Title:               Historic Judgement on Interest

Author:          Mufti Muhammad Taqi Usmani

Publisher:       Idarat-ul-Muarif-ul-Qur’an, 2007

This was an important book in the modern Islamic economics literature from an established and renowned Muslim scholar, Mufti Taqi Usmani.

The book summarizes answers to the arguments given by some people who hold the position that bank interest is Riba and hence it is not prohibited. The major arguments given include the following:

1. Riba was prohibited in very late stages of Prophet Muhammad’s (PBUH) life and Prophet Muhammad (PBUH) could not explain its scope clearly (God forbid). Hence, the scope of Riba shall not be extended to anything not specifically identified by Prophet Muhammad (PBUH) Himself.

• Mostly, debts were taken for personal needs. Interest based commercial loans were uncommon. In loans taken for personal needs, one is not earning from the amount of loan received. Hence, it seems justified that the needy person shall not be burdened with interest, especially if it is exorbitant and usurious.

• The charging of interest upon failure of payment of maturity was prohibited, but the initial increase over the principal amount was not prohibited. Compounded interest may be considered as prohibited, but the simple interest seems to be allowed.

• The wisdom behind prohibition as per Qur’an seems to be injustice. Therefore, if interest rate as price of capital is determined in market through competitive forces, it would not be allowed to become usurious. Corporations and industrialists which are provided with finance expect to earn money. The person or institution taking the loan expects to earn more than the interest to be paid. Hence, charging market determined interest should not be equated with interest on personal loans.

The respected author tactfully, logically and academically answers all these criticisms first in the light of right interpretation of Islamic sources of knowledge and then also explains the logic and wisdom behind Islamic prohibition of interest.  

On argument 1, the author mentions that Riba had been prohibited in earlier nations and traditions as well, such as in Judaism and Christianity. Riba prohibition in Islamic faith verify the prohibition mention in earlier holy books. Among the four verses on prohibition of Riba, only the last verse was revealed in later years after Hijra. Prohibition and condemnation of Riba dates back to second year of Hijra. The ambiguity in Riba was not about Riba on loans, but in some specific application of Riba in exchange. There is some difference of opinion on the specific details regarding Riba in exchange, but there has been no ambiguity at all in Riba on loans. It was appreciated by both Muslims and non-Muslims as to what is Riba in loans. That is why, Qur’an while condemning Riba, does not define Riba since it was such a well-known phenomenon that no explanation was necessary.

Nonetheless, when Qur’an mentions that one can only take back the principal amount of loan, Riba is indirectly defined and that definition is what is reported in Ahadith and by earlier jurists too with consensus.   

On argument 2, The respected author gives account of Qur’anic verses and Ahadith on the prohibition of Riba which leave no doubt on the prohibition of Riba and that this prohibition is absolute and not concerned with the purpose for which loan is taken or the rate of Riba in the loan contract.

Through careful analysis of Arab history, the respected author explains that most of the loan transactions in Arab at that time were done for commercial endeavours. Tribes used to take loans from other tribes for business purposes. Therefore, it is inconceivable that all loan transactions in Arab at that time were done for personal needs and that Riba prohibition only applies to high interest rate charged on emergency loans for personal needs.

The author rightly points out that sometimes personal loans for homes and cars are taken by wealthy people as compared to the commercial microenterprise loans provided to the entrepreneurs. Therefore, there is no reason to assume that personal loans are always taken up by poor people who are unable to afford and commercial loans are always taken by wealthy people and institutions who are able to afford. Hence, it cannot be argued that charging interest on consumer loans is incorrect while charging interest on commercial loans is allowed. There is no ambiguity left in guidance on this matter. It is not a matter of Ijtihad. There is no reason why such a difference is introduced which is not warranted in Islamic sources of knowledge.   

The author mentions several Ahadith which reveal that lenders are asked not to take gifts like fruits, meat or take any service like riding the borrower’s means of transport. Pious people used to even avoid standing in shelter setup by the borrower, lest it be considered a reciprocal benefit connected with the loan transaction. In the light of these guidelines, there is no room for any rate of interest on the premise that it is not exorbitant. Furthermore, in prohibiting Riba, Qur’an categorically only allows taking back principal amount.

On argument 3, the author rightly mentions that if excess in wrongdoing is prohibited, it does not mean that if the wrong act is not excessive, it will be allowed and tolerated. The author gives a very easy to understand example. Qur’an warns that one should not sell Qur’anic verses and message for a very short sum of money. It does not imply that the same can be done if huge sum of money is involved. Therefore, the condemnation of compound interest shows the intensity of crime and does not imply that small amount of interest is tolerable. It is confirmed by the fact that several Ahadith categorically condemn taking even 1 dirham of Riba. Qur’an also allows taking principal amount of loan back meaning that anything asked over the principal amount of loan is prohibited.

On argument 4, the author explains that Islamic directives are based on clear basis (Illat), rather than wisdom (Hikmat). Wisdom may not be visible in clear form in every matter and in clear terms. Some prohibitions may not affect the direct parties involved as much as they affect the collective society.

In describing economic rationale for the prohibition of Riba, the respected author highlight concentration of wealth which results in interest based banking system. A great number of small savers deposit their surplus savings with banks and banks use these funds to provide loans to small elite of large capitalists. This way, wealth flows from many small savers to a small number of large capitalists. These capitalists earn exorbitant profits and insure their assets and operations. These large capitalists and corporations who are the primary beneficiaries of bank lending cover their cost of finance by raising output price if they have to. They insure themselves and the insurance claim is entertained by the insurance company from the insurance premiums of common people.

Thus, interest based banking system in a capitalistic economy results in concentration of wealth. It also has negative consequences on market competition. When access to finance is asymmetric, in most large scale and capital intensive businesses, large players are able to ward off competition. Asymmetric access to credit creates a strong barrier to entry and hence leading to market concentration and its associated imperfections and inefficiencies.