Believers, fear God and waive what remains due to you on account of Riba (Al-Baqarah 2: 278)

The Qur'an emphatically and unequivocally prohibits Muslims from taking Riba. The prohibition of Riba, in view of the related directives of the Qur'an, has remained undisputed throughout Muslim history. However, after the general practical dominance of the capitalistic approach in the world economy, a number of questions, which previously did not have much significance, have not only become pertinent but also need precise answers in the successful designing of any economic model based on the directives of Islam.

In this brief article, we shall consider some of the important questions that are generally raised in this respect. The questions that shall be considered are:

• What is Riba? What is the criterion on which we can term a particular transaction to be based on the concept of Riba and thus prohibited?
• Does the prohibition of Riba apply only to transactions based on compounded interest or does it also include transactions based on simple interest?
• Does the prohibition of Riba apply to interest charged on commercial loans as well or is it restricted to interest charged on personal, non-business loans only?
• Why is Riba prohibited by the Qur'an?
• Does the prohibition of Riba also hinder any inflationary adjustments in loans?
• Does the prohibition of Riba also affect the concept of rent, as there apparently seems to be no significant difference in Riba and rent? Is there any difference between Riba and rent?
• Does Islam allow a 'buy back on mark-up' arrangement?
• Is payment of Riba also prohibited in the Islamic Shari`ah?
• In case of the abolition of Riba from a Muslim economy, will the Muslims be liable to honor their past financial commitments, which may be based on Riba?

In the following sections, each of these issues shall be considered briefly.

The Implication of the Word 'Riba'

The first and probably the most significant question that is raised in this connection relates to the meaning and the implication of the word Riba. Incidentally, some time back, when the Supreme Court of Pakistan asked for assistance from Muslim scholars and thinkers in taking a decision about the prohibition or allowance of contemporary commercial interest, it also asked the same question. The question asked by the honorable court was worded as follows:

The Holy Qur'an has prohibited Riba. What is meant by this term? What is its true definition and connotation in the light of the Holy Qur'an and Sunnah of the Prophet (PBUH)?

It should be clarified at the outset that the word Riba is not a term specific to the Qur'an. On the contrary, the word has been used in the Qur'an in its simple literal meaning. This is a very important fact and has its implications in determining the meaning of the word Riba.

Had the word been used as a term in the Qur'an, it would have been necessary that the meaning be determined on the basis only of its usage in the Qur'an. On the other hand, if Riba is a common Arabic word, and is used in the Qur'an in its common literal meaning and connotation, then the determination process would not depend solely on the Qur'an but it would then actually follow the same course as we adopt in determining the meaning and connotation of any given word of any given language. Thus, we shall have to base our findings primarily on the authentic dictionaries and other such reliable sources of the Arabic language.

The Arabic verb: Raba, Yarbu has generally been explained in most of the Arabic dictionaries as:

to increase and to grow [to augment].

The noun, Riba or Al-Riba, generally used in the Qur'an, has been defined by the most authentic and well known Arabic dictionary "Aqrab al-Mawarid" as:

[It is the same thing as the transaction of] al-`eenah ... and increase

It is quite clear from the above statement that as a noun, the word Riba or Al-Riba is used in two meanings: 1- increase and 2- something called "al-eenah". "Aqrab al-Mawarid" itself under the word has defined or the 'Transaction of al-`eenah' as:

That a man asks another for a loan, but the lender is not interested in extending that loan as he shall not be able to get any extra amount on that loan [because that is prohibited]. So he says: I sell you this cloth for twelve dirhams [on credit] for a fixed period of time. While it's actual price was ten dirhams. Thus he gains two dirhams for that fixed period of time.

The meaning and connotation of the word "Riba" or "Al-Riba" have remained unchanged over time. The meaning of this word as given in some modern-day Arabic dictionaries is as follows:

According to "Al-Raayed":

Riba means: 1- the extra [i.e. the additional amount] or the increase; 2- gain on a loan.

According to "Laroos":

Riba means: a) the extra [i.e. the additional amount]: the gain or the profit that a gainer gets on his loaned amount; b) (in financial and economic language) the amount that a borrower pays over and above the amount that he had borrowed following specified conditions [regarding rate and time].

The same kind of explanation has also been given in "Mo`jam al-Waseet".

In the light of the above explanation, we can say that the word "Riba" is used in the Arabic language in two connotations: 1) any increase on an amount; and 2) a gain on a loan (or investment), at a predetermined rate, which the lender (or investor) receives from the borrower (or the business in which he invests) for allowing the borrower to use his financial assets for a time period (on the basis of the meaning given in "Aqrab al-Mawarid", "Laroos" and "Mo`jam al-Waseet").

