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Riba (Arabic: ربا ,الربا، الربٰوة ribā or al-ribā, IPA: [ˈrɪbæː]) can be roughly translated as "Usury", or unjust, exploitative gains made in trade or business. Riba is mentioned and condemned in several different verses in the Qur'an (3:130, 4:161, 30:39 and perhaps most commonly in 2:275-280). It is also mentioned in many hadith.
While Muslims agree that Riba is prohibited, there is disagreement over what it is. It is often used as an Islamic term for interest charged on loans and many but not all scholars equated it with all forms of interest. There is also disagreement over whether it is a major sin and against sharia (Islamic law), or simply discouraged (makruh).
- Riba an-nasiya: an excess (riba) charged for a loan in cash or kind.
- Riba al-Fadl: the simultaneous exchange of unequal quantities or qualities of a given commodity.
- 1 Etymology and definitions
- 2 History
- 3 Scripture on Riba
- 4 Sharia and Riba
- 5 Interest
- 6 Alternatives
- 7 See also
- 8 Notes
- 9 References
- 10 External links
Etymology and definitions
The word was used by the Arabs prior to Islam to refer to an increase. In classical Islamic jurisprudence the definition of riba was "surplus value without counterpart."
Definitions of Riba include:
- unjustified increment in borrowing or lending money, paid in kind or in money above the amount of loan, as a condition imposed by the lender or voluntarily by the borrower. Riba defined in this way is called in Fiqh riba al-duyun (debt usury).
- an increase in a particular item. The word is derived from a root meaning increase or growth.
- non-equality in an exchange. This can be different results from the exchange of nonequivalent quantities (Riba al-fadl) or from the presence of a risk in which the other contractual party does not share.
- interest or usurious interest. Historically Islamic legal scholars have interpreted the Quran as "prohibiting any loan contract that specifies a fixed return to the lender" on the grounds that it provides "unearned profit to the lender" and imposes "an unfair obligation on the borrower." In the modern era most Muslim countries allow moderate interest rates (some banning compound interest), while Islamists and revivalists" preach that all interest is socially unjust and should be banned;
- all forms of interest charged on loans
- Banned in Islam but evaded by legal subterfuges (known as hila, pl. hiyal) where, for example, a money lender buys something and later sell it back for a greater amount. In contrast Islamic banks charge fees or make the account holder share in the profits and losses of the bank;
- "all interest, regardless of form, context, or magnitude"
- "Any excess on the principal sum of loan irrespective of the amount, purpose and duration of the loan."
- interest - profit from the loan of money or goods, which is prohibited in any degree but hardly observed in any Islamic country, where instead it is either disregarded (considered permissible provided it is not excessive (Egypt)), or "referred to by some such euphemism as `commission`" 
- Only exploitative interest charges
Most Islamic jurists (Fuqaha) describe different kinds of Riba:
- Riba an-nasiya: Riba on Credit Transaction, when two items of same kinds are exchanged but one or both parties delays delivery or payment and pays interest, (i.e. excess monetary compensation in the form of a predetermined percentage amount or percentage).
- Riba al-fadl: the simultaneous exchange of unequal quantities or qualities of a given commodity.
- Riba an-jahiliya: usury practiced in pre-Islamic Arabia referred to in Quran 3:130 where a debt was "doubled and redoubled" each year if the borrower could not pay what was owed.
John Esposito describes riba as a pre-Islamic practice in Arabia "that doubled a debt if the borrower defaulted and redoubled it if the borrower defaulted again". It was held responsible for enslaving some destitute Arab borrowers.
According to a conservative source (Youssouf Fofanaa), "some jurists saw riba [which he defines as interest] forbidden early in Mecca, some in the year 2 AH and some after the opening of Mecca, but the majority agreed on its prohibition". Other sources, such as the Encyclopedia of Islam and the Muslim World, state that early Muslims disagreed on whether all or only exorbitant rates of interest could be considered riba, and thus declared forbidden, but the broader definition won out with a consensus of Muslim jurists holding that any loan that involved an increase in repayments was forbidden. One particular jurist (al-Jassas, d.981, who is criticized by Modernists) is credited with establishing the orthodox definition of riba -- "stipulat[ing] excess [payment] in a loan or debt", (i.e. interest on debt).
