interest used in traditional banking operations. This is due to the fact that in Arabic language, riba literally means an increment or addition. Additionally, riba in etymology means Ziyadah (additional). It is simply defined as charging predetermined additional amount on a loan extended based on length of credit period (Corporate Finance Institute 2019).
In the specific sense, riba is generally translated into English as usury or interest but in fact it has a much broader sense under shari’ah (Haqqi 2009). According to the shari’ah terminology, riba can be defined as an excess, increase or addition without due consideration. In terms of linguistics, riba means to grow and enlarge. Meanwhile, according to technical terms, riba means additional intake of the underlying substance or capital. Referring to the economic terms, riba is the excess amount of principal money lent by lenders from borrowers.
The practice of riba has begun since 3000 years ago and during that period, a systematic credit system was utilized in which wheat loans were based on the quantities and loans of silver metals were based on weight. At the time of Babylon era, the Regent Hammurabi introduced a rule known as the Code of Hammurabi which recognised interest rates and made it a valid rate on the side of Neo laws and the rule has been used for almost 1200 years old. (Homer & Sylla 1977). In the early days of the third century, this interest-taking practice was a resistance from the church and the priest. In addition, there are also evidence that the loans issued in the state of the monarchy in European countries are also based on the interest (Homer & Sylla 1977).
Riba is a term, known and used in economic transactions by the community of Arab before the existence of Islam. At that time, riba is loosely defined as additional money due to the delayed repayment of debts. Before the arrival of Islam in Mecca, riba is not an uncommon concept to the Arabs and there’s quite a huge amount of lenders, especially those rich traders and merchants. The interest rate is quite high and it does bring difficulties to those individuals who borrows commodities from the lenders. However, when Islam arrives, riba has gradually been rejected as it is not convenient and very oppressive towards the borrowers. The prohibition comes in four phases, based on a few surah commanded by Allah S.W.T. Prophet Muhammad (PBUH) did warns about the danger and consequence of practicing riba. Hence, riba is solely prohibited and the Muslim community in Mecca and other parts of the world are forbidden to do riba at all cost.
Looking back at the history of interest, the existence of riba is not only known in the religion of Islam but also prevailed in other religions. In Christianity, Prophet Jesus has mentioned on the prohibition of riba in The New Testament. He had asked his followers to lend but not to take back. ‘Give to the one who asks you, and do not turn away from the one who wants to borrow from you’ (Matthew 5:42). The continuation of this verse is as follows, ‘And if you lend to those from whom you expect repayment, what credit is that to you? Even sinners lend to sinners, expecting to be repaid in full.
But love your enemies, do well to them, and lend to them without expecting to get anything back. Then your reward will be great, and you will be children of the Most High, because he is kind to the ungrateful and wicked’ (Luke 6:34-35). Prophet Jesus has encouraged the believers to never be selfish to those in need of financial assistance, although the person is an enemy or stranger and he did warned everyone to never obtain any additional commodities on top of the borrowed ones.
Types of Riba
Riba can be divided into two main categories, Riba al-Nasiyah and Riba al-Fadl. Riba al-Nasiyah can be defined as is an increase in payment from a borrower to a lender over the original loan amount charged by the lender due to delay in time of payment. An example of the occurrence of Riba al-Nasiyah is when an organization lends an individual a certain amount of money for a specified period of time on the condition that the particular individual returns it back to that organization with an additional amount of money. The additional money is actually considered as interest or riba as there is an excess compensation without consideration.
When the buyer is unable to pay, there will be an extension of time given by lender accompanied by additional payment on top of the original amount that needs to be paid by the borrower. Looking at the everyday situation, riba al-Nasiyah can be interpreted based on the interest rate, set by conventional banks. Whenever borrower apply for funds, they will be charged when making loan payment. Property and vehicle buying are often associated with this type of riba. For instance, an individual has borrow 1000 dollar from a finance institution, but there will be an additional of 200 dollar payment if the individual fails to do repayment within the given time. Same situation occurs while doing personal loans for college fees. Sometimes, a financial institution will set a certain interest rate to the borrowers if they didn’t settle up the payment according to the specific date or time.