Now, the obvious question that comes to mind is: In which of the two meanings has the Qur'an used the word "Riba". A close look at the verses in which the word "Riba" has been used by the Qur'an provides us with adequate basis to say that it is actually in the second of the two meanings given above that the Qur'an has used this word. Some of the reasons that clearly guide us in this matter are:

• Had the Qur'an used the word Riba in the first meaning, it would also have applied to that "increase" which is a result of all kinds of trading and business activities. But it is obvious from the words of the Qur'an that such "increase" has not been included in the implications of the word "Riba", as is evidenced from the words: "They say: Trading is but like Riba" (Al-Baqarah 2: 275) and: "Allah has allowed trading and has forbidden Riba" (Al-Baqarah 2: 275). In both these sentences, it is clear that the "increase" which is the result of a trading or a business activity is not included in the word "Riba".
• Then again the Qur'an says: "... then you shall get your principal amounts back. Neither should you wrong nor should you be wronged." (Al-Baqarah 2: 279). This verse removes all doubts that might have existed in one's mind regarding the fact that the Riba referred to in these verses is what has been given above in the second meaning.
• Then again, the Qur'an says: "If he [that is the debtor] is in some difficulty [and is therefore not in a position to return the principal amount immediately] grant him time till it becomes easier for him [to return the principal amount]" (Al-Baqarah 2: 280).

It should be quite clear from the details given above that the word "Riba" is used in the Qur'an in the same meaning in which we generally use the word "interest" (as in 'interest on loans') in the English language and the word "sood", in the Urdu language. Thus, the word "Riba" is actually used for: "a gain on a loan or an investment, at a predetermined rate, which the lender demands from the borrower for allowing the borrower to use his financial assets for a given period of time".

Does the Qur'an only Prohibit Compounded Interest?

One of the questions regarding the prohibition of Riba, as directed by the Qur'an, is whether the prohibition mentioned in the Qur'an is for all kinds of Riba (whether simple or compounded) or does it pertain only to compounded Riba. This question has generally been asked because of an opinion expressed by some Muslims, who hold that the Qur'an has only prohibited compounded Riba. Although the majority of the Muslim scholars do not hold this opinion to be correct, however, because the opinion is presented on the basis of the Qur'an, it, therefore, deserves our attention.

The mentioned opinion is presented on the basis of Aal Imraan 3: 130. The verse reads as:

Believers do not devour Riba, increasing it manifolds.

It is held, on the basis of this verse, that the Qur'an has admonished the believers against taking Riba only when it is 'increased manifolds' - in other words, when it is compounded.

The Qur'an, however, does not support this opinion. The Qur'an, in more than one verse, has prohibited taking Riba, without the qualification of 'increasing it manifolds', or compounding. For instance, in Al-Baqarah 2: 275, the Qur'an says:

Those who devour Riba shall rise up before God like men whom Satan has demented by his touch.

Then again, in the same verse, the Qur'an, while referring to an objection raised by the disbelievers says:

And God has allowed trading but prohibited Riba.

In Al-Baqarah 2: 278, the Qur'an says:

Believers, fear God and waive what remains due to you on account of Riba.

Then, once again in Al-Room 30: 39, the Qur'an says:

And whatever you give of Riba [based loans] so that it increases [by circulating] in other people's wealth, it does not increase in the sight of Allah.

It is quite apparent that the prohibition mentioned or referred to in the cited verses is absolute and not qualified with 'increasing it manifolds' or, as interpreted by some Muslim scholars as compounded.

It should be interesting to note that the opinion that Aal Imraan 3: 130 prohibits only compounded Riba, is based on an incorrect understanding of the referred verse. The verse has been interpreted to imply that a Muslim must not take Riba, if it is 'increased manifolds', while there is no harm in taking Riba, if it is not increased manifolds. In my opinion, this is not the correct interpretation of the verse. What the verse truly implies - keeping in view the other cited verses, which mention the absolute prohibition of Riba, whether compounded or at a simple rate - is that 'Muslims have been directed to refrain from taking Riba, the right thing for them, therefore, is to avoid taking even a penny on account of Riba, rather than devour it increasing it manifolds'. The verse, in its magnificent literary style, implicitly stresses on the abhorrence and detestability of the Shylock mentality. In such a style, 'increasing it manifolds' is not a condition under which 'Riba' is prohibited, but is only to magnify the detestability of the act. This literary style of Aal Imraan 3: 130 is the same as is used in Al-Baqarah 2: 41. The Qur'an says:

Do not trade my revelations at a paltry price...

In this verse, the Qur'an has admonished the Banu Israel against ignoring God's revelations for worldly gains. The implication of this verse, obviously, is that no worldly gain is great enough to qualify as the right price for turning one's back on God's revelations. The verse should, clearly, not be taken to imply that one may ignore God's revelations only when one is offered a higher price to do so. This literary style is one in which the abhorrence and detestability of an impious act is highlighted. Similarly, in Aal Imraan 3: 130 the implication is not to allow Riba when charged at a simple rate but to highlight the abhorrence and detestability of the usurer's mentality.