Some (scholar Timur Kuran) attribute the basis of religious condemnation of interest on loans to the widespread practice in the ancient world of selling loan defaulters into slavery and often shipping them to foreign lands. Among other monotheist Abrahamic religions, the Jewish Torah prohibited lending at interest to fellow Jews but allows lending at interest to non-Jews (i.e. Gentiles) (Deut. 23:20). The prohibition against interest in early Christianity made no exceptions, and centuries before Islam, Christian theologians condemned interest as an "instrument of avarice". Since Jews were barred from many professions in Christian territories and charging interest to non-Jews (Gentiles) is permissible in Judaism unlike Christianity in which lending on interest is illegal to Christians and non-Christians alike, many Jews were driven to money lending with interest as their profession.
Historically, while the Islamic states followed classical jurisprudence in prohibiting an increase in repayments on loans (interest), the giving and taking of interest continued in Muslim society "at times through the use of legal ruses (hiyal), often more or less openly." In Ottoman Empire, the business of money lending was completely in the hands of Jewish Sarrafs and the Europeans who visited Ottoman Empire stated that Ottoman economy would not function without these Sarrafs. Many of these Sarrafs were accused of cheating by cutting the corners of coins or cheating in their weights. In Persia also, money lending was dominated by Jewish Sarrafs. In nineteenth century Shiraz, almost all Jews were active in lending money on interest. According to Timur Kuran, "in the sixteenth century, an Ottoman sultan limited the annual rate of interest to 11.5% throughout the empire", though this was allowed "only on transactions that satisfied the letter of the ban through stratagems; this order was duly ratified by a legal opinion (fetva)." One common "stratagem" to circumvent of the ban on interest in the Ottoman era was known as istiglal and involved the borrower selling his house to a lender and immediately leasing it back. The proceeds of the sale served as the loan, the rent of the lease served as interest payment. (According to another source—International Business Publications—the "common view of riba among classical jurists" of Islamic law and economics during the "Islamic Golden Age" was that interest charges on loans of gold and silver currencies were unlawful, but applying "interest to fiat money -- currencies made up of other materials such as paper or base metals -- to an extent" was not riba. Thus, when "currencies of base metal were first introduced in the Islamic world", Islamic jurists did not forbid interest charges on them as riba.)
This prohibition was reconsidered by Islamic Modernists starting in the late 19th century in reaction to the rise of European power and influence during the Ages of "Enlightenment", "Discovery" and colonialism. According to author Gilles Kepel, for many years in the 20th century, the fact that interest rates and insurance were among the "preconditions for productive investment" in a functioning modern economy led many Islamic jurists to "rack their brains" to "find ways of" justifying the use of interest "without appearing to bend the rules laid down by the Koran".
In the late 20th century (mid-1970s) however, Islamic revivalists/Islamists/activists have worked to define interest as riba, to enjoin Muslims to lend and borrow at "Islamic Banks" that avoided fixed rates, and to mobilize to pressure governments to ban the charging of interest. In 1976, King Abdulaziz University in Jeddah organized the First International Conference on Islamic Economics in Makkah. At the conference, "several hundred Muslim intellectuals, Shari'ah scholars and economists unequivocally declared ... that all forms of interest [were] riba".
Scripture on Riba
Quran and prohibition
The Qur'an deals with riba in 12 verses, the word appearing eight times in total, three times in 2:275, and once in 2:276, 2:278, 3:130, 4:161 and 30:39.
- And whatever Riba you give so that it may increase in the wealth of the people, it does not increase with God (Quran 30:39)
The other Medinan verses:
يَا أَيُّهَا الَّذِينَ آمَنُواْ لاَ تَأْكُلُواْ الرِّبَا أَضْعَافًا مُّضَاعَفَةً وَاتَّقُواْ اللّهَ لَعَلَّكُمْ تُفْلِحُونَ
Culminating with the verses in Surah Baqarah:
Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the Devil; this is because they say: "Trade is like interest" while God has permitted trade and forbidden interest…God deprives interest of all blessings but blesses charity.... O believers, fear God, and give up the interest that remains outstanding if you are believers. If you do not do so, then be sure of being at war with God and His messenger. But, if you repent, you can have your principal.... (Quran 2:275-280)
ذَٰلِكَ بِأَنَّهُمْ قَالُوا إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا ۗ وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا
According to Youssouf Fofana, jurists do not consider the first two verses as clear prohibitive verses on the matter, whereas the latter two have been understood to prohibit Muslims from riba.
