Bank interest is not `riba`

Published June 26, 2009

THE controversy about the permissibility or prohibition of bank interest started in the colonial times, in the 19-century onwards, when banking institutions came to the Islamic world.

The controversy first raged in Egypt. It is said that the Grand Mufti of Egypt, Muhammad Abduh, had permitted interest on postal savings though the fatwa issued by him is not available now. Today, many still ask if bank interest is prohibited in Islam. Most of the jurists maintain that it is not permissible, and Muslims should not accept interest on their bank deposits.

In the latter part of the 20-century many Muslim intellectuals came out with the concept of Islamic banking based on mudaraba and profit-sharing. A number of Islamic banks were started in Muslim and non-Muslim countries with a large Muslim population. Still the question continues to be asked if banking interest is permissible, and there is no unanimity of opinion on this question.

Yet, there are many Islamic scholars who feel that banking interest is not prohibited by Islam. Many modern commentators of the Quran also translate riba as usury and not as simple banking interest. From Pakistan Prof Fazlur Rehman, who had migrated to the US and taught at Chicago University for a number of years, wrote a very well-argued paper on the permissibility or otherwise of banking interest. He came to the conclusion that banking interest is not prohibited. Even those who do not agree with this view must read his article. It is very scholarly and based on original sources.

What is riba then? The Quran strongly condemns the institution of riba. It says, “Those who swallow usury (riba) cannot arise except as one whom the devil prostrates by (his) touch. That is because, they say, trading is only like usury. And Allah has allowed trading and forbidden usury. To whomsoever then the admonition has come from his Lord, and he desists, he shall have what has already passed. And his affair is in the hands of Allah. And whoever returns (to it) — those are the companions of Fire there they will abide.” (2275)

The Quran also goes on to say, “But if you do (it) not, (i.e. continue to take riba), then be apprised of war from Allah and His Messenger; and if you repent, then you shall have your capital. Wrong not and you shall not be wronged.” (2279)

Thus we see that if one continues to take riba, the Quran not only warns against it but even permits war against the usurer. Is bank interest so severe in consequences as to be warned of a war by God? Banking interest is taken and given by hundreds of thousands of Muslims all over the world, including in Islamic countries. Should Islamic states declare war against banks? No country ever does it. Let alone war, they are not given any punishment.

Then what is riba? Its root meaning in Arabic is 'growth' and here obviously it is unjust growth. One should not fatten oneself at the cost of others, which leads to gross injustice in society. Our justice system overlooks the stock exchange operations, which is based on pure speculation. One either becomes a millionaire overnight or is ruined completely if share prices crash. Islam permits only just growth which one earns in a permissible way through one's hard work, physically, intellectually, or both.

Speculation is strictly prohibited. For example, it is not permissible to buy a standing crop in the field as one does not know how much it would be maturing and how much will be destroyed. To buy cheap a standing crop amounts to speculation and exploitation of the peasant. Yet, many middlemen thrive on such speculations. Our justice system hardly ever condemns such practices. Many people become rich overnight by speculation using such practices. On the contrary, our jurists allow the share trade without any restrictions.

There were no banks during the time Islam appeared on the scene. People used to borrow money from private moneylenders and return double or more than the actual amount. Thus we see riba was the doubling of double (3129), which ruined the poor borrowers who often borrowed either for personal needs or small trade. This is certainly condemnable and all governments should take action against such practices.

Banking interest is far from ruinous and its rate is fixed by market operations to increase or decrease liquidity in case of inflation or deflation. A bank cannot be conceived as an exploiting institution. On the other hand, it is a regulatory institution facilitating financial operations between borrowers and lenders.

Some jurists argue that interest is not permissible as there is no element of risk in it and its rate is fixed. There is no such argument in the Quran itself. If this argument is valid then even investing in a building and giving premises on rent will also not be permissible as rent is fixed and there is no risk involved. The Quran denounces riba as an exploitative practice leading to unjust growth, not because there is no element of risk in it.

In view of the above arguments it can be argued that banking interest cannot be treated as riba and should be held permissible.

The writer is an Islamic scholar who heads the Centre for Study of Society and Secularism, Mumbai.

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