Another closely related question that is sometimes posed about the prohibition of Riba is that whether the charged rate has any effect on the prohibition or otherwise of Riba. This question, like the previous one, is also based on the contention that in Aal Imraan 3: 130, the Qur'an has prohibited Riba, when it is increased manifolds. Thus, according to this understanding, when Riba is charged at a nominal or a competitive rate, it is not prohibited in Islam.

Nevertheless, keeping the above explanation of Aal Imraan 3: 130 and also the other cited verses in which the Qur'an has mentioned the absolute prohibition of Riba, in perspective, we may safely derive that Riba, whether charged at a simple rate or at a compound rate or whether charged at an exorbitant rate or at a nominal or competitive rate, is prohibited by the Qur'an.

Does the Prohibition of Riba Apply Only to Consumption Loans?

The third question with respect to the prohibition of Riba is that whether the Qur'an has prohibited to charge Riba on loans taken for consumption purposes only or does the prohibition also apply to Riba charged on commercial or business loans as well.

This question is the based on the contention of some Muslim scholars, who hold that during the times of the revelation of the Qur'an, there was no concept of commercial loans. Loans were generally taken for meeting personal consumption - non-business and non-commercial - requirements. Thus, when the Qur'an prohibited Riba, this prohibition could only have been with reference to the Riba that was being charged in the immediate environment of the revelation of the Qur'an. Hence, the prohibition of Riba, mentioned in the Qur'an refer only to Riba charged on consumption non-productive loans. If a loan is taken for commercial or productive purposes, there is no element of exploitation in asking for an increment on such a loan and, therefore, such an increment should not be considered Riba.

The first thing that should be clarified is that to include or exclude a given transaction from the scope of Riba is not within our jurisdiction. All that we have to ascertain is the implication, meaning and connotation of the word Riba in the Arabic language. Once the implication and the meaning has been satisfactorily ascertained, we shall then have to apply the Qur'anic prohibition to all such transactions which come within the scope of the implication, meaning and connotation of the word Riba. Thus, it is the responsibility of those scholars who hold that the prohibition of Riba applies only to increments charged on consumption loans to provide linguistic basis to prove that the word Riba, in the Arabic language, was used for increments on loans taken for consumption purposes only. We have, on the contrary, established in one of the previous sections that Riba, in the classical Arabic language, was used for any increment on a loan (or an investment) at a pre-determined rate. The purpose for which the loan was taken - on which this increment was charged - does not effect the implication of the word "Riba". In other words, Riba, as we have seen, is any increment on a loan (or an investment) at a pre-determined rate, irrespective of whether the loan is taken for consumption purposes or for commercial purposes.

Moreover, the contention that during the times of the revelation of the Qur'an loans were granted or taken for consumption - non-business - uses only, is not supported by the Qur'an. The Qur'an, in Al-Room 39: 30 has referred to the motives of the people who used to give loans on Riba in such words that clearly point-out the fact that people, during the times of the revelation of the Qur'an, used to give loans for commercial - productive - uses as well. The Qur'an says:

And whatever you give of Riba [based loans] so that it increases [by circulating] in other people's wealth, it does not increase in the sight of Allah.

The words "so that it increases in other people's wealth" could not be said about loans granted to poor people for consumption purposes. It is obvious from the referred words that in the Arab society, in which the Qur'an was revealed, loans were generally granted and taken for commercial and business usage and not for personal non-commercial usage only.

Why does the Qur'an Prohibit Riba?

An analysis of the positioning of the directives related to the prohibition of Riba in the Qur'an shows that it has primarily mentioned the prohibition of Riba in the particular context of promoting and stimulating the Muslims on Infaaq fi Sabeel Allah - i.e. charity, helping others and spending in the cause of Islam^[1]. For instance, in Surah Al-Baqarah, the Qur'an has directed the Muslims to spend for the needs of others as well as for the cause of Islam (261 - 274). After this directive, the Qur'an has mentioned those who in their greed of earning Riba hold back from spending their money for the general good of the society and that of Allah's Deen^[2] (275 - 281). The contrast of the spirit inculcated by Riba with that which is required for succeeding in the life hereafter has been specifically made in verse 276, where the Qur'an says:

God obliterates usury and increases charity [in blessing]. Indeed God does not like the ungrateful usurpers.

The same contrast has also been made in Aal Imraan 3: 130 - 134 (especially with reference to the needs of Allah's deen, with particular reference to those who held back from spending in Allah's way at the time of the battle of Uhud) and Al-Room 30: 38 - 39 (especially with reference to the needs of a person's relatives and the destitute). The Qur'an, in Al-Room 30: 39, says:

And whatever you give of Riba [based loans] so that it increases [by circulating] in other people's wealth, it does not increase in the sight of Allah. While whatever you spend in charity, seeking the pleasure of God - these are the ones for whom it shall truly be increased.