Muhammad ibn Jarir al-Tabari quotes a number of Tabi'een (Muslims who were born after Muhammad died but who were old enough to be contemporaries of the Sahaba "Companions"), who state the verse from Surah al-RumQuran 30:39 refers to a gift, whereas al-Jawzi quotes Hasan al-Basri as stating it refers to riba. Thus, there is insufficient indication from this verse that riba is prohibited.
The next verse (3:129-130) is seen by many as prohibiting riba, including Ibn Hajar al-Asqalani (a medieval Shafiite Sunni scholar of Islam). However it appears that recourse to some traditions relating to Amr ibn Aqyash are required for the prohibition as the verse itself could be interpreted as expressing a preference against interest.
Conservative scholar Mohammad Nejatullah Siddiqi, interprets Quranic verses (2:275-2:80) to mean that riba is not only "categorically prohibited" and "unjust" (zulm), but is defined as any payment "over and above the principal" of a loan.  Other conservatives also see the verse as categorically forbidding riba. The background of these verses was the dispute between two clans, Banu Thaqif and Banu Amr ibn al-Mughirah, over riba due on loans between them. As such, the jurists historically agreed on the prohibition of riba from these verses and termed it riba al-nasia, distinguishing it from the interest in exchanging like goods in different quantities at the same time, mentioned in a number of narrations, riba al-fadl.
Modernist Mohammad Omar Farooq argues that the Quran condemns riba but does not define it. Raquib Zaman notes that the only figures or only definition for riba given in the Quran are "doubling and quadrupling (the sum lent)" in Quran 3:129-130.
Hadith and prohibition
Riba is mentioned in a number of hadith (the body of reports of the teachings, deeds and sayings of the Islamic prophet Muhammad that often explain verses in the Quran). According to Mohammad Omar Farooq, "it is commonly argued that riba is defined by hadith."
In Muhammad's farewell sermon he is reported to have said:
- "God has forbidden you to take Riba, therefore all riba obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer inequity. God has judged that there shall be no riba and that all the riba due to `Abbas ibn `Abd al Muttalib shall henceforth be waived.".
- Muhammad cursed the accepter of usury and its payer, and one who records it, and the two witnesses, saying: They are all equal. (Abdullah, however, could not swear to the cursing of the 'And the writer and the two witnesses)
Examples of hadith denouncing what jurists call Riba al-Fadl include:
- Narrated Abu: We used to be given mixed dates (from the booty) and used to sell (barter) two Sas (of those dates) for one Sa (of good dates). The Prophet said (to us), "No (bartering of) two Sas for one Sa nor two Dirhams for one Dirham is permissible", (as that is a kind of usury). (See Hadith No. 405).
- Narrated 'Umar bin Al-Khattab: God's Apostle said, "The bartering of gold for silver is Riba, (usury), except if it is from hand to hand and equal in amount, and wheat grain for wheat grain is usury except if it is from hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount, and barley for barley is usury except if it is from hand to hand and equal in amount.".
- Narrated Ibn 'Umar: Muhammad said, "The selling of wheat for wheat is Riba (usury) except if it is handed from hand to hand and equal in amount. Similarly the selling of barley for barley, is Riba except if it is from hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount.
- Narrated AbuHurayrah: Muhammad said: If anyone makes two transactions combined in one bargain, he should have the lesser of the two or it will involve usury.
Raqiub Zaman notes that when riba is described in hadith literature, it is "in the context of sales", with "no mention of loan (qard) or debt (dayan)" (i.e. the bartering of dates, wheat, gold, etc. is riba al-fadl not riba an-nasiya). According to the mufti of Egypt, Dr. Muhammad Sayyid Tantawy, there is nothing in the Quran or Hadith that prohibits the pre-fixing of the rate of return, as long as it occurs with the mutual consent of the parties.
