This article discusses the contemporary understanding of the scope and application of Riba in modern forms of banking and finance. The schools of thoughts in the understanding of Riba and Riba-free finance can be classified into the mainstream school and the heterodox school. The mainstream school represents classical scholarship whose views are grounded in Classical Fiqh. The mainstream school can be further classified into conservatives and realists. The heterodox school can also be further classified into assimilative and interpretive school. Figure 1 gives an illustration of the schools of thought related to contemporary understanding of Riba and Riba-free finance.
Figure 1: Schools of Thoughts in Contemporary Understanding of Riba
Conservatives are the scholars who want to avoid not only Riba, but also want to stop backdoor ways of indulging in Riba as Sadd-e-Zariya (a precautionary step). They suggest caution and emphasize that it is vital to ensure safety from Haram (impermissible activities) than to engage in Mubah (a lawful activity). Safety from impermissibility is a must while engaging in a lawful activity is only permissible at best.
The conservatives include two kinds of scholars, i.e. those following any major school of jurisprudence in Classical Fiqh in all matters and those who take inspiration from Classical Fiqh schools and scholarship, but do not bind themselves and others to follow one particular Classical Fiqh school in particular. The former scholars are known as Muqallid (binding themselves to follow one particular Classical Fiqh school) and the latter are known as Non-Muqallid (not binding themselves to follow one particular Classical Fiqh school).
In the context of South Asia and especially Pakistan, the former includes scholars which hail from mainstream religious schools, such as Jamia Farooqia, Jamia Uloom-ul-Islamia and Jamia Ahsan- ul-Uloom, for instance. It is known that Rector of Jamia Farooqia, Maulana Saleemullah Khan and Chancellor of Jamia Uloom-ul-Islamia, Maulana Abdul Razzaq Iskandar had been critical of Islamic Banking. They had expressed their views in a jointly published Fatwa, i.e. legal opinion (Jamia Uloom-ul-Islamia, 2008). Likewise, Principal of Jamia Ahsan-ul-Uloom, Mufti Zar Wali Khan had also written a critique of Islamic banking (Khan, 2014). These scholars not only condemn conventional banking interest, but also criticize Islamic banking on the premise that it uses Hiyal (legal stratagems) to achieve the economic results of conventional banking transactions. Thus, in their views, Islamic banking merely mimics and serves the objectives of financial capitalism by compromising on the higher goals and ideal objectives of Islam (Maqasid-e- Shari’ah).
In the context of South Asia and especially Pakistan, conservative scholarship also includes scholars who do not hail from any particular Classical Fiqh school; but who, nonetheless, align themselves with classical scholarship overall. Maulana Maududi, Dr. Israr Ahmed and Sheikh Imran Hosein are few examples of scholars in this group. Maulana Maududi regards bank interest as Riba and condemns interest no matter how small or large it is and whether it exists in personal or commercial loans (Maududi1960, 1969). Dr. Israr Ahmed (1985) and Sheikh Imran Hosein (2001) have similar views, but both are also apprehensive of allowing differences in cash and credit prices in prevalent Murabaha transactions in Islamic banking. These scholars and the scholars which hail from religious seminaries in conservative school regard bank interest as Riba and they suggest Mudarabah and Shirkat as modes of Riba-free finance. Therefore, in summary, the scholarship in conservative school in mainstream scholarship condemns Riba and emphasizes on the use of Mudarabah and Shirkat for Riba-free finance instead of using Hiyal (legal stratagems) to mimic conventional banking in essence.
The realist school in mainstream scholarship represents scholars who spearhead Islamic banking. Respected scholar Mufti Muhammad Taqi Usmani is the most prominent scholar among them who has explained the views of this school eloquently in his writings (Usmani 1983, 2004a, 2004b, 2007). This school condemns bank interest as Riba, but suggests a wide array of Islamic alternatives for Riba-free finance including trade-based modes of financing (Murabaha, Salam, Istisna), lease-based modes of financing (Ijarah and Musharakah Mutanaqisa) and equity-based modes of financing (Mudarabah and Musharakah).
This school is not categorized as a liberal school since it provides the basis for developing Islamic finance products from the principles of Classical Fiqh. Even though conservative scholars and realist scholars differ in the application of Classical Fiqh principles and their relevance and validity in the context of banking, they share the same source of binding knowledge, which is Classical Fiqh.
In the heterodox thought, there are two sub-branches, i.e. the assimilative school and the interpretive school. The scholars in assimilative school are impressed with contemporary developments in socio-economic milieu in an age dominated by West. They think that it is best for Muslims to assimilate the institutions developed by West to avoid reinventing the wheel and lagging behind in the race for development as long as the primary Islamic sources of knowledge do not have a single, clear and direct meaning regarding prohibition of those contemporary institutions. For instance, Rahman (1964) argues that it will be suicidal for the welfare of the society and the financial system to abolish bank interest. In South Asia, this thought was originally shared by Syed Ahmed Khan. In Egypt, this thought was put forward by Shaikh Abduh and his disciple Rashid Rida in some contemporary issues.