Thus, from the positioning of the directive regarding the prohibition of Riba, it may easily be derived that the Qur'an has mentioned it as a deterrent against the spirit of Infaaq fi Sabeel Allah. Riba, it may be derived from the above explanation, is considered by the Qur'an to develop apathy toward the needs of other individuals, the society in general, and Allah's deen. In other words, according to the Qur'an, Riba has the potential of inculcating in a person the spirit of indifference towards the needs of others. This indifference has extremely adverse effects on the individual as well as the collective morality of a people. It replaces the spirit of mutual help with commercialism and that of sacrifice with apathy and self-interest.

Furthermore, the Qur'an has also mentioned that taking Riba is Zulm - i.e. injustice^[3]. There is absolutely no justification, in the eyes of the Qur'an, in asking for a pre-determined increment on a loan, when the loan itself is to be returned in full.

The aspect of Zulm, in charging Riba, is generally not greatly contested in cases where a loan is taken for a personal, non-commercial usage. However, for some people it is difficult to comprehend any element of Zulm in charging Riba on a loan taken for a business or a commercial usage. Although, for a Muslim, it should suffice that because the Qur'an has unequivocally declared that taking Riba is unjust, therefore, it should be considered and categorized as such. Yet, for the satisfaction of the questioning mind, it seems reasonable to point out the major element of injustice in charging Riba, even in cases where a loan is taken for a business venture.

Riba, it should be kept in mind, is a pre-determined increase on a loan (or an investment). It is primarily the element of pre-determination of the increase that makes it Riba - and as a result prohibited in Islam. It is the same element of pre-determination of the increase that makes it a Zulm or an injustice. A loan is generally granted to a venture (whether commercial or non-commercial) for two reasons. Firstly, a loan may be advanced with the spirit of supporting a particular venture. This, generally, is a philanthropic activity, where a person lends an amount of money for the purpose of supporting another person or a group and is only interested in getting his money back at the stipulated time. Secondly, a loan may be advanced with the spirit of investment. In this case, the prime interest of the lender is to earn a return by advancing his idle wealth. It is primarily in these types of loans that the element of Riba is considered to be morally justified. The moral justification generally propounded for charging Riba in such loans is that if the borrower is deriving a monetary advantage from capital, which is provided by someone else, it would only be fair if the real owner of the capital is also given a reasonable share in the monetary advantage thus derived. Makes sense!!! However, it should be understood that the pre-determination or the pre-fixation of the 'reasonable share' that the owner of the capital should get is what makes the whole idea, in the eyes of the Qur'an, to be against the principle of justice and equity. It is indeed justified that the real owner of the utilized capital be given a 'reasonable share' in what his capital has produced. Nevertheless, why should such a 'reasonable share' be determined before any production has materialized or even initiated? Why should not the 'reasonable share' be apportioned on the basis of the actual production that the capital has succeeded in producing? If the utilized capital has only succeeded in producing far less than the initial expectations (or has not succeeded in producing anything at all), then why should capital be apportioned a bigger share than it deserves (or any share at all)? On the other hand, if the utilized capital has succeeded in producing more than the expectations, then why should the owner of the capital be deprived of his 'reasonable share'? In my opinion, it is primarily these aspects of the Riba-based transactions that the Qur'an holds to be against the principle of justice and equity and is therefore emphatic about the prohibition of any pre-determined increase (Riba) on a loan - even if the loan is taken for a commercial purpose.

To summarize, the reasons for the prohibition of Riba, as derived from the Qur'an are:

It adversely affects the spirit of charity, sacrifice for a higher cause and mutual help, which has its serious repercussions on the individual and collective morality of man and thus on his success in the life hereafter.

According to the Qur'an, charging Riba is against the principle of justice.

Does the prohibition of Riba hinder Real Value adjustments in loans?

With the advent of paper money and the repercussions of the management of paper money, another important question that is commonly asked is whether any inflationary adjustment in loans would be allowable under the Islamic law or would it also be included in the ambit of the prohibited Riba.

The question raised in this connection, may be stated as:

If a debtor who had borrowed a particular amount of paper currency repays the same amount to his creditor after a substantial time, during periods of inflation, the creditor can suffer a significant loss in real-value terms, even though the nominal value of the loan would be returned in full. Thus, under the circumstances, would Islam consider it unjustified on the part of the creditor to demand from the debtor to pay a higher nominal value than the amount originally advanced, as a compensation for the loss of the real-value, due to inflation?

Keeping in perspective the implication of the word Riba, as explained in the first section, we may safely say that any inflationary adjustment, in which the rate of such adjustment is not arbitrarily pre-determined, but is based on the actual rate of inflation cannot be brought under the ambit of Riba, because of the simple reason that such an inflationary adjustment is not an increase on a loan at a pre-determined rate.

It may be added here that such inflationary adjustments are not only allowed but also seem to be quite desirable. Just like charging Riba is an injustice because it asks for an arbitrary increase in the amount loaned to the borrower, avoiding value adjustments in times of inflation or, in other words, avoiding to pay back the full value of the loaned amount is also an injustice, because it asks the lender to accept a lower value, in settlement of the value that he had originally loaned to the borrower. Obviously, If Islam prohibits Riba due to the element of injustice, an Islamic state, on the same principle, should make it mandatory for all borrowers and lenders to make real value adjustments in the settlement of all deferred payments.