The gravity of committing riba is reported to have been described by Abu Huraira:
- Narrated Abu Huraira: The Prophet said, "Avoid the seven great destructive sins." The people inquire, "O God's Apostle! What are they? "He said, " To associate others in worship along with God, to practice sorcery, to kill the life which God has forbidden except for a just cause, (according to Islamic law), to eat up Riba (usury), to eat up an orphan's wealth, to give back to the enemy to flee from the battlefield at the time of fighting, and to accuse chaste women who never even think of anything touching chastity and are good believers." 
Sharia and Riba
Whether riba is a violation of sharia (Islamic law) to be punished or simply a sin for God to judge is disputed by Muslims. Scholar Muhammad Akran Khan has noted that on the basis of the Farewell Sermon (where the Prophet abolished all claims of riba on loans),
- God has decreed that there will be no usury, and the usury of ‘Abbās b. ‘Abd al-Muṭṭalib is abolished, all of it.
and the fact that the Banu Thaqif clan was threatened with war (for abrogation of their treaty with the early Muslims if they tried to collect interest on loans from Muslims), contemporary orthodox scholars have recently argued that interest is a violation of sharia law.
However, khan argues,
"the Prophet could easily have announced the broad features of such a law. The fact is that neither the Prophet nor the Qur'an has announced any law relating to interest, as in the case of theft, adultery or murder. The attempts to convert these injunctions into a public law are quite recent. ... Neither the Prophet nor the first four caliphs nor any subsequent Islamic government ever enacted any law against riba."
An example of a more traditional attitude toward riba or at least interest charges is found in Ayatollah Ruhollah Khomeini's book of fatawa Tawzih al-masa'il. In the chapter on selling and buying (Kharid o forush) he does not forbid the charging of interest but states that lending without charging interest, "is among the good works that are particularly recommended in the verses of the Quran and in the Hadiths.")
A prohibition of interest on loans in the name of prohibiting riba, has been called "the most salient objective of Islamic economics." Its importance among revivalist Muslims was reflected in a 2004 uproar in the Pakistan parliament after an MP quoted an Egyptian Islamic scholar decreeing that bank interest was not un-Islamic. An Islamist MP responded later saying that since the Pakistan state Council of Islamic Ideology had decreed that interest in all its forms was haram in an Islamic society, no member of parliament had the right to negate this "settled issue". Among some (such as Imran Nazar Hosein) interest on loans constitutes not only a sin but the "grand design of hostile forces who have already made considerable progress, through riba, in gaining control over mankind. Their aim is to gain total control and to use that power to destroy faith in Allah."
However government policy on charging of interest in Muslim majority states is complicated even in states that have supported Islamic (i.e. interest-free) Banking.
- In Kuwait, Article 547 of the Civil Code states "loans shall be without interest. Any condition to the contrary shall be void without prejudice to the loan agreement itself". But that country's Commercial Code states "The creditor has the right to interest in a commercial loan unless the contrary is agreed."
- In Saudi Arabia, chapter 2 of the charter of the Saudi Arabian Monetary Agency states: "the Saudi Arabian Monetary Agency shall not pay or receive interest but shall only charge certain fees on services rendered to the public and to the Government in order to cover the Agency's expenses." However tradingeconomics.com reports the Saudi Arabian Monetary Agency has a "benchmark interest rate" (2 percent as of April 2015).
Commercial banks in Saudi Arabia, except for the al-Rajihis, "conduct their business on the basis on interest", and the Saudi Banking Control Law promulgated by Royal Decree no.M/5 of 22 Safar 1386AH is "totally silent" on the issue of interest.
Forbidding interest as Riba
A number of Islamist/revivalist preachers, writers and economists have attempted to provide arguments for why the Quran and traditions of Muhammad (in their view) prohibit of interest on loans. Ismail Ozsoy defines interest as riba and as "an unearned or unequally distributed income." In arguing that no matter what the rate of interest, the knowledge and the consent of the two parties, both the paying and the receiving of interest are sinful and unjust because the interest rate is "fixed at the very beginning, but it is impossible to predict the outcome of the business at which the loan is used, profit or loss, or how much either would be." Ozsoy states that his argument is supported by Quran 2:275-280 and particularly the phrase, "deal not unjustly and ye shall not be dealt with unjustly".
