by Dwi P. Nugroho, 5th July 2017
Allah created Human as a social being. Allah creates Eve since Adam can not live alone and he need a friends or partners to live. No one can do everything from planting rice, vegetables, fruits to fulfill his needs. Human can not build their house except live in caves. Human can not protect their self from robberies thieves etc. They need to join and interact with others to get their need by trading or barter and by hiring others to do things that they can not handle.
A community will sustain as long it members live in harmony and not conflicting each other. Every community’s member should put their effort to sustain the community by making others enjoy to living with them. Community will appoint a leader to lead the community and becomes a judge to solve disputes among them. Set of rules will be used to justify which activities are allowed and which are not. A leader also appointed to prevent other oppress others in the community
It is natural if anyone want to be rich and to enjoy good and luxuries things and they need more money to able to to that. But sometimes this temptation prompting greedy. There will be people who want more money but with less effort. They will find easiest and shortest way to increase their wealth even with unfair stealing, robbing, cheating, corrupting and else.
But in some condition, those unfair activities are considered legal/ normal in a community depends on the law in the community it self. If the written law said it is allowed (example : to takes small item from others) so that activities are legal to be practiced such as the bank loan with interest and alcohol trading.
Islamic community established based on the Islamic principles. The communities’ values are Islamic values and the communities’ law are Islamic laws. One of the Islamic value and thus an Islamic law are prohibition of the Riba (interest).
Literally riba is increase or growth (ziyadah). Allah SWT said in Surah Rum (30):39 “Whatever you pay as interest so that it may increase (li yarbu) the wealth of people does not increase (fa la yarbu) in the sight of Allah”.
Al-San’any and Ibn Al-Arabi describes al-Riba as any gain (other than by way of charity) realized without a consideration or compensation (Ibrahim, 2000). The increase can be applied in money due to loan or credit, and can be applied in a commodity when people exchange the same commodity but with different weigh/volume. This articles will only discussed Why Allah prohibit riba in credit/loan and to not explain the reason of prohibition riba in commodities.
Allah SWT creates this universe for mankind and allowed them to enjoy it while living in the world. He said “Say: Who has forbidden the adornment of Allah which He has brought for His servants and the good things of His provision?” [QS Al-A’raf: 32]. But Allah SWT also remind us to seek the hereafter happiness through that which Allah has given. Allah SWT allowed mankind to get wealth as long it comes from legal ways or in the ways that Allah allowed. Among Allah SWT messenger, there was Prophet Sulaiman (Solomon) that so very rich and among Rasulullah companion there are Abdurahman ibn Awf and Uthman bin Affan those were richest person when they were in Makkah nor in Medina.
Allah SWT forbid mankind to get the wealth through the wrong way or trough any mechanism that Allah SWT forbid. And during day to days’ transaction among people, Allah SWT forbid anyone to not consume another’s wealth unjustly (QS 2:188) such as stealing, gambling, cheating and those involving riba. In another verse, which is similar opening sentence, Allah forbid mankind to consume another’s wealth unjustly except only in lawful business/trading and by agreement (QS 4:29).
One of the haram/illegal ways to get the wealth is by performing any transaction that involves riba (usury). For this matter, Allah SWT states its unlawful status by comparing two contrary business which one is legal while another one is illegal. Those businesses are riba (usury) and trading. Allah said: “But Allah has permitted trade and has forbidden interest”, and that sentences was a respond for anyone who said “Trade is (just) like interest” (QS 2:276).
At a glance, looks like there is a similarity between riba and trading i.e. to get the profit. Lender whose lends his money to the borrower (debtor) will get profit or excess from its capital which is the same with the traders who sold their goods for gaining profit that excess from its capital (modal) and they both (lender and trader) also face the same risk i.e. dealing with losses.
But at a glance too, anyone can see the significant different between trading and riba. Trading is only once time profit while riba usually can be multiplied profit. Traders will only get profit once the goods have bought and paid (cash or credit), while lender will get profit continuously until the debtor settle the loan.
As example, we have two scenarios the first one Luqman sold his car to Ismael for $ 6,000 while he bought it for $5,000 so he got $ 1,000 profit. The second scenario Johnny lend $ 5,000 to Nani and Nani agree to paid $ 6.000 after 3 months, but at next 3 months Nani only have $ 3,000 and Johnny got penalties him doubled for each month so Nani must have paid Johnny $ 6,000 in next months or he will have got doubled again $ 12,000 for the next 2 months. But for Luqman scenario (trading), it can be he applied riba the same with what Johnny did, if he (Luqman) sold the car to Ismaill by credit ($ 6,000) for 3 months and Luqman will penalties Ismails 100% of the rest payment if Ismail did not settle the credit.