However, the following points must be kept in mind in such real value adjustments in the settlement of deferred payments:

• To avoid any potential disputes in future, the criteria for such value adjustments should be mutually agreed upon and decided at the time of the loan transaction.
• Any equitable method for such value adjustments may be adopted. For example, some of the bases of such adjustments may be:

1. the rate of inflation declared by the state; or
2. the average price index of a particular number of the most consumed items in the country; or
3. the price of gold in the country, etc.

• Whatever methods are adopted for such real value adjustments in the settlement of deferred transactions, it should be kept in mind that they should not be adopted as methods of inflationary adjustments only, but that of value adjustments. This implies that the adopted method should not work to the advantage of any of the parties concerned. In case there is a fall in the value of paper currency (as is the case in times of inflation), the method should provide a proportionate increase in the nominal amount of the repayment. On the other hand, if there is a rise in the value of paper currency (as is the case in times of deflation), the method should provide a decrease in the nominal amount of the repayment. For example, suppose at the time of the loan transaction, the lender and the borrower mutually agree on relating the loan with the prevalent market price of gold and also agree on retiring the loan by relating the loan with the prevalent market price of gold at the time of retirement. Suppose A lends Rs. 100/- to B. The market price of gold at the time of the transaction is Rs. 100/- per gram. Thus, it may be agreed that A has lent one gram of gold to B. If the market price of one gram of gold at the time of the retirement of the loan, say after five years, is Rs. 150/-, B shall have to pay Rs. 150/- to fulfill his obligation. By the same token, if the market price of gold falls to Rs. 90/- at the time of retirement of the loan, B shall then be considered to have cleared his obligation by paying Rs. 90/- to A.

What is the Difference between Riba and Rent?

Another interesting question/objection that is raised regarding the prohibition of Riba is that its prohibition, when seen in comparison to the allowance of rent, under the provisions of Islamic law, does not seem to make sense. Riba apparently does not seem to be any different from rent. Thus, prohibition of Riba should also prohibit the institution of charging rent. After all, what is the difference between lending money (on which charging Riba is not allowed) and lending property (on which rent is charged, which is seen as allowable under the Islamic law).

The question, thus, is whether there is any empirical difference between the two charges of Riba and rent or not.

To understand the difference between the two concepts of Riba and rent, we shall first try to understand the simple mechanism in the working of the two concepts.

Let us first take rent.

Rent is a payment made for the use of an asset or a service (which may include payment made for the use of land, premises, a telephone equipment, machinery etc.). Rental payments continue till the time that the tenant uses the asset or the service and are understood to cease at the end of such usage. The end of a rental contract, is marked by:

• Discontinuity, on the part of the tenant, of using the asset or service;
• Transfer of the possession of the existing (i.e. used) asset from the tenant to the owner; and
• Discontinuity of the rental payments from the tenant to the owner.

It should be noted that rental payments are not payments for the purchase of an asset, but on the contrary, are payments for the purchase of the service provided by the asset. The asset remains under the ownership of its original owner. At the end of the rental agreement, the tenant is not required to replace the existing asset with a new one and return it to the owner, but is only required to return the existing asset to its owner. Rent, thus, is a charge on the use of an asset or a service.

Riba, on the other hand is a time-based charge on the sale of an asset. In other words, Riba is a pre-determined additional payment demanded by the seller (of the asset) from the buyer, in return for allowing a stipulated time to make the payment for the transacted sale. The asset being sold may be a real asset or a financial asset (i.e. it may be a house, a piece of cloth, gold, or paper currency etc.).

A Riba-based loan or financing agreement, in effect, is a sale of a financial asset (money) or a real asset (like land) in which the seller allows time to the purchaser to make the payment for the transacted sale. It should be interesting to note that the sale of financial assets - like money - can only take place in the shape of credit sales. No one, in his senses is likely to buy Rs. 100/- for an immediate payment of Rs. 110/- and vice versa. Furthermore, buying Rs. 100/- for an immediate payment of exactly Rs. 100/- is an equally meaningless transaction. However, many people would be and are willing to buy Rs. 100/- today for a reasonably delayed payment of Rs. 200/-. Thus, in a Riba-based loan agreement, the seller offers to sell his financial asset (money) for the immediate sale price of the financial asset (i.e. the face value of money) plus an additional sum of money charged (at a pre-determined rate) for the time allowed to make the payment of the sale transaction. On the other hand, in a Riba-based real asset's financing agreement, the seller offers to sell his real asset (for instance land) for the immediate sale price of the real asset plus an additional sum of money charged (at a pre-determined rate) for the time allowed to make the payment of the sale transaction. In a Riba-based loan or financing transaction, therefore, the original (full) value of the asset (financial or real) sold, as well as an additional sum (Riba) is to be paid to the seller.