Mohammad Nejatullah Siddiqi argues that prohibition of interest is prohibition of a type of exploitation. In matters of "consumption loans" (personal loans to buy something), those who have wealth should assist those without. In productive loans (i.e. commercial/industrial loans), a guaranteed return on capital is an unjustice and sharing of profits between entrepreneur and financier is just.
Taji al-Din argues that charging interest on loans restricts the circulation of wealth to those who already have it, since lenders do not provide loans to those who are unable to repay them. This is forbidden by the Quran and results in an increase the divide between the rich and poor.
Islamist leader Abul A'la Maududi believes the charging interest on loans causes an imbalance between production and consumption, by the transferring of purchasing power from those with a propensity to consume to those with a propensity to invest. This transfer of income increases production and decreases consumption which (somehow) increases prices of consumer goods, reinforcing this process and (Maududi believes) results in economic evils such as stagnation, depression, monopoly and ultimately imperialism. Eliminating return on capital with interest-free loans along with zakat, and profit-share would restore this balance. The focus shifts to the entrepreneur whose activity becomes the only source of income along with wages, giving him the upper hand in society. Siddiqi and Ganameh cite the hadith of "income devolved on liability" in this context.
Ibn Rushd argued the rationale for prohibition relates to the possibilities of cheating that exists in riba, which is clearly visible in riba fadl.[page needed] Other arguments that some writers[who?] try to extract from indications on the divine texts include the rationale being corruption, unjust acquisition of property rights, destruction, and a detrimental personality.
Hameedullah believes interest is unjust because the borrower bears risk and the lender does not. The Islamic principle is for a reward, there must be some liability incurred; otherwise, a return is prohibited.
Ghulam Ahmed Pervez also argued against all forms of interest based lending. Khaled Ahmed mentions that the works of Parwez “are currently banned or under attack”. Parwez argued that the correct definition of this term, according to the Quran, is any excess return on a loan above the amount that was lent. According to Parwez, the Quran allows a return on actual contributions and efforts, and not on pure capital investments. Even charging for a product above its actual worth Parwez saw as Ribba, claiming that the "fair price" should be decided by society, and not arbitrarily by the sellers. He also disagreed with the orthodox emphasis on the concept of "risk" in interest based lending, arguing that if risk was an important factor in making such financial transactions allowable, then gambling would be allowed by the Quran, when it is not. Parwez summarized his views on riba as follows:
- "To reiterate, riba means more than simply ‘interest’. It is the singular factor that makes all human systems exploitative and thus contrary to the Qur’an. In the Divine system every citizen works to full capacity and happily keeps a minimum for him/herself whilst giving most of it to society. In a human system every individual seeks to do as little as possible and simultaneously maximise his profits through the work of others. The two system-types are so fundamentally different that the Qur’an even terms human systems as a ‘revolt against God and His Messenger’ (2:279)."
Benefits of forbidding
Islamists writers, have asserted that contrary to what non-Islamist economists maintain, banning interest would not mean a collapse of savings but greater stability, efficiency, development etc.
Muhammad Siddiqi states that replacing fixed rates with profit-sharing would make the financial system more stable, more entrepreneurial, and that savings would not collapse without interest because savings are a function of income and desire for interest is minor. Mannan argues that replacing interest with profit and loss sharing would stimulate job creation and economic vitality and would be in line with the cooperative norm of the Quran. Mawdudi states that interest payment holds back production that is socially useful but generates a small return.
Another alleged deficiency of interest on loans is that it "lends itself to speculation" as lenders seek higher interest rates (allegedly) borrowing at low interest rates to lend at higher ones. This (allegedly) disrupts "trade cycles" and interferes with economic planning and would be remedied by banning interest charges.
Permitting "bank interest"
Most Muslims and most "non-Muslim observers of the Islamic world" believe that interest on loans is forbidden by Islam. But while this is the “majority accepted view” among Islamic jurists, it is not the consensus (ijma).