Those kinds of riba named as above is categorized as Riba Jahiliya, which is known by people of Makkah in pre-Islamic era. Rasulullah PBUH uncle – Abbas – also commit with this activity before it is forbidden. Riba Jahiliya is specific type of the Riba i.e. excess money due to delayed payment. Imam Malik narrated that Riba in the Jahiliyyah was that a man would have a debt on a man for a set term. When the term was due, he would say, ‘Will you pay it off or increase me (ataqdi aw turbi)’. If the man paid, he took it. If not, he increased him in his debt and lengthened the term for him.” (Muwatta, 1180)
Common practice of Riba Nasiah that currently applied is when someone or institution lend money for some months with credit/interest rate (%) and another penalties rate for late payment. As example Johnny borrow money form Bank X for $ 1,000 for 12 months with interest rate 20% annually so he must pay $ 120 per month with minimum payment 5% ie $ 50. If Johnny did not pay in the first month, Johnny must pay $ 240 plus 30% penalties rate for $120 late payment in previous month. So Johnny next month must pay $276, $240 instalment plus $36 penalties.
In interest base loan mechanism, we found that the borrower mostly become the victim and the lender always win. Once the borrower lend money, he bound by the contract with lender and the lender have a right to bill and to collect the payment event sending debt collector to comes. In worth case the lender can Foreclosures the borrower’s properties to pay the loan that being used as the collateral for the debt with or without court decision.
Considering those examples, we can realize why Allah forbid riba.
First, Riba is an unfair interaction between people who have money and with another one that doesn’t have money. The debtor must be working to pay the loan and the lender didn’t care how the debtor find the money. Do the debtor easily can repay the loan as he has normal job, or maybe he must be working hard day and night to pay it. So now we have the lazy guys (lender) at home watching the TV while the debtors are working outside there to repay the loan.
Second, Riba potentially becomes a kind of human exploitation. For debtor if he can not pay the monthly payment then the loan becomes higher. In some case the excess money can be several times rather than the principal money. It commonly known as predatory lending. Predatory loans have excessively high interest rates, and abusive provisions including balloon payments and large prepayment penalties (Carr and Loppa, 2001). This predatory lender usually targeted lower-income and minority communities because they known their vulnerability.
Third, Interest/usury eliminates humanity. The habit of charging excess money (interest) makes people became greedy to the wealth. They prefer save the money in Banks to get the interest. Of if not, they prefer to lend money to the needy with some interest. Their paradigm to always get benefit from lending money also make them to have an attitude getting benefit even they did not charge excess money. They will exploit the borrower to get benefit him such as a free ride or free lunch, asking the borrower to do something, etc. Al-Baihaqi narrated from Abdullah Ibn Mas’ud (RA) “Whatever benefit of riding your creditor will receive, it will be Riba.” (Taqi Usmani, 1999)
Fourth. Riba caused Inflation. It can happen in two mechanism. Firstly, If everyone save their money in the banks to get the money it makes numbers of money in the communities decreased. And if the money decrease while the demand for goods is the same or even higher, it will cause inflation. Secondly, if entrepreneurs get the capital from riba basis loan, he will add the excess money charge to product’s cost and it makes the price or selling cost became higher and that will cause inflation as well (Ibrahim, 2016).
Fifth. Riba (interest) trapping nations and make a country depends to other country. Currently, the major user of riba transaction are multinational company and countries. Big company need more money to leverage their business. Development countries lend money to other countries or bodies to their nation development. As examples Indonesian’s government lent money from CGGI with these scenarios:
When monetary and financial crisis attack Asia including Indonesia, CGGI or Foreign countries just don’t care if Indonesia can not pay the loan. They would not erase even for the excess money. What just they did are what that they called as loan restructuration means they just delay the payment only. And then after several years Indonesia start rise up from previous crisis, it get another crisis wave due to the same reason.
Dwi Condro (2013) – and Indonesian scholars – interpreted the Quranic verse “Those who consume interest cannot stand as one stands who is being beaten by Satan into insanity” (QS 2:275) with condition that nation or countries with interest economic system will not stable. They will face crisis again and again just like an insane human.
