Opposing sides Most Muslims and most "non-Muslim observers of the Islamic world" believe that interest on loans (also on bonds, bank deposits etc.) is forbidden by Islam. (Such loans—or banks that make them—are sometimes referred to as
ribawi, i.e. carrying
riba.) This "orthodox" position is fortified by "voluminous and overwhelming" scholarly literature. Among the Islamic bodies that have declared all interest to be
riba include the First International Conference on Islamic Economics (1976), Its importance among
Islamists/
revivalist Muslims is reflected in the size of the
Islamic financial industry built on the basis of the orthodox position (approximately $2 trillion as of 2017), and in expressions such as the uproar that temporarily shutdown the
Pakistan parliament in 2004 when a Member of Parliament (MP) had the temerity to quote an Egyptian Islamic scholar decreeing that bank interest was not un-
Islamic. (In response—after the parliament was reopened—an Islamist MP stated that no member of parliament had the right to question this "settled issue" since the Pakistan state
Council of Islamic Ideology had decreed that interest in all its forms was
haram in an Islamic society.) Among some (such as
Imran Nazar Hosein) interest on loans constitutes not just a sin or crime but the "grand design of hostile forces who have already made considerable progress, through
riba, in gaining control over mankind. Their aim is to gain total control and to use that power to destroy faith in Allah." However, not all Muslims agree with the "orthodox" formulation that any and all interest—including contemporary "bank interest" (as opposed to interest charged in
predatory, unfair or abusive lending)—constitutes
riba. The "thin ranks" of notable contemporary non-orthodox scholars While the minority status of non-orthodox scholars is uncontested, whether there is a consensus (
ijma) in favor of orthodoxy, is. One non-orthodox economist (M.A. Khan) argues that a true consensus requires the agreement of not only most Islamic scholars but the Muslim community as a whole. Since most Muslims have failed to choose interest-free Islamic banking for most of their assets, this demonstrates (according to Khan) that they do not agree that all interest is
riba.
Overview of rationale and its critics In answer to the question, "why has God prohibited interest?", a number of arguments have been advanced by orthodox/
Islamist/revivalist scholars, preachers, writers and economists. They include that (in their view) • interest is a form of exploitation by the lender of the borrower and/or by the rich of the poor, that brings more inequality in society; • interest should not exist because money is unproductive and charging a price for it is unfair; • it is unjust for a lender to receive a fixed return (i.e. interest) when the profits or losses of the borrower/entrepreneur vary, and/or to gain from financial activity without risk of potential loss; • interest is unnecessary in a contemporary economy because investment capital can be generated justly by the sharing of risks and profits between financiers and entrepreneurs (and when that is impractical other financing of commodity and product purchases); this Islamic system of banking and finance will lead to greater prosperity and more human sympathy, economic stability, efficiency, development, etc. At the same time that orthodox analysts offer rationale for why interest is forbidden, "more than one analyst"—including medieval Quranic exegete
Fakhr al-Din al-Razi Usmani writes: "The Holy Qur'an has itself decided what is injustice in a transaction of loan, and it is not necessary that everybody finds out all the elements of injustice in a
riba transaction", [or even that] "the philosophy of the law" [be] "visible in a particular transaction". ... "There are areas in which human reason cannot give proper guidance ... [thus] it is the firm belief of every Muslim that the commands given by the divine revelations ... are to be followed in letter and spirit and cannot be violated or ignored on the basis of one's rational arguments ..." In any case, Usmani writes, injustice (
zulm) "is a relative and rather ambiguous term the exact definition of which is very difficult to ascertain". • and which is far removed from the much more benign bank lending of contemporary society where most lending is for commercial purposes to large, sophisticated borrowers paying competitive, regulated interest rates; • that the arguments advanced for
why interest is unjust, exploitative and forbidden, do not "hold up", • and can seldom be backed up by any studies or in depth research on the subject because so few have been done—the orthodox usually talking about injustice only in their polemical arguments, • that attempts to replace interest with an
Islamic banking system based on profit and risk sharing have
not been successful, • thanks to practical problems such as dealing with inflation, the
time value of money, "
information asymmetry", additional costs; which have led •
profit and loss sharing itself to become a
minor player, • while the backbone of the system (debt-like instruments such as
murabaha) have used
hiyal (legal stratagem) to get around religious requirements until they resemble conventional banking in most everything besides the terminology they use; • and that promises made for this system—such as that it would fund long-term economic development and help low-income small traders—have not been fulfilled; • and that ultimately the campaign against bank interest can best be explained not by scriptural-based argument, but by a need to create a complete and separate Islamic realm — with its own financial sector—by which Muslims can strengthen their identity and avoid lapsing into being "partial Muslims".