Explanations for why some Islamic scholars judge bank interest permissible include the tendency for rulers to get the fatwas they want on "key policy issues" from "official" ulama "whose task it is to legitimize" rulers' policies. Egyptian President Anwar Sadat obtained a fatwa from the Sheikh of al-Azhar ruled that interest-bearing treasury bonds were consistent with Islamic law. More recently the mufti of Egypt, Dr. Muhammad Sayyid Tantawy issued several fatawa permitting bank interest in 1991. In 1997 Shaykh Nasr Farid Wasil (Grand Mufti of Dar al-Ifta al-Misriyyah at the time) also declared bank interest permissible provided the money was invested in halal avenues: "there is no such thing as an Islamic or non-Islamic bank. So let us stop this controversy about bank interest." Dr Abd-al-Munim Al-Nimr, an ex-minister of 'Awqaf in Egypt, publicly stated that banking interest cannot be considered riba.
The practice is not new. Jurists legitimized interest for awqaf (religious endowments) during the late period of the Ottoman rule (as mentioned above). They were the first to introduce the notion that riba al-nasia was permitted.
But not all jurists opposing the formulation interest=riba are tied to governments. Doubters of the connection between contemporary "bank interest" and riba include 20th century Modernist jurists, such as Muhammad Abduh, Rashid Rida, Mahmud Shaltut, Syed Ahmad Khan, Fazl al-Rahman, Muhammad Sayyid Tantawy and Yusuf al-Qaradawi. Modernists interpreters of riba on the India-Pakistan subcontinent include: Ja'afar Shah Phulwarai (1959), Tamanna Imadi (1965), Rafiullah Shihab (1966), Yaqub Shah (1967), Abdul Ghafur Muslim (1974), Syed Ahmad (1977), Aqdas Ali Kazmi (1992), and Abdullah Saeed (1995, 1996).
- Modernist definition
Muhammad Akram Khan summarizes the Islamic Modernist position as defining riba as the money lending practices of the Makkan society (Riba an-jahiliya) where the Quran was revealed. Modernists believe this was much different from and more problematic than, contemporary bank lending. It involved high interest rates charged by rich money lenders to poor customers who borrowed for purposes of consumption, and led to the accumulation of large debts and often financial slavery. Most money loaned in contemporary society, in contrast, is for commercial purposes and investment, transacted between sophisticated parties, offering/paying interest rates set and kept low by a competitive and regulated market.
Another source (The Encyclopedia of Islam and the Muslim World) gives a similar description, stating that critics of Islamic economics, including Islamic Modernists, believe riba is distinguished from ordinary interest, that competitive financial markets "limit interest charges" and contemporary bankruptcy laws "protect borrowers against the horrors once produced by riba." Furthermore, "the goal of eradicating interest is both misguided and unfeasible," because interest is "indispensable to any complex economy".
- Other arguments
Scholar, economists, jurists embracing and expanding on one or more of these arguments include Mohammad Omar Farooq, who argues that the Quran does not define riba and that contrary to traditionalists and activists claims, hadith commonly-cited to define riba as interest are not unambiguous. Mohammad Omar Farooq notes that a number of early jurists questioned whether riba was interest. Imam Ahmad ibn Hanbal (780–855 CE), believed only Riba an-jahiliya (where the amount owed "doubled and redoubled" each year if not paid off) was unlawful "without doubt from the Islamic viewpoint". According to Nabil A. Saleh, several companions (Sahabah) of Muhammad (Usama ibn Zayd, Abdullah ibn Masud, 'Urwah ibn Zubayr, Zayd ibn Arqam), including Ibn Abbas, one of the major companions of the Prophet and earliest of the Islamic jurists, also "considered that the only unlawful riba is riba al-jahiliyyah”.
(One author—Imad-ad-Dean Ahmad—argues "ribâ as it is used in the Qur'an and sunnah" is not the same as interest, but that the "now common practice of issuing unbacked paper currency", is a "form of ribâ" and should be replaced by the gold standard.)
Raqiub Zaman argues against the translation of riba as
"an excess or addition -- i.e. an addition over and above the principal sum that is lent." If Muslim jurists are referring to interest as usury on the basis of this literal meaning of riba, than naturally one wonders why God Almighty used the terms `doubling` and `quadrupling` (the sum lent) as usury in 3:130 ... and why there was no further clarification of this verse in the Quran or by the Prophet.
Fazlur Rahman defined riba as "exorbitant increment whereby the capital sum is doubled several-fold, against a fixed extension of the term of payment of the debt."