Riba Al-Fadl is a riba that occurs when trading with a variety of supplements or excess. This type of riba occurs when there is a sale transaction of ribawi items, such as barley, wheat, dates for the similar type of commodity but different quantities or weight (Investment & Finance 2005). The example of this type of riba can be constructed in an example where an individual is selling 3kg of wheat with 2kg of barley. This exchange is not allowed as it is an exchange of similar types of commodity but with different weight. Another example will be exchanging 5 grams of gold with 15 grams of gold. The unequal amount of weight from this exchange can be said as Riba Al-Fadl.
Prohibition of Riba in Islam
In the religion of Islam, the believers are not allowed to do riba as it is deemed as haram. Since the arrival of Islam in the Arab community in Mecca, interest or riba is no longer practiced as it is putting the borrower in a tough situation. Because of this, Allah S.W.T. has commanded everyone, especially those Muslim believers to completely banned the practice of riba. The prohibition of Riba can be refer on the several verses in the holy Quran. In fact, the seriousness of this matter has been highlighted eight times in four different surah. In surah Ar-Rum, Allah S.W.T has talked about riba and how it is not encouraged at all to expect an interest from someone’s wealth or property.
“And that which you give in (to others), in order that it may increase (your wealth by expecting to get a better one in return) from other people’s property, has no increase with Allah; but that which you give in charity seeking Allah’s Countenance, then those they shall have manifold increase” (Ar-Rum 30:39).
The prohibition of riba is also prevailed in Surah Al-Baqarah. The verse clearly stated the prohibition of riba in Islam and one is not allowed to do so as it contradicts with the commandment of Allah S.W.T. Only buying and selling without the presence of interest is considered lawful.
“Seized in this state they say: ‘Buying and selling is but a kind of interest’, even though Allah has made buying and selling lawful, and interest unlawful” (Al Baqarah 2:275).
Prophet Muhammad (PBUH) has always advised his ummah to avoid practicing riba at all cost. There are too many downside of practicing it, both in religion and societal aspects. As mentioned above, the verses has strictly forbid any Muslim from getting involved in riba as it is a heavy sin and there will be consequence in hereafter for those who still refused to denied riba in transaction and such. It is stated in the Surah An-Nisa on the prohibition of riba and the punishment that Allah S.W.T. has prepared for those who continue to do riba.
“And their taking of Riba (usury) though they were forbidden from taking it and their devouring of men’s substance wrongfully (bribery). And We have prepared for the disbelievers among them a painful torment” (An-Nisa, 4:161).
Moreover, if we were to look at the usage of riba in modern days, it is definitely more beneficial towards the rich compared to the poor. The practice of riba has widen the gap between these two social class and the injustice of interest has made the poor struggled in so many aspects of life, particularly in financial aspect. For instance, loan contract or riba al-Nasiah is seen as exploiting the poor as there are the elements of usury in it with a higher rate. Not only that, there is a deadline to be met and if it’s not fulfil, the contract will be revoked. Sometimes, the poor will have a hard time getting financial aid or an occupation with satisfactory pay and because of this, they are forced to do personal loans from the banks with high interest rate to buy a house or a car.
While the rich gain profits on the high interest rate, the poor are struggling to do repayment and sometimes, their property can be repossessed due to the inability to make payments since the amount of interest is too high. It is not surprising to see that there are an increasing amount of cases where people are no longer eligible to acquire assets in a short amount of time and falls into poverty within 5-10 years. The rich has not being affected by the interest rate, given that they are the one who benefited from it, especially those who fed on the profits of interest. This situation clearly shows that riba oppresses people who is not financially stable into getting involved with the never ending debts and making the rich even richer, while the poor becomes poorer.
Apart from that, riba is potentially harming the economy as it will disrupt the balance of the supply and demand. Higher interest rate will contributes to the decrease of economic growth. When banks offer high interest, people will be attracted to do savings in hopes of getting a high return from capital utilisation in the industry and business sectors. Due to this, the bank will be forced to invest their money in less productive activities such as purchasing government securities. The aftermath of this will invoke inflation, unemployment and economy recession. Additionally, high interest rate will subdue investor’s traction, resulting in lack of income. All the risks of riba will be puts on the shoulder of the borrower. This is another prime reason on why it is important to disallow riba.
Besides, riba is prohibited due to the masses of people depending on the profit from doing riba rather than occupying real jobs or doing business. Any real effort, skills and knowledge will not be utilized as everyone will start to rely on unearned income. Simultaneously, many individuals will get involved in wasteful activities such as betting and gambling and gradually becomes unproductive. Youth, especially are among those group of age that will fall into this incredulous behavior, thus making the future generation clouded with the images of futile wealth. This is why it is important for everyone to acknowledge how destructive it is to practice riba and why it is prohibited.