Among the contemporary scholarsand economists in South Asia, Phulwari (1959), Shah (1959), Rahman (1964), Saeed (1996), Khan (1998), Farooq (2009) and Khan (2020) contend that bank interest is not Riba on the grounds that modern bank interest rate is determined in a competitive market and it cannot be usurious and exploitative. Shah (1959) in his correspondence with Maulana Maududi takes refuge from principles like creating ease for people and keeping in view public interest. However, these are not solid grounds and justifications when explicit guidance on prohibition of Riba is stated in Quran and Hadith.
In their views, a nominal competitively determined interest rate in commercial borrowing does not involve exploitation, which was severely condemned by Quran (Pal, 1994). These writers contend that scope of Riba prohibition excludes market based commercial lending on interest. They think that Riba is an exorbitant increment whereby the capital sum is doubled several-fold, against a fixed extension of the term of payment of the debt. These writers draw attention to the fact that since Quran was even asking to forgive loans of debtors, it suggests that such loans were taken by people who were not taking productive loans and thus were unable to repay the principal, let alone interest.
In the court case against Riba, the advocates of the viewpoint that ‘bank interest is not Riba’ put forward following four arguments taking inspiration from the interpretation of Riba in the assimilative school:
Riba was prohibited in very late stage of Prophet Muhammad’s (PBUH) life and Prophet Muhammad (PBUH) could not explain its scope clearly. 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, the borrower does not earn from the amount of loan received. Hence, the borrower in personal loans shall not be burdened with interest, especially if it is exorbitant and usurious.
The charging of interest upon failure of payment at maturity was prohibited in Riba Jahiliyya (Riba in Prophet’s (PBUH) time), but the initial increase over the principal amount was not prohibited. It implies that compounded interest may be considered as prohibited, but the simple interest seems to be allowed.
The wisdom behind prohibition as per Quran 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 which has to be paid on the borrowed amount. Hence, charging market determined interest should not be equated with interest on personal loans.
Renowned Scholar Maulana Taqi Usmani (2004a) academically answered these criticisms. On the first argument, Usmani (2004a) mentions that Riba had been prohibited in earlier nations as well, such as in Judaism and Christianity. Among the four verses on prohibition of Riba, only the last verse was revealed in later years after Hijra. Condemnation of Riba dates back to second year of Hijra. It is not correct to say that Islamic sources did not explicitly define Riba. When Quran mentions that one can only take back the principal amount of loan, Riba is indirectly defined and that definition is what is reported in a hadith.
On the second argument, through careful analysis of Arab history, Usmani (2004a) explains that most of the loan transactions in Arab at that time were done for commercial endeavors. Tribes used to take loans from other tribes for business purposes. Therefore, it is unthinkable 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.
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 the poor people who are unable to afford and commercial loans are always taken by the 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 reason why such an anomaly shall be introduced which is not warranted in Islamic sources of knowledge.
On the third argument, Usmani (2004a) 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. Quran warns that one should not sell Quranic verses and message for a very small sum of money (Al-Baqarah: 41). 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 one dirham of Riba. Quran only allows taking principal amount back meaning that anything asked over the principal amount of loan is prohibited.
On the fourth argument, Usmani (2004a) explains that Islamic directives are based on clear basis (Illat), rather than on wisdom (Hikmat) alone. 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 an adverse way. Consensual relationship outside wedlock among opposite genders may not harm their utility; but, for a society as a whole, it is detrimental to have broken family system as a result.
Coming to the last school of thought on Riba in contemporary times, the interpretive school is another contemporary school that can be categorized under the heterodox school. The scholars in this school are not classified as realists as the realist school takes inspiration from Classical Fiqh. There are differences in views among conservative and realist schools when it comes to the interpretation of Classical Fiqh. The interpretive school is also distinctly classified and not clubbed under assimilative school since it does not argue for merely assimilating contemporary institutions without critical inquiry. Though, the interpretive school does not necessarily want to provide Classical Fiqh basis of developing Riba-free finance, it nonetheless resorts to the primary sources, i.e. Quran and Sunnah (ways of Prophet Muhammad PBUH) to interpret and form views about contemporary institutions and develop Islamic alternatives.
In the interpretive school, there are thinkers, such as Javed Ahmad Ghamidi, founder of Al- Mawrid School, who regard stipulated profit taken on loan as Riba. However, he allows mortgage, hire-purchase, and lease financing where an asset is involved. He also thinks that the Quranic prohibition of Riba does not prohibit or condemn taking loans on interest (Ghamidi, 2014a, 2014b). He also allows a pre-determined profit rate agreed between the financier and the client in financing contracts as also suggested by Shaikh Tantawi (2002).
To summarize, increased penetration of Islamic finance requires clarity on what is Riba and confidence in Riba-free alternatives. On one hand, there are very few writers who advocate a separation between bank interest and Riba in the assimilative school. Others in the conservative school are apprehensive of Riba-free alternatives. The interpretive school through its interpretations unintentionally narrows the scope of Riba prohibition and also provides alternate Riba-free solutions. The realist school provides practicable Riba-free alternatives without narrowing the scope of Riba prohibition. To transform the economy on Riba-free basis, the realist school has practicable alternatives and hence, its solution has prevailed in the practice of Islamic banking in the world. In a nutshell, Table 1 summarizes the views of different schools of thoughts in the discourse on Riba and Riba-free finance.
Table 1: Summary of Viewpoints Regarding Riba and Riba-Free Finance
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