Keeping the above explanation in perspective, the main points of distinction between Riba and rent may be enumerated as follows:

• Nature of Charge: Rent is a charge on the use of an asset. The tenant is required to pay the usage charge, for as long as he wants to use the asset. Riba, on the other hand, is a time based charge (at a pre-determined rate) on the sale of an asset (real or financial) that a seller demands from the buyer for allowing the buyer a stipulated time for making the payment of the purchase of the asset in question.

• Period of Contract: A rental agreement may be called off at any such time when the rented asset loses its utility in the eyes of the tenant or is required back by the owner of the asset. At the end of the rental agreement, the tenant is only required to deliver the possession of the existing asset to the owner. In contrast, a Riba-based loan or financing agreement cannot be called off without the payment of the full (original) value of the asset sold in addition to the accumulated (pre-determined) charge (Riba), even if the borrower (purchaser) loses all utility or usage of the asset lent (or sold).

• Nature of Return to the Owner or Lender: At the end of a rental agreement, the tenant is required to return the rented asset to its owner, in its existing (used) state. The tenant is not required to return the original (full) value of the rented asset, as it stood at the time of the rental agreement. In contrast to the rental agreement, in a Riba-based loan or financing agreement, the original (full) value of the asset lent (or sold) is to be returned to the lender (or the seller). Thus, in a Riba-based loan or financing agreement a charge (at a pre-determined rate) is to be paid to the seller, in addition to the return of 100% of the lent value.

• Ownership Risk: In case of a rental agreement, all ownership risks are retained by the owner of the rented asset. Thus, if, for instance, the rented house is struck by lightening or is completely destroyed in an earth quake, the total loss is borne by the owner of the house. In case of a loan agreement - which, for all practical purposes, is a sale agreement with the provision of deferred payment to the seller - all ownership risks are transferred to the borrower (buyer), while the ownership rights are retained by the lender. Thus, in case the loaned asset is completely destroyed in a contingency, the loss is fully borne by the debtor, while the creditor's original value - as well as any additional amount due to him on account of Riba - remains fully secured. In fact, the creditor (or the lender) faces the risk of losing his original value - and the accumulated amount of Riba - only if the debtor is declared to be insolvent.

Keeping these points of distinction in mind, it should be clear that a rental agreement is quite distinct from a Riba-based loan or financing agreement. A Rental agreement can only be comparable to a Riba-based loan or financing agreement if:

• It requires the tenant to pay the periodic rent;
• It is irrevocable till the full value of the rented asset, in addition to any predetermined service charges, is received;
• It requires the tenant to return the original value of the rented asset at the end of the rental agreement. This implies that at the end of the rental agreement, the tenant be required to return the rented asset, not in its existing state, but in its original state, as it was at the time the rental agreement was contracted; and
• During the time of the rental agreement, all ownership risks are transferred to the tenant, while the ownership rights are retained by the owner.

In the absence of these clauses, it is obvious that a rental agreement is distinctly separate from a Riba-based loan or financing agreement^[4].

Is 'Buy-back on Mark-up' Arrangement Lawful?

As the gravity and the significance of the prohibition of Riba in Islam was felt by the Government of Pakistan, efforts were directed toward designing an economic structure which was free from Riba. In this connection, a number of alternative were suggested and proposed for the purpose of the mobilization and distribution of financial resources, which, previously, were controlled through the mechanism of interest - considered and interpreted to be Riba by the managers of the Pakistani society. One such proposal was the "buy back on mark-up" arrangement.

Under the "buy back on mark-up" arrangement, a financial institution finances its client on the basis of an agreement, whereby the client proposes to sell a particular commodity to the bank and simultaneously buys it back at a higher price on the basis of deferred payment. A certain rate of mark-up (generally stated as 'percent per annum') is applied to the second sale. Thus, through this arrangement, the bank finances the requirement of the client and gets its investment back from the client over a stipulated period of time, with an increase.

It is generally asked whether such an arrangement includes the element of Riba or not.

In the light of the explanation of the word Riba in the first section, it should not be difficult to determine whether such an arrangement includes any element of Riba or not. The simple question to answer is whether or not such an arrangement of financing includes an element of pre-determined increase on a loan (or an investment). If the answer is 'no', then the arrangement is clear of Riba and should, therefore, be considered as allowed in Islam. However, if the answer is 'yes', then the arrangement is adulterated with the element of Riba and should, therefore, be considered as prohibited.

A close look at the transaction shall show that the referred arrangement is primarily a sale on credit arrangement - as are all installment purchase arrangements. It may be noted that a sale on credit arrangement, in its essence is no different from a simple loan arrangement. The only difference is that in place of a financial asset, a real asset - like machinery, land, building etc. - is sold out on credit (loaned or invested), while in a simple loan arrangement, as we saw in the previous section, a financial asset is sold out on credit. Moreover, there is also the element of increase at a pre-determined rate that the 'lender' (or the seller) shall get from the 'borrower' (or the buyer). Thus, the "buy back on mark-up" arrangement entails:

• A credit sale, which, in essence is no different from a loan; and
• An increase on this loan at a pre-determined rate.