Injustice of fixed return The (alleged) injustice of fixed return and its (alleged) lack of risk, has been attacked by Ismail Ozsoy, M.N. Siddiqi, and M. Hameedullah. Ismail Ozsoy defines interest as
riba and as "an unearned or unequally distributed income." He argues that both those who pay and receive interest are sinful and behaving unjustly because the interest rate is "fixed at the very beginning, but it is impossible to predict the outcome of the business at which the loan is used, profit or loss, or how much either would be." Ozsoy states that his argument is supported by . Mohammad Nejatullah Siddiqi argues that charging interest on loans—whether intended for consumption or production—is forbidden exploitation. If a loan is to buy consumer goods, those who have wealth should assist those without and not charge any increment above principal. If a business borrows to invest in plant or equipment, a guaranteed return on capital is unjust because there is no sharing of profits between entrepreneur and financier, the borrower is "obliged to pay to the bank an extra amount"—i.e. interest. M. Hameedullah and M. Ayub also argues that interest is unjust because the borrower of collateralized loans bears risk but (they believe) the lender does not, since the lenders can keep collateral if the borrower defaults, which (they believe) violates the Islamic principle that reward should require taking/being liable for risks.
Abul A'la Maududi also believed return on an investment other than profit sharing is unjust. He preached that the interest-charging lender will increase interest rates "in direct proportion" to the borrower's "misery and the extent of his need, ... if the child of a starving man is dying of illness, the money-lender will not deem an interest rate of 400 or 500% as unduly harsh." Defending the justice of a "fixed" return, M.O. Farooq asks if lenders aren't "renting out" the purchasing power of their capital for the length of the loan and due interest as a form of rent much as any landlord, rental agency, or other temporary provider of something valuable/useful. M.A. Khan asks why fixed rent and fixed wages are not equally unjust despite not being forbidden by orthodox scholars. (While some Islamist thinkers have promoted the idea that 'labor owned firms would express the spirit of Islam better' than conventional ones, there is no movement to restrict businesses to profit-sharing payment for employees or even much debate on the issue.) but this is hardly the same as declaring all interest
riba. Another argument against the idea that charging interest on loans exploits entrepreneurs, is that availability of capital for a modern business endeavour is one factor among many that lead to success or failure. The entrepreneur/business management involves in multiple elements—product design, production, marketing, sales, distribution, employee management and motivation, etc. Having provided its share in the process, why should financiers suffer part of the losses (if there are any) that are beyond their control; or be rewarded with profits (if there are any) that they had so little to do with? In answer to the idea that collecting interest on a business loan when the business has gone insolvent is unjust, M.A. Khan replies that in the overwhelming majority of cases both banks and lenders benefit from loans and asks if it is sensible to let the small fraction of bankruptcies dictate how finance is structured. Feisal Khan points out that contrary to the orthodox view that collateralized loans are risk free, the 2008
subprime mortgage crisis has shown that "even AAA-rated collateral is often insufficient to ward off lender losses". M.A. Khan cites rates of
profits of business enterprises from developed countries over several decades, which were "consistently" higher by "
several multiples" than the rates of interest, a reflection of
capital markets compensating the greater risk of equities with
greater returns (on average), and safer
fixed income investment with lower returns. Fixed income accounts also provide a service for those with fixed and modest income, Concerning the motive of fighting injustice and exploitation, M.A. Khan complains that the orthodox have never bothered to define exactly what they mean by exploitation or done the research to substantiate their claim that all interest exploits. Farooq and others (e.g. Izzud-Din Pal and Yoginder Sikand) complain that the pursuit of justice has not been made the "underlying reason" in defining
riba by jurists. (
See above.)
Vice and corruption Among those arguing that interest has a corrupting influence on society are Muhammad N. Siddiqi, Yusuf al-Qaradawi, medieval jurist
Fakhr al-Din al-Razi,
Abul A'la Maududi. Interest "corrupts" society and "demeans and diminishes human personality" according to M.N. Siddiqi. Those who earn income from interest will not have to work, leading to the interest drawers' contempt for work and depriving others of the benefits of the interest drawers' industry and efforts, according to Yusuf al-Qaradawi. Interest brings an end of "mutual sympathy, human goodliness, and obligation", according to Imam
Fakhr al-Din al Razi.
