Introduction
The prohibition of Riba is one of Islam’s clearest financial guidelines. This post explores why Riba is banned, the harm caused by interest-based systems, and why Islamic finance often fails to deliver on the promise of a debt-free, fair financial system.
As Muslims, we should know that Riba is banned. Most of us equate Riba with interest. However, it is not as simple as that.
What is Riba anyway?
Interest is certainly accepted (by most, but not all, jurists) as one type of Riba. This is the increase of money on money, and often takes the form of debt (and interest on this debt).
There are at least two other key variations on Riba that exist, and, over the centuries, jurists have generally failed to understand these other variations. That is not the focus of this article, but I will write about that shortly.
In any case, the banning of interest is a clear guidance to us of what we should and should not be doing as Muslims. To me, we must understand both aspects. We can not just accept it is forbidden without understanding why it is forbidden, and then to think hard about what this means and how we move forward.
This aspect that of Riba I will look at today relates to charging extra money on a loan that is given.
Negative aspects of Riba
It is easy to read about the commercial, moral and ethical reasons for the banning of interest. And I am sure many of us have some strong resonance with the idea that debt and interest causes harm. This harm can manifest itself on three levels:
1) Personal debt – debt marketing is literally rammed down our throats every day, and everywhere we turn. And we should all know of the real danger of living beyond our means, taking on debt that we can not handle, and then suffering greatly with the debt and interest burden that follows. Although I say this is “personal debt”, but of course the impact extends to families too
2) Corporate debt – this is debt used in some way to support a business. It is hard to find a business that does not have any debt at all. And we will all know the problems faced when markets slow down and the interest still has to be paid. Investments in property based on debt are particularly vulnerable in this scenario. Over-leverage and debt is a very significant cause for otherwise viable businesses to be forced to shut down.
3) Country debt – again, this should not be news to us. So-called wealthy countries now have levels of debt exceeding their GDP, and poorer countries are trapped in a vicious cycle of relying on debt and then being held to ransom when it comes to interest and capital repayments.
We all hate banks
And, to be honest, I think many of tend to hate banks anyway. And interest is (generally) the stranglehold of the banking sector. So, the fact that interest is forbidden gives us a good reason to feel good about hating banks in general.
Ok, so once we begin to understand a little about the nature of debt and interest, it is not too difficult to understand some of the wisdom behind the prohibition of Riba.
What do we replace Riba with??
This leads us to what must be the next stage of thinking as follows:
If interest is forbidden, and if it is prevalent in the modern social and economic system globally (and it is), then what do we do to replace the gap that debt and interest currently fills?
Debt is difficult to avoid. How many of us have debt on credit cards, bank loans, car finance, home finance and so on? Quite a lot of us, I would imagine.
How many companies rely on some form of debt to remain viable?
How many governments would totally collapse if their debt was called in today?
So, it is not good enough, today, to simply say interest is forbidden. We must understand what this means, and then apply ourselves to finding a solution.
And it is this application, this honest endeavour to find a real alternative system to debt and interest, where we, as Muslims globally, are failing.
Playing games with Riba
What we are doing, instead, is taking a technical approach to replace Riba with Shariah compliant contracts. These contracts are not designed to deliver Riba, of course, but we manage to do that via manipulation and distortion. This is a process that I do write quite a lot about.
Let me be clear – if we fail to understand Riba to be banned not simply because it is interest – but also because of the negative impact that debt and interest has on all of us, then we are simply fooling ourselves.
For example, alcohol is not banned just because it is alchohol – it is banned because of the results of its nature as being alcholol – which is intoxication. Thus, the jurists have quite rightly concluded – other intoxicants should also be banned.
We do not take the same approach to Riba – we are quite happy to declare interest as banned, but we refuse to understand that it is also the outcomes of interest and Riba that must also be guarded against.
If we replaced alchohol with another drink that had no alchohol content, but it had exactly the same impact in terms of intoxication, then I am sure most of us would agree that should not be permitted. It is just trying to play game and find loopholes.
Yet, this is what we do with Riba and Islamic banking. We replace riba with contracts such as Murabaha, Mudarabah, Wakalah, Ijara that just deliver the same thing as Riba but in a different commercial context.
And if you think this is not occurring, then I suggest reading my article where my research concludes that 99% of the activities of Islamic banks are priced at Riba, and 90% of global Islamic banking assets are priced at interest.
