Interest: The Islamic Perspective
By Syed Osman Sher
Mississauga, Ontario, Canada

The Muslims world is facing numerous challenges today. While meeting these challenges in accordance with the needs of the time, it has to be ensured that the customs and practices so adopted should not be in conflict with the sacred law. The Shariah, on the other hand, is not meant only to show the right path but also to make life easier for its followers. The Quran says: “God doth wish to lighten your (difficulties), for man was created weak.” (4:28). Islam gives freedom and full play to man’s faculties of every kind.
Islam encourages man to enjoy the good things in life bestowed on him by God: “O Children of Adam! Wear your beautiful apparel at every time and place of prayer: eat and drink: But waste not by excess, for Allah loveth not the wasters. . . Say: Who hath forbidden the beautiful (gifts) of Allah, which He hath produced for His servants, and the things, clean and pure, for sustenance?” (7:31-32). It preaches for a practical life: “Surely, Allah does not change the condition of a people until they change their own condition” (13:11)
One of the issues posing serious challenges to the Muslim world today is ‘usury.’ Let us start with the following verses of Quran, and examine this issue from different angles.
Those who devour usury will not stand except as stands one whom the Evil one by his touch hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of the Fire: They will abide therein (for ever). . (2:275)
O ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are indeed believers. If ye do it not, take notice of war from Allah and His Messenger: But if ye turn back, ye shall have your capital sums: Deal not unjustly, and ye shall not be dealt with unjustly. (2:278-279).
Concept and Definition: The first task in this regard is to get at the meaning of ‘riba,’ the word used in Quran, or the English equivalent, ‘usury’. Unfortunately, the Muslim world has not yet converged on a point to finally agree on the definition of riba. However, pushing ‘usury’ in the background, interest has taken the position in the forefront. The result is that these days the word ‘interest’ has become synonymous to usury, or the two have become interchangeable.
Starting with this premise, we have to first understand what interest is. And, for this we have to know what ‘production’ is. Production is the creation of utility in a thing. If a piece of land is lying fallow, but if a farmer ploughs it and grows food from it he has undertaken production, because he has instilled utility in that land. If somebody fills up air in a balloon, he has produced utility in the balloon, as well as in the air which would not have otherwise been utilized. If a water carrier fills up his cask with water at the river and brings it to the doorstep of somebody who is in need of water, he has created utility in the water, which would otherwise have fallen into the sea. In other words, they have undertaken ‘production.’ Utility is added to a thing in many ways like when cotton is turned into yarn, or yarn is made into thread, or thread is woven into cloth, or cloth is brought to the shop, or when it is ultimately sold to the consumer. All these stages have resulted in production, of goods and services, because every time utility has been added.
Production is carried out by four factors: Organization, land, capital and labor. In the absence of any one of them, production will not be possible. For instance, our balloon vender has to organize a system to start a business. He has to stand up on a piece of land to carry his trade. He would need money or capital to buy balloons and a pump. In the end he would put his labor for pumping the balloons with air and for selling them. We see in the end that the balloons have become useful for entertaining children or for decorating party halls. The balloon vender has either to provide all factors of production himself, or for earning a profit as the entrepreneur he embarks on a risky venture which involves taking a shop on rent, borrowing money on interest to buy balloons and a pump, and hiring a laborer on wages to fill the balloons and to sell them. He has to pay each factor of production its reward in the shape of profit, rent, interest and wage. Even if all the resources are owned by the entrepreneur and he takes away all the rewards himself, the respective reward of each factor of production will be hidden in what the entrepreneur has got.
Each factor, which participated in the production, has been given its recompense. It is a system where justice has been done to all. But if there is a system in which enterprise, land and labor are paid their reward but it is denied to the capital, will it be termed as just? Can any religion or philosophy that preaches such a principle be acceptable as fair and sound? No. We now proceed further. If the other three factors agree to participate in the process of production in the hope of getting, in return, the fruits of their efforts, why the fourth factor, the capital, would agree to participate in it if it has not to receive any reward? And. in the absence of capital, production would not take place. Can then the payment of recompense to the capital be termed as ‘devouring men’s wealth wrongfully’? Does Islam as a religion preach a philosophy which, if implemented, would put a brake on the process of production, the essential element for the continuation of life? Again, No! Thus, Islam in no way seems to have banned the interest as described above. The question then arises: what has been prohibited by Islam in the name of usury?