These, precisely, are the two factors, which need to be present in a transaction to qualify to be termed as a Riba-based transaction. We can, therefore, safely say that a "buy back on mark-up" arrangement, due to the presence of the element of Riba in it, cannot be considered as allowable in Islam.

Does Islam Prohibit Payment of Riba?

The Qur'an has mentioned the prohibition only of taking Riba. However, in some of the narratives ascribed to the Prophet (pbuh) - i.e. Hadith - the Prophet (pbuh) is reported to have condemned and prohibited the payment of Riba. Furthermore, the Prophet (pbuh) is also reported to have condemned offering one's services as a scribe for a Riba-based loan deed and/or standing witness on such a loan deed. In view of this, apparent, discrepancy it is sometimes asked whether Islam prohibits only the taking of Riba or does this prohibition also include payment of Riba.

It is clear from various verses of the Qur'an that the real prohibition of the Shari`ah applies to taking Riba. The Qur'an has not even once mentioned the prohibition of giving Riba. The reason is quite simple: the real moral crime, i.e. the injustice, according to the Qur'an, lies in taking or devouring Riba not in giving it. Thus, the basic initial emphasis of the Qur'an and the state of Medina, under the leadership of the Prophet (pbuh) was to abolish the practice of charging Riba, not of giving Riba. Throughout this time, the Qur'an condemned those who charged Riba; it admonished them and reminded them of the punishment that they shall face on the Day of Judgment for charging Riba, and then, finally, it gave them the ultimatum that if they do not refrain from charging Riba, the Islamic state - under the leadership of the Prophet (pbuh) - shall declare a war against them (Al-Baqarah 2: 279). During all this time, not a single verse admonished those who paid Riba. They were not threatened with any dire consequences of their act and were never directed by the Prophet (pbuh) to stop the payment of Riba. On the contrary, the Qur'an actually directed the lenders to deal with them in a soft manner: it directed the lender to give the borrower some time to return the lender's principal amount, if he was not in a position to retire the loan immediately. It further advised them that if it be possible for them, they should even forgo this principal amount as alms and get their rewards for this generous act in the hereafter.

However, it is quite clear that taking Riba, in contrast to, for instance, lying is a two-way transaction. That is, one cannot take Riba, unless somebody is willing [or forced] to pay Riba. It is this transactional aspect of Riba, due to which, payment of Riba is also brought under the ambit of Islamic discussion. It is clear that payment of Riba or, in other words, securing a Riba-based loan can sometimes come under the scope of "co-operating in a sin" ^[5]. This is so because every case of payment of Riba shall consequently imply the taking of Riba by the other party of the transaction. And taking Riba, according to the Qur'an, is a major sin.

In view of this fact, Muslims (individuals as well as states) should do their utmost in avoiding to secure a Riba-based loan, as this, in many cases, can amount to "co-operating in a sin". However, when the provision of a necessity of life (whether at the individual level or at the collective level) is possible only through a loan, a person (or the collectivity) may not be left with any option besides securing a loan and thereby provide for the necessity^[6]. In such a situation, it may be hoped that such an action will not be considered "co-operating in a sin", because of the lack of alternatives available to the individual (or collectivity), in question.

It was primarily in the spirit of refraining people from cooperating in the sin of taking Riba that the Prophet (pbuh), after completely abolishing the institution of charging Riba from the society declared that (when the society is cleared from the evil) even those who offer to pay Riba to secure loans for themselves or who silently accept paying Riba and do not bring it to the notice of the state authorities and those who are scribes of and witnesses to the documentations for Riba-based transactions without bringing such transactions to the notice of the state are accomplices to the crime and therefore deserve to be punished for their acts.

As is quite clear from the foregoing explanation, the real sin and crime, according to the Qur'an and the life of the Prophet (pbuh) lies in taking or charging Riba. Agreeing to give Riba becomes a crime when the society is completely cleared from this evil and taking Riba is legally declared to be a punishable crime at the state level.