Turkish-American economist and Islamic Studies scholar Timur Kuran questions whether an economy without interest has ever existed: "As far as is known, no Muslim polity has had a genuinely interest-free economy."
- Harm to borrower
Islamic Modernist scholar such as Fazlur Rahman Malik, Muhammad Asad, Sa'id al-Najjar, Sayyid Tantawi, differ from traditionalists in arguing that riba must involve exploitation of the needy. They differentiate between various forms of interest charges advocating the lawfulness of some and rejecting others.
Abd-al-Munim Al-Nimr, also argues that riba must involve harm to the debtor. In his fatawa permitting bank interest and declaring it non-riba, Muhammad Sayyid Tantawy argued it makes little sense to suggest that modest saving account holders are exploiting sophisticated multibillion-dollar banks that pay them the interest on their accounts. Rather it is more likely that savers have an advantage since "determination of the profit in advance is done for the sake of the owner of the capital (that is the depositor) and is done to prevent a dispute between him and the bank."
Economist Maha-Hanaan Balala questions how creditors would ever extend interest-free loans considering "the opportunity cost, erosion of value through inflation, risk of default by debtors", In answer to the complaint that it is unjust to have an income fixed (by an interest rate) for the lender while the profits of the borrower can never know with complete certainly, capital markets give greater returns (on average) for greater risk, and the lower risk of a fixed income return is compensated with lower returns (on average) than returns from shared profits.
Writers such as Fazl al-Rahman argue that an interest rate serves as a price for financing, regulating demand for it by borrowers. If this finance cost (interest rate) is taken to zero, finance markets will be faced with limited supply and infinite demand. How would credit be allocated? (This problem would apply to interest-free loans but not profit-share, cost-plus basis, or leasing of financing.)
They also advanced rational economic arguments that market rate interest is not riba because it serves the public interest (Maslaha) by allowing for efficient allocation of resources, economic development. Most of these arguments have been criticized by Islamic revivalist writers, including Siddiqi, Zarqa, Khan & Mirakhor and Chapra, a good case in point being the published Supreme Court of Pakistan Judgement on the matter.[page needed]
One critic of the campaign against "the curse of interest" in Pakistan, lawyer and Islamic scholar Kemal A. Faruki, complained that much time and energy were spent on "learned discussions on riba" and "doubtful distinctions between `interest` and `guaranteed profits,`" in the Western-style banking system, while a far more serious problem affecting the poor was ignored:
usury perpetrated on the illiterate and the poor by soodkhuris (lit. `devourers of usury`). These officially registered moneylenders under the Moneylenders Act are permitted to lend at not more than 1% below the State Bank rate. In fact they are Mafia-like individuals who charge interest as high as 60% per annum collected ruthlessly in monthly installments and refuse to accept repayment of the principal sum indefinitely. Their tactics include intimidation and force.
While the majority of Muslims and Islamic jurists consider interest riba, Mohammad Omar Farooq argues this doctrine may eventually follow other such "long-standing orthodox" but no longer accepted views, such as hadd capital punishment for apostasy from Islam, or that "triple talaq" (i.e. divorcing your wife simply by declaiming "talaq" three times) is "valid and enforceable".
To deal with the problem of zero interest creating unlimited demand for investment that is limited in supply, activists such as Siddiqi suggest a two-tier mudarabah model as the basis of a riba-free banking system. This involves the bank acting as the capital partner in a back-to-back mudarabah contract with the depositor on one side and the entrepreneur on the other side. This model can be supplemented by a number of fixed-return models (like Ijara, Istisna, Murabaha etc.). In practice the murabaha model is the bank's favourite, as it bears results most similar to the interest-based finance models.
However, it has been criticised as not following the possession by bank/seller requirements and risks taken by the financier are non-existent (being insured or guarantees provided by the customer). Additionally, Khattab has criticised the whole two-tier mudarabah system as having no basis in Islamic law, as there are no instances where the mudharib passed funds onto another mudharib, and as such is questionable.