There is, however, one situation under which a man may agree to lend his money to others without compensation, although it would not be a comfortable situation for him because it involves both pain and risk. And, that situation is to help someone in need or, in other words, to give in charity. Charity is one of the cardinal teachings of Islam. This is a plane on which people may be ready to sacrifice, and also feel pleasure instead of pain. People have been enjoined in Islam time and again to give charity openly and secretly. In addition, charity has been prescribed in the form of zakat. It is meant for rescuing people out of personal predicaments or extreme hardship, for example, to meet their basic needs as hunger, etc. In such a situation if one wants to make a capital of someone’s pain and suffering, and to earn income from a loan, his action would not conform to the Islamic principles of charity and sacrifice. Such a gain may thus be conveniently termed as riba. All agree that riba means an increase over and above the amount what had been lent. And, scholars also agree that there is room for differences in defining as to what kind of such increase should be called ‘usury’ According to Ibn Kathir, Hazrat Umar, the second caliph, had also felt some difficulties in this regard. But, before this question was settled the Prophet had died.
Human needs are as old as the man himself. They arise when he is born, and so arises simultaneously the instinct in others to help and support him, either free or with a price. In such a situation what rightful attitude one should adopt was taught as early as the time of writing of the Old Testament:
And in case your brother grows poor so he is financially weak alongside you, you must also sustain him. As an alien resident and a settler, he must keep alive with you. Do not take interest and usury from him, but you must be in fear of your God; and your brother must keep alive with you. You must not give your money on interest, and you must not give your food out on usury. (Leviticus 25:35-37)
An important thing to note here is that in the Old Testament the word ‘interest’ is used for lending money while ‘usury’ is used for lending food. But both the terms have been used in the context of helping people in extreme difficulties. Qur'an's commandments must not be different from what God had asked the Jews to practice. The Quran attests the Old Testament in verse 4: 161: “That they (the Jews) took usury, though they were forbidden; and that they devoured men's wealth wrongfully; we have prepared for those among them who reject faith a grievous chastisement.”
In the pre-Islamic days the people of Arabia were not all Jews, but the practice of lending money was very common. Naturally, at that time not much of others’ money might have been needed for conducting one’s trade. If one had his own resources he started his own business, otherwise he took to other occupations. Loan was obtained mostly for mitigating personal hardship. The loans thus extended without exacting a price must have been deemed as charity, otherwise it was usury. For this reason, charity and usury have been mentioned side by side in the verses 2:276 (Allah will deprive usury of all blessing, but will give increase for deeds of charity: For He loveth not creatures ungrateful and wicked), and 2:280: If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew. Charity and usury stand in equal stead but apposed to each other. If one helps the needy it is charity; if he charges a price for his help it is usury. Quran commands giving in charity but prohibits usury.
