THE RIBA VERSUS INTEREST DEBATE: BACK TO SQUARE ONE

Riba

The Arabic word ‘riba’ means growth. In the financial context it may be interpreted as growth of the borrowed principal or commodity, and in common parlance, it is commonly understood to mean interest.
Even now that Islamic banking (as an interest free system) has become a well-recognised practice around the world, one keeps coming across points of view that the only type of interest that should be prohibited is “riba al-jahiliyya,” which was prevalent during the pre-Islamic period. Al-jahiliyya refers to the pre-Islamic period in the Arabian Peninsula.

“Riba al-jahiliyya” consisted of the repeated and continuous doubling of the money owed or borrowed commodities when the borrower could not pay on time, thus resembling today’s condemned practice of charging excessive interest rates (usury) that leads to exploitation and causes harm and inequity.

There are some views that the Holy Qur’an is not specific about the type of interest when it refers to the prohibition of riba. Professor Mohammad Omar Farooq states “there is hardly any empirical work done by scholars of Islamic economics and finance in support of their claim that interest in all its forms is exploitative and makes either the borrowers or the society in general worse”?.

Proponents of the prohibition of interest explain that it aims to protect poor borrowers from rich lenders, whereas its opponents protest that this is not a valid argument nowadays when rich corporations borrow money through rich banks, and banks do compensate depositors for opportunity cost, expected inflation, and other risk factors. Others oppose the blanket ban on all types of interest and point out that the poor are not being exploited; they are typically denied access to credit since they lack the required collateral. In addition, the Grameen Bank initiative is cited as a case in point to demonstrate that the interest-based framework can be used to fight exploitation and alleviate poverty. Other opponents have opined that the ban on interest in Muslim countries may be hindering their economic growth, arguing that government regulations, which impose a ceiling on interest rates, should be able to protect borrowers from exploitation by commercial banks, particularly in a competitive environment.

Even some Muslim priests have defended the interest-based banking system, for instance the Grand Mufti of Al-Azhar in Egypt Sheikh Tantawi argued back in 1989 that “interest-bearing bank deposits are more Islamic than what is offered as Shari’a-compliant products.” He also argued that interest earned on government treasuries represents profit-sharing rather than an exploitative form of riba.

On a practical level, there have been numerous criticisms of the frequent instances of lax interpretations of Shari’a, which have resulted in financial products that satisfy the letter but not the spirit of Shari’a law, especially in case of some types of Sukuk, an instrument which is in vogue these days.

Professor Farooq opines that on the topic of interest “Islam has become a victim of overly legalistic approach, where form has overtaken the spirit and substance” and that “the riba-interest equation actually suffers from a myopic reductionism” because instead of fighting for a world which is free from exploitation, Islamic banks are preoccupied with freeing the world from interest.

According to the critics of Islamic banking and finance, in practice it is nothing more than change in nomenclature to reassure the Shari’a-sensitive clients that the typically low monetary compensation paid on deposits or the non-excessive charges on financing are not a form of the forbidden interest or riba.

In my opinion, referring to Islamic banking as being mainly ‘riba-free banking’ is a marketing ploy, which is over-simplistic and which may have exhausted itself. It shortchanges Shari’a’s objectives that aim to protect the welfare of all humans and prevent exploitation, one manifestation of which is excessive interest charges. It ignores other equally important, if not more important, prohibitions that include gharar (deceit), maysir (gambling), speculation, and the sale of debt.

In the aftermath of the global financial crisis, proponents of Islamic banking have celebrated the fact that Islamic banking prohibits interest, when in fact the crisis could be blamed on other prohibited elements such as speculation, gharar, and the sale of debt since most home mortgages had zero or low interest levels when they were first originated.

The controversy and debate concerning whether or not riba includes all types of interest needs to be addressed urgently, once and for all. In addition, by eliminating all the prohibited elements rather than just the ‘riba’ element, the Islamic banking industry could resurrect itself and spare itself a lot of criticisms. By doing so, it may also save itself on the efforts and costs of structuring ‘new’ financial products that aim to window dress or conceal the interest component.

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