Does Riba have some benefits?
What we should be doing is looking at how we use debt, interest and Riba currently. And then saying:
“Look, it is clear that we can not do these things, so let us find out another, better way, to deliver these same perceived benefits to people, WITHOUT the negative aspects of Riba (that has caused the ban)”
So, let us look at the three levesl I referred to earlier:
1) Personal debt – let’s not just deliver more debt and interest to customers in the guise of contracts with Arabic names. Let us understand WHY people take out debt in the first place, and let’s try to fix that. Do we try to live beyond our means? If so, then maybe we should educate ourselves and stop that. Why give us another tool to live beyond our means?
If some aspects of personal debt are seen as a consequence of not living beyond our means, but the deliver something important to us and our families (here I am referring to debt to purchase a home to live in for us and our families), then, again – let us find a solution to this. Let’s not just ram Riba down the throats of customers by banks, in the form of so-called Shariah compliant contracts.
2) Corporate debt – I can fully understand the benefit to companies of receiving an investment and being able to accurately gauge the repayment obligations in the future. This can certainly be a benefit to a company. However, it takes the form of interest. So let’s find a way to deliver this same benefit to companies and businesses without resorting to Riba.
3) Country debt – again, it can be a benficial fiscal tool for governments to have access to liquidity to support short term imbalances – we must find a realistic system to replace this without resorting to Riba.
Now, it is clear to me, that these are the challenges that MUST be faced, and solved, in order for us to deliver the benefit of the prohibition of Riba and interest.
We are being told to THINK!
THIS is exactly what we are being told by our Creator, but in a more subtle manner. We are not just told that Riba is banned, but we are led to understand why this is the case (and the reasons are abundantly clear if we just open our eyes and look around us).
What this prohibition is implicitly saying is also this
– We have to understand why we use debt and riba to the massive extent that we do today, and then we have to understandwhat benefits this debt and interest is delivering to people – and it IS delivering some benefit. But the point is that the benefit it far outweighed by the harm (this is similar reasoning provided to us with regards to alchohol).
– THEN we must find good ways to deliver this benefit in a manner that has no relationship at all to debt and interest.
It is these steps that we have wholly failed to consider, never mind take, over the 40+ years that Islamic banking has been flourishing.
How do we help families with important financial decisions without burying them in debt?
How to de support businesses without giving them debt and taking their assets as collateral?
These are the real questions we must find answers to.
And, once we start thinking this way, we realise something quite simple, and at the same time, startling.
The whole system is the Problem
Fiat money is the cause of all of this – fiat money was only created for one purpose, and that is to support the creation of debt. And this debt can not exist without interest. This is unequivocally true.
So, it is difficult to avoid the uncomfortable conclusion that what our Creator is telling us, in an indirect manner, is that we must replace this flawed monetary system. There is no other way.
In the meantime, we must continue to support those negatively impacted by debt and interest. There are ways to do this, however we have singularly failed to even think about this.
What we have done is relentlessly pursue a policy of delivering nothing but debt and interest to Muslims via the proliferation of Islamic banks.
Summary
The prohibition of Riba is a wonderful opportunity delivered to us by our Creator, to re-invent our relationship with money and wealth. However, we have completely failed to realise this challenge, and take it on, What we do instead is pay lip-service to the rules of our religion, and give our blessing to new, massive industry (worth over $2 trillion and counting) that is marketing themselves in the name of our religion.
We are responsible for what is being done in our name and the name of our faith. We must educate ourselves, see through deception, and demand real change from those in a position to make real change.
This is a responsibility on ALL of us. Do not just leave it to some scholars to speak out against this (and they do, but they are marginalised).
Do your bit. Educate yourself, ask tough questions to those who claim to represent Islamic banking. Ask for explanations. Demand something better.
What can you do?
I am trying to do my bit, I provide education for those who seek it. Please do yours.
– educate yourself
– share what you learn with others, encourage others to find out more
If you wish, please support my efforts by:
– sharing my resources with anyone you want to, they are all free and freely distributable (just inform me first before sharing, please!)
– follow me on twitter (@safdaralam) or just click on the Twitter icon on this page and on my website. You will receive updates on my new articles and analysis
– and speak out!
May Allah guide all of us and help us bear the shared responsibility of protecting our Deen.