Usury (Riba) and the Place of Bank Interest in Islamic Banking and Finance

M Raquibuz Zaman

doi:10.32890/ijbf2009.6.1.8379

Abstract

This paper examines the concept of usury or Riba as was understood at the time of the Prophet of Islam and his contemporaries in Mecca and Medina, and what differing interpretations of the term developed in succeeding centuries in Muslim populated countries of the world. It gives a brief summary of the concept of usury in Judaism and Christianity and how this term is equivalent of Riba in Islam. It demonstrates that Riba and interest are not synonymous terms, and that what Islam forbids is usury and not interest. It asserts that, although some interests are usurious, the claim by the contemporary Islamic Banking and Financial institutions, IBFIs, that these institutions are “Islamic” because the term is not used in their transactions, is misleading at best. It ends with the proclamation that true IBFIs are not only feasible, but also are inevitable to serve the needs of the Muslims around the world.

Highlights

Islamic Banking and Financial Institutions, IBFI, have been in operation in some countries for around four decades, yet in most Muslim countries where Islamic as well as conventional banks operate, the IBFI are relatively very small, and command even smaller market share
The objective of this study is to show the real historical meaning of the term usury or Riba in Islam, and why Riba should be interpreted as usury and not ordinary interest rates
If the Muslim jurist are referring to interest as usury on the basis of this literal meaning of Riba, naturally one wonders why God Almighty used the terms “doubling” and “quadrupling” as usury in Chapter 3 Verse 130, and why there was no further clarification of this verse or by the Prophet

Summary

Introduction

Islamic Banking and Financial Institutions, IBFI, have been in operation in some countries for around four decades, yet in most Muslim countries where Islamic as well as conventional banks operate, the IBFI are relatively very small, and command even smaller market share. If the Muslim jurist are referring to interest as usury on the basis of this literal meaning of Riba, naturally one wonders why God Almighty used the terms “doubling” and “quadrupling” (the sum lent) as usury in Chapter 3 Verse 130 (quoted above), and why there was no further clarification of this verse or by the Prophet. Once Riba is defined as “an addition to the sum lent,” all arguments for joint enterprises, cooperative ventures (as not all members of the coops can participate in the decision making process or in implementation of those decisions), interest-free banking, and/or Islamic monetary policies become redundant and all these institutions become forbidden for the Muslims. Sanhuri 1954-1959; al-Saud 1985; Tantawi 1989; Salus 1991; Suhail 1936; Yousuf Ali 1946 (in his commentaries on Quran 2:275 and 2:324); Shah 1967; Rahman 1980; and Afzal 1996, make a clear distinction between Riba and interest

The concept of Usury in Judaism and Christianity

IBFI and their Modus Operandi

Assessing the Operations of the IBFI

Streamlining the IBFI

Findings

Conclusion