Banks have demand deposits in the nature of loans to the bank and investment deposits. Some offer guaranteed savings accounts with permission to use the funds and a discretionary reward to the depositor as in the case of the Bank Islam Malaysia Berhad. Initially, demand deposit accounts were more common, but over time, most accounts are now investment accounts, which reflects the confidence of depositors in the ability of banks to generate a return. Islamic banking operations are successfully operating in many Muslim countries, including Pakistan, Bangladesh, Malaysia, Iran, Sudan, Turkey and Bahrain.
Insurance operations, starting in Sudan in 1977, have now been successfully implemented in a number of countries from Malaysia to Jordan. The takaful mudarabah model is used, compensating premium-paying subscribers in case they incur losses or damages without any interest-based activities.
In its campaign against Riba in the 1980s the regime of General Muhammad Zia ul-Haq replacing interest-bearing savings accounts with PLS (profit-loss sharing) instruments in Pakistan's state banks. The government also introduced and encouraged such banks to adopt financing schemes based upon the principles of mudaraba and or musharaka.
- Murabaha is a practice in which the "lender" (usually a bank) purchases, in its own name, goods that the borrower (usually an importer or trader) wants, and then sells the goods to him at an agreed mark-up. This mark-up is interest by a different name, and serves as a semantic work-around. The technique is used for financing trade, but because the bank takes title to the goods, and is therefore engaged in buying and selling, its profit derives from a real service and entails a degree, albeit minimal, of risk.
- Musharaka is a practice in which the "lender" (usually a bank) enters into a partnership with the borrower/client in which both share the equity capital—and perhaps even management—of a project or deal, and both share in the profits or losses according to their equity shareholding.
Critics claim that Islamic banks have "found it impractical to obey their own charters" and that they have "disguised interest under a variety of charges".
One area where complaints about interest charges has gone beyond revealed truth as interpreted by Islamic scholars concerns the external debt of developing countries, where in some cases the borrowers have already paid the sum they borrowed "several times, but the debt grows faster than they can repay it". Some heavily indebted countries include Afghanistan, Comoros, Guinea, Malawi, São Tomé and Príncipe. The movement for debt forgiveness (Jubilee 2000) does not argue that interest itself is sinful but that both interest and principle of large external loans should be forgiven because: debt repayment would be better spent on on poverty reduction, lenders should have known that the borrowing countries poor inhabitants are not responsible for the debt because it was lent to dictators or oppressive regimes, with much of the money was lost to corruption and wasteful projects.
Accounting concept of interest
Some writers argue for an accounting concept of interest to evaluate projects and investments. As a tool for comparing projects with countries where the interest rate is operated, however, it is argued that it is hard to see why a profit rate cannot be used.
Others argue the need of a bank rate for monetary policy. Siddiqi suggests two variables that can alternatively be used: mark-up in sales with deferred payment and ratios used in sharing modes of finance. These ratios can be used to manipulate the rates of profit. They can be determined through market forces or set by governments in public interest, as is legislated in Sudan and Pakistan.
Substitute for riba
Economic modeling in an Islamic context looks to find alternative variables and parameters. For instance, many of the key models in modern economic theory have interest (riba) as a key element. According to one author, Tobin's q could replace Interest (I).
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أَلَا إِنَّ كُلَّ رِبًا كَانَ فِي الْجَاهِلِيَّةِ، مَوْضُوعٌ عَنْكُمْ كُلُّهُ، لَكُمْ رُؤُوسُ أَمْوَالِكُم لَا تَظْلِمُونَ وَلَاتُظْلَمُونَ، وَأَوَّلُ رِبًا مَوْضُوعٍ، رِبَا الْعَبَّاسِ بْنِ عَبْدِالْمُطَّلِبِ مَوْضُوعٌ كُلُّه
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Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank interest was not riba and not un-Islamic. He said without interest the country could not get foreign loans and could not achieve the desired progress. A pandemonium broke out in the house over his remarks as a number of MMA members...rose from their seats in protest and tried to respond to Mr Bhindara's observations. However, they were not allowed to speak on a point of order that led to their walkout.... Later, the opposition members were persuaded by a team of ministers...to return to the house...the government team accepted the right of the MMA to respond to the minority member's remarks.... Sahibzada Fazal Karim said the Council of Islamic ideology had decreed that interest in all its forms was haram in an Islamic society. Hence, he said, no member had the right to negate this settled issue.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
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