Justice and Pragmatism: Further, at the time of the rise of Islam loans were extended in the form of gold, silver, and food grains. They were loaned in kind and repaid in kind. Let us assume that any amount additional to the principal, lent for mitigating hardship or even for business purposes, is usury. In those days, the value of gold and silver remained constant. The prices of commodities also did not change. They were not as volatile on the upward side as they are today. If no additional amount was paid in those days at least the lender received back his loan in the same coin with full value. But today transactions are made mainly in terms of money. Also, loans are generally made on long-term basis. For instance, today governmental loans from foreign countries and agencies are contracted with a repayment period of even twenty-five years, or more. The value of money decreases day by day. In this situation, if an additional amount is not paid along with the principal after the lapse of a few years this would be tantamount to paying less than the principal. The lender would thus be a loser. Does Islam ask the people to receive back their principals with a diminished value? Is it justice? A reasonable additional amount seems justified today at least to equalize the value of the money when it was lent. Then a risk is also involved in such transactions, the risk of non-payment. Thus the payment of an additional amount is also a sort of insurance premium against that risk. If the condition of additional payment, over and above the principal, is not there, who would lend his money to others, unless it is a case of pure charity? A reasonable rate for this purpose thus seems justified but, of course, not doubled or tripled as has been prohibited by verse 3:130. (O ye who believe! Devour not usury, doubled and multiplied; but fear Allah; that ye may prosper)
Welfare and Exploitation: Initially, the Quran was given to the people of Makkah and the people around that city: “Thus have We sent by inspiration to thee an Arabic Qur'an: that thou mayest warn the Mother of Cities and all around her, and warn (them) of the Day of Assembly, of which there is no doubt: (when) some will be in the Garden, and some in the Blazing Fire (42:7). But today’s world is not limited to that environ. It is a totally different sky. Now transactions, involving setting up of industries, carrying out international trade, establishing social institutions, building infrastructures etc., take place not in thousands but in unimaginable magnitude of billions of billions of currency units. Modern economic machinery of diverse nature like banking and interest, insurance and re-insurance, stock market and currency exchange, and so on, performs this function. The whole structure of modern-day economic prosperity and wellbeing is standing on the pillars provided by such economic instruments. Remove them and the wheels of progress will not only stop but the whole system would collapse, destroying everything in its wake, even the civilization of today.
It is natural that whatever money one earns is not totally spent, unless he is hand to mouth. The propensity to consume always remains below the income line. The resulting saving is thus channeled through the modern banking system into investment. The propensity to consume with the resultant savings gives birth to the multiplier effect of economic theory meaning, in simple terms, a multiple growth in the economy. Again when savings are deposited in banks, the depositors do not withdraw all the savings at a time. Working on the basis of the average withdrawal, the banks then create, with the amount left with them, many times more credit than the original deposit. They are channeled in still more investments.
On the other side, it is not possible that all the savings accruing in an economy could be mobilized into investment optimally by individual efforts. For investment purposes, loans are not only obtained by individuals, but by small businesses, multinational enterprises, and commercial undertakings. Even governments acquire loans from their own citizens, from multi-national banks and from other countries. Big and small businesses and projects of economic and social development, like roads, bridges, airlines, railways, airports, residential complexes, telephone lines, TV and Radio stations, schools, hospitals, museums, parks, libraries, etc., are established mostly out of loans, which come out of this pool of savings collectively created by the individuals or corporations. Even maintaining an army for the defense of the country sometimes needs foreign loans. It is also needed even for procuring necessary items of consumption from other countries. If savings are not invested in this way, and are simply hoarded in closets, the economic engine will fail. This hub of economic system, called loan or inversely interest, is such a mighty force that it pervades all over. This engine is pushing economic activities in all directions.
It is commonly seen that some Muslims, in reverence to the Quranic injunctions, do not obtain loans from the banking system even for such essential facilities as for owning a house or a vehicle. They do not like to be sinners by paying interest. It must be realized, however, that for the use of a service or the consumption of a commodity the price is paid by the ultimate consumer, and not by the original provider of the facility or by the middleman. So whatever price we pay for using a good or service includes the portion of that interest, which has been earlier obtained by the provider of the facility For example, if I take a house on rent, the rent paid by me will include the interest which the builder has to pay for his loan. It is also hidden even in the prices or fees we pay for the goods and services of daily use, because they have been produced by using the capital obtained generally through loans. Sometimes, the government pays the interest for its loans through the revenue collected through taxes, and the tax is paid by the citizens. Can then any person claim that his life is not polluted with interest, and so he would not obtain loan on interest for increasing his welfare?