Shiddiqi citing Gessel statement that the eternal evils of interest, money & monetary system were not recognised by the classical economists. Zuberi (1992) test the hypothesis that non-interest bearing money tends to be stable public demands on money and it will have a significant role in determining the inflation rate.
From above situations, it is reasonable if Islam prohibit riba and promote sales (Trade). Arabic word bay’ is normally translated as sale but the word bay in its widest meaning stands for a bilateral contract, that is, an exchange by two persons that influence the counter-values, like transfer of ownership (Nyazee, 2003)
Islam encourage earning profit on investment in trade and business as long the allied risks and gains are not one-sided but equally balanced. (Omar Khalid). Islam aims at shaping exchange relations among the factors of production based on cooperation, mutual benefit and fair play (Zubair, 2008)
Ibrahim (2000) mentioned, Islamic economy in their view does not allow the exploitation of the needy, the rewarding of the lazy or the unfair distribution of wealth; such vices being attributed to the de-linking of economic gains from risk-taking. Gains must accompany liability for loss (al-ghunm bil ghurm) and its application to specific assets (al-Kharaj bil Daman). Therefore, Islam encourage peoples to dealing business with risk either in exchange or profit sharing
Some examples of dealing with risk are:
- Traders must diligently select which goods that salable in highly demanded in current market. If he sells it with credit he must also consider the probability of the creditor if he can repay or pay off the installment.
- Factory owners must capable to select the right mechanic and evaluate his performance if meeting with his objective hiring the mechanic or not. Once the mechanic does wrong and upsetting the customers, the customers will complaint or asking penalties or event stop to continuing contract with the factory.
- Investors (with mudhraba concept) must capable to select the partners who will manage their money and run the business. He must actively be overseeing the business to ensure if it runs in accordance with the contract or not. He must capable to check the bookkeeping to ensure the money are used properly or not
Behind the prohibition of interest, Islam design various conditions to productive the economy growth whereas everyone must involve in the real economy activities and not only waiting the money grows it self without real action. Human must develop their business capabilities either as a trader, business owner or as an investor. The prohibition of riba in al-Qur’an institute equity and fairness among financiers and entrepreneurs (Ahmad and Hassan, 2007).
All riba are prohibited, not only the consumption loan but also the investment loan. Not only nominal charge but also interest rate charge of the excess money. Not only prohibit the big interest that some scholars named it as usury but any small kind of growth money are interest if it is not equal and fair exchange mechanism (Ahmat et al, 2007)
Islam prohibit riba to benefit all the mankind, not only benefiting some groups and disadvantages the other groups. Islam did not take side with the poor and against the have. Islam is not close capitalist and not even close to communist as well. Islam define the right ways for all mankind so everyone will get the justice.
- Ahmad, Abu Umar Faruq, and M. Kabir Hassan. “Riba and Islamic banking.” Journal of Islamic Economics, Banking and Finance 3.1 (2007): 1-33.
- Bhatti, Omar Khalid. “Riba: The underpinning principles.”
- Carr, James H., and Lopa Kolluri. “Predatory lending: An overview.” Fannie Mae Foundation Report (2001).
- LAWAL, Ibrahim Mohammad. “RIBA (USURY); A TOOL THAT SHOULD BE CARVED OUT OF FINANCIAL TRANSACTIONS.” Turkish Journal of Islamic Economics 3.2 (2016): 13-24.
- Nyazee, Imran A. Khan. “The Rules and Definition of Riba.” Nafis A. Siddiqui, Mohd. Zahir and Abu Nazim (eds.), Riba, Modern and Islamic Banking: A Critique (2007): 126-146.
- Shihata, Ibrahim FI. “Some Observations on the Question of RIBA and the Challenges Facing Islamic Banking.” YB Int’l Fin. & Econ. L. 5 (2000): 23.
- Siddiqui, Nafis Ahmad, Mohd Zahir, and Mr Abu Nazim. “Riba, Modern and Islamic Banking: A Critique.”
- Usmani, Muhammad Taqi. “The Text of Historis Judgement on Riba: The Supreme Court of Pakistan.” (1999).
- Zuberi, Habib A. “Interest free banking and economic stability.” The Pakistan Development Review 31.4 (1992): 1077-1087.
- Triono, Dwi Condro. “Ekonomi Islam Madzhab Hamfara.” Penerbit Irtikaz. Yogyakarta. Cetakan ke-2 (2012).