In personal context, Muslim scholars agreed that riba can also be detrimental to oneself and their relationships, whether it is among spouses or siblings. It is a general knowledge that to do loans from the commercial banks, there will be a certain rate of interest applied to those borrowers. Young spouses, students and fresh graduates will usually have no other options but to make loans on certain things such as cars, house or college fees. Oftentimes, the financial stress due to the unreasonable rate of interest from the loans can led to various complications, for instance, depression and anxiety. Married couple may get affected by this problem, which led them to divorce and extra-marital affairs. All of this occurred just because of the existence of interest in their transactions and banking matters. Hence, it is very obvious on why prohibition of riba should be reinforced.
Prohibition of riba is very crucial element in order to create a socially responsible economy. Since there is an increase of Islamic investment, riba will gradually be removed from transactions and thus, the focus of creating social justice and equality in wealth division can be fulfilled. The prohibition is also a form of protection for everyone from being the victim of opportunists.
Consequently, the prohibition of riba by should be seen as an effort to open up everyone eyes about the importance of treating everyone fairly with compassion and selflessness. A true Muslim believer should understand that the act of riba could grow in them and shape their nature into greed and egoism. Not only it will disrupt the true intention of being a Muslim, riba can destroy the harmonious stance on society as everyone will compete with one another to gain wealth rather than distributing it.
Conclusion
When all is said and done, riba’s prohibition is enforced with reasonable causes. It is safe to conclude that practicing riba will resulted in various complications toward the society and nation. Everyone now should realize that forbidding riba will served as a preventative measure from the creation of extra liability that is literally non-existent. The danger of interest is giving someone or an organization authority to get hold of assets or properties of individuals as well as businesses and countries in a deceitful way. It is of course morally not right to do so and clearly unfair, thus Allah S.W.T. prohibits human being from doing it.
To sum up, it is going to be extremely hard for everyone and firms to remove interest or riba from the system, given that conventional banking has been utilizing this system for many years. However, being a Muslim has made us responsible to not deal with riba and decline the interest based system. The emergence of Islamic banking has shed a light on this issue and has given more exposure towards the downside of interest or riba. Islamic banking considers interest as an unjust compensation that interferes with the balance of economic life.
Riba is only going to benefit those who are fortunate, meanwhile it is a huge disadvantage for those who is not fortunate enough. Economic wise, it is not beneficial at all for the developed and poor nations. Overcoming the practice of riba needs the cooperation of all parties, whether it is from the organizations and banks itself or individuals. For starters, there should be a gradual change of finance system. Conventional banks should take an initiative in copying the Islamic finance system. Interest should be converted into donations and rather than utilizing the interest for self-benefit, everyone should utilize the funds by giving it back to the society through social initiatives such as education, health, environment, and of course toward the less unfortunates.
The result of this investments will definitely benefit the society in a positive way and shape their attitudes and abilities as a good human being with compassion and positivity. Surely, there will be less issues on the poverty and the financial stress will gradually diminished if it’s correctly handled. There is no need to borrow money or reverse mortgages to care for the needy and every nations will be able to experience exponent growth in economy.
References
- Surah Al-Baqarah.2:275. Available from: https://quran.com/2/275
- Surah An-Nisa 4:161. Available from: https://quran.com/4/161
- Surah Ar-Rum 30:39. Available from: https://quran.com/30/39
- Haqqi, A. R. A. 2009, The philosophy of Islamic law of transactions, CERT Publications, Selangor
- Luke 6:34-35. Available from: https://www.bible.com/bible/111/LUK.6.34-35.NIV
- Matthew 5:42. Available from: https://biblehub.com/matthew/5-42.htm
- Homer, S, Sylla, R 1977, A History of Interest Rates (Wiley Finance), Rutgers University Press, New Brunswick, New Jersey
- Corporate Finance Institute 2019, Cash Credit. Available from: https://corporatefinanceinstitute.com/resources/knowledge/finance/cash-credit/. [ 31 July 2019].
- Investment & Finance, 2005, Riba Al-Fadhl. Available from: https://www.investment-and-finance.net/islamic-finance/r/riba-al-fadhl.html. [30 August 2019].