On the basis of the verse 4.29 (Eat not up your property among yourselves in vanities: But let there be amongst you traffic and trade by mutual goodwill) Abul Ala Maududi argues thus against the modern-day interest: “Islam does not confer an open license to its follower to earn wealth in whatever manner he likes. Instead, it establishes a norm of lawfulness and otherwise in the ways of earning wealth keeping in view the collective welfare (of the society). This norm is based on the principle that all those methods of earning wealth are unlawful in which one person’s gain is obtained at the cost of the other, and that all those methods are lawful where mutual gains are based on justice to both the parties” (Islam Aur Jadid Maashi Naazariyat by Abul Ala Maududi, p. 97, published by Islamic Publications Private Ltd. Lahore, Pakistan).
To the contrary, the interest as prevailing today does not entail eating away of the property of one by the other. This sort of traffic is carried out with mutual consent, not under coercion, and with full understanding that it would prove to be mutually beneficial and would be contributing to the well-being and prosperity of both the parties. Barring rare cases of failures, in fact, it does so. It should not, therefore, be termed as exploitation by one party of the other.
How the interest is providing economic progress has been recounted above. At individual level too it is promoting welfare. Due to this arrangement people are becoming homeowners. They are able to have their own vehicles without which it might not be possible either to get a proper earning, or to reach the workplace in big cities, or to carry big or small business and trade. In this connection, Abdullah Yusuf Ali has commented: “Our Ulema, ancient and modern, have worked out a great body of literature on usury, based on economic condition as they existed at the time of Islam. I agree with them on the main principles, but respectfully differ from them on the definition of usury. The definition I would accept would be undue profit made, not in the way of legitimate trade, out of loans of gold and silver and necessary articles of food, such as wheat, barely, dates and salt (according to the list mentioned by the Holy Apostle himself). My definition would include profiteering of all kinds, but exclude economic credit, the creature of modern banking and finance.” [Abdullah Yusuf Ali, The Holy Quran (Arabic text with English translation and commentary), Beirut, 1968, p. iii.]
Based on the Quranic injunctions on riba, ijtehad has been done and principles formulated such as musharika, mudariba, and even no profit/no loss banking system.
It needs to be examined whether such systems are really in accordance with the spirit of the Quranic injunctions of avoiding exploitation, or are just dressed in a camouflage. Are they really an improvement over the existing system? Do they meet the needs of the time fully? Can they be inter-changeable with the existing economic order? Is new ijtehad required in this regard, keeping in view the well-known legal principle that ruling once given can be changed according to the situation?
Receipt and Payment Another issue which needs further examination is that whether usury has been prohibited as a receipt only or also as a payment. One may argue that if receiving usury is evil, its payment should also be bad. Not necessarily! If harming others is a sin, to get harmed should not be a sin. If exploitation is bad, blame should not be put on those who are exploited by others. Receiving of usury is definitely a sin because it is a sort of extortion for extending help to another person or, in other words, it is oppression. In all the verses quoted above the exaction of usury is prohibited, including in the Old Testament as mentioned above. However, in verse 30-39, the Quran says: “That which ye give in usury in order that it may increase on (other) people's property hath no increase with Allah; but that which ye give in charity, seeking Allah's Countenance, hath increase manifold” Here the word riba (usury) is used here in the sense of giving by way of bribe. Commenting on the Verse 30:39, Abdullah Yusuf Ali says: “According to commentators this verse specially applies to those who give to others, whether gifts or services, in order to receive from them greater benefits in return. Such seemingly good acts are void of any merit and deserve no reward from Allah, since He knows the real intention behind such ostensibly good deeds.” (The Holy Quran, English Translation and Commentary by Abdullah Yusuf Ali, p.1189, footnote # 3552, The Presidency of Islamic Research, IFTA, Mushaf Al-Madinah An-Nabawiyah). So here giving of riba does not mean paying interest, but bribery.
The fact that usury, even if it is interest, is prohibited by way of taking, and not giving, also becomes clear from the following words of the last sermon of the Holy Prophet: “Allah has forbidden you to take usury, therefore all interest obligations shall henceforth be waived. Your capital is yours to keep. You will neither inflict nor suffer any inequity. Allah has judged that there shall be no interest and that all the interest due to Abbas ibn 'Abd'al Muttalib [the Prophet's uncle] be waived.” The Prophet did not ask his ummah not to give interest in