In view of the foregoing explanation, it should be clear that the prohibition of Riba at the state level would primarily entail:

1. Prohibiting its citizens and the institutions operating within the country from charging Riba, from any other individuals whether residing inside or outside the jurisdiction of the state, on any financial transactions;
2. Prohibiting its citizens and the institutions operating within the country from charging Riba, from any other institutions whether operating inside or outside the jurisdiction of the state, on any financial transactions;
3. Refraining itself from charging Riba from any individuals whether residing inside or outside the jurisdiction of the state, on any financial transactions;
4. Refraining itself from charging Riba from any institutions whether operating inside or outside the jurisdiction of the state, on any financial transactions;
5. Refraining itself from charging Riba from any other countries on any loans or aids advanced to them;
6. To promulgate and implement laws for the punishment of its citizens and the institutions operating within the jurisdiction of the state that do not abide by the above prohibitions;
7. To promulgate and implement laws for the punishment of such of its citizens and institutions operating within the jurisdiction of the state, who agree to pay Riba to other citizens and institutions operating within the state on any financial transactions and avoid to bring such activities to the notice of the state, by considering such citizens and institutions accomplices in the crime;
8. To promulgate and implement laws for the punishment of such of its citizens and institutions operating within the jurisdiction of the state who act as scribes of or witnesses to a Riba-based financial contract and avoid to bring such contract to the notice of the state, by considering such citizens and institutions accomplices to the crime.

It should be kept in mind that the payment of Riba on loans secured from individuals and institutions operating outside the jurisdiction of the state cannot be brought under the scope of any legislation passed for the prohibition of Riba in a particular Muslim state. Such payment shall be governed, not by the legislation of the particular Muslim state, but by the agreement/contract between the borrower and the lender. The two parties to the loan contract may, at any time, revise the terms of the contract with mutual consent, and thereby make the contract coherent with the injunctions of the Islamic law. However, such revision of the contract can neither be made on the whims, likings or the religious beliefs of the borrower only nor can it be enforced by the Muslim state of which the borrower is a citizen.

The government of the Muslim state should obviously be advised to do their utmost in securing Riba free loans. However, as the saying goes: "beggars cannot be choosers", if such arrangement is not possible payment of Riba shall be made and the contracts fulfilled, without effecting any of the aforementioned points of the proposed prohibition of Riba within the Muslim state.

Honoring Riba-based Commitments

One of the very pertinent and important questions that is generally asked with reference to the abolition of Riba is that if at any stage in time, an Islamic state decides on passing a legislation whereby all Riba-based transactions are abolished, then what would be the fate of the existing donors or lenders of such an Islamic state. Would such a legislation or abolition imply a one-sided revision of all such Riba-based contracts? Or would the Islamic state continue to pay Riba on its past commitments, as originally contracted?

In the questionnaire that was circulated by the Supreme Court of Pakistan, this question, in view of its practical significance, was also included. The learned Court had asked:

If all the [stated] transactions are held to be violative of the Islamic injunctions, what will be the treatment of the past transactions and agreements? Especially what procedure should the government adopt with regard to the previous foreign loans?

As a principle, it should be remembered that Muslims, by the clear and direct injunctions of the Qur'an, are bound to fulfill all contracts or agreements that they have entered into. The Qur'an, in Al-Maaidah 5: 1, says:

O ye who believe, be true to your obligations.

At another instance, the Qur'an, while mentioning the qualities of true believers (Al-Baqarah 2: 177) says:

And [they are] true to their contracts, when they contract.

Then again, in Al-Israa 17: 34, the Qur'an says:

And honor your promise. Indeed you shall be accountable for all your promises.

In view of the cited verses of the Qur'an, it is extremely important that all past and present commitments and agreements with foreign creditors and donors - without any exception - be honored^[7]. However, a Muslim state may, in view of its internal legislation, request its creditors to renew their contracts on any such new terms as the Muslim state may have to offer. Nevertheless, if the creditors do not accept the terms of the new contract, the Muslim state shall be bound to fulfill its running obligations. Under no circumstances, whatsoever, can the loan contract be revised without the approval of the creditors.

This would mean that payment of Riba on these foreign loans should be made as was agreed upon between the lenders and the borrower at the time of the contract or, if possible, on the basis of any mutual revision of the contract. As has been implied in the previous section, the Muslim state after passing the legislation to effect the abolition of Riba shall refrain from taking Riba, but shall have to pay Riba to its foreign creditors as per the mutual contract between these creditors and the Muslim state. The government of the Muslim state should, however, feel the moral burden of being an accomplice in an act that the Qur'an has forbidden and should therefore direct all its efforts in retiring the Riba-based loans of such foreign creditors and thereby relieving itself from its obligation towards the Lord of the worlds.

As far as the domestic loans are concerned, the ideal state will be to stop payment of Riba on these loans with immediate effect, as soon as any such legislation is promulgated. Nevertheless, such an action would essentially require the Muslim state to be in a position to retire these domestic loans immediately.

Furthermore, keeping in mind that an indeterminable amount of the Riba-based domestic debts have been provided by people whose lives depend on the income (Riba) generated by these debts, it would be imperative that the Muslim state provide a non-Riba-based substitute to these domestic creditors and should then convert the existing Riba-based debts to the new substitute for all such people who want their loans converted to the non-Riba-based substitute.

Till such time, the Muslim state, while meeting its obligations, should, in the light of the directives of the Qur'an, educate its citizens regarding the intensity and gravity of the "crime" of taking Riba and thereby discourage people from such a heinous act.

© Copyright March 2000. All Rights Reserved with the Author