Ibn Rushd argued the rationale for prohibition relates to the possibilities of cheating that exists in
riba, which is clearly visible in
riba fadl. Non-Orthodox M.O. Farooq replies by asking why Siddiqi does not even attempt to provide evidence for how charging interest leads to social and personal corruption, noting there is no connection between levels of corruption as determined by monitors such as
Transparency International and the use of interest-bearing loans. Farooq answers the charge that interest leads to sloth by stating that matching the savings of savers/depositors with the capital needs of borrowers is an economically useful and competitive function, and that in the present day many savers are retired elderly of modest means for whom it would be foolish to take risks with their life savings, and who pay for this caution with smaller returns. Another non-orthodox critic, Faisal Khan, argues that while complaints of lenders being wealthy and predatory may well have been valid in the 12th Century of al-Razi, or among the North Indian peasantry that Maududi knew (who borrowed from the
bania Hindu merchants who sometimes serve as money lenders), it "is hardly an accurate description" of the effects of a "modern conventional banking/financial system". Taqi Usmani, maintains that investors/savers desire for fixed income investments/accounts is the result of an unnatural expectation of no risk of loss, brought about by the separation of finance "from normal trade activities" in capitalist banking—normal trade activities of course resulting in losses from time to time. Once people understand this they will invest in Islamic finance.
Inequality Among those who believe that interest bearing loans favor the rich and exploit the poor are M.U. Chapra, Taqi Usmani, Al-Qaradawi, Abul A'la Maududi, Taji al-Din and Monzer Kahf,
Fakhr al-Din al-Razi, and
Ghulam Ahmed Pervez. Many (such as Taji al-Din, Fakhr al-Din al-Razi and Al-Qaradawi), express concern over rich lenders exploiting or refusing to lend to poorer borrowers following the traditional orthodox theme of a "vicious rentier class that thrives on the misery of the poor" perpetuating "a system designed to enrich the few at the expense of the many. However
Taqi Usmani expresses concern about rich borrowers who borrow "huge" amounts for "their huge profitable projects" and exploit lenders by only paying interest and not sharing their profits. (Elsewhere he states that "the intrinsic nature" of interest and not the "financial position of the parties" make loans charging interest invalid.) Taji al-Din and Monzer Kahf argues that charging interest on loans restricts the circulation of wealth to those who already have it, since lenders do not provide loans to those who are unable to repay them. This (he believes) is forbidden by the Quran and results in an increase the divide between the rich and poor. Chapra notes that since banks are primarily interested in collateral to secure loans rather than the profitability of what the borrower/entrepreneur is seeking capital for, banks will finance rich borrowers with collateral rather than small borrowers with good ideas. Abul A'la Maududi calls interest "the greatest instrument by ... which the capitalist tries to concentrate in his hands the economic resources of the community", proclaiming "there is hardly a country in the world in which money-lenders and banks are not sucking the blood of poor labouring classes, farmers and low-income groups". M.A. Khan replies that these difficulties would not be solved by Islamic banking, firstly because "no business firm will extend credit to a customer until it is satisfied with its credibility", and secondly because there is no evidence that Islamic banking institutions have been focusing on the potential profitability of the proposals of entrepreneurs seeking capital rather than collateral. Overall, Khan writes, there is simply "no significant and rigorously argued study, of either Muslim or non-Muslim countries, showing that interest is causing or contributing to inequalities of income and wealth." squelching job creation. Maududi states that productive investment is withheld when enterprise seeking investment cannot yield a profit equal to the "prevailing rate of interest".
Mohammad Abdul Mannan writes that eliminating interest would follow the cooperative norm of the Quran, and stimulate job creation and economic vitality. M.A. Khan replies that the harm created by interest cannot be that severe as interest-based finance is "deeply entrenched" in the developed countries of the OECD, where per capita income is quite high and the percentage of poor people relatively low. M.O. Farooq notes that the countries that have gone in an "'interest-free' direction" are "hardly examples of greater economic stability." On the issue of over-indebtedness and instability, Chapra also argues that the interest-based system and its reliance on collateral leads to excessive levels of debt, which leads to economic instability. Mirakhor and Krichene M.T. Usmani insists interest-based financing may "fuel inflation" since it "does not necessarily" finance the creation of real assets" (its financing not tied to real assets), and may increase the supply of money without increasing products to match it. He cites a number of non-Muslim economists criticizing capitalist financial system for its propensity towards financial speculation, over-indebtedness, misallocation of lending capital. (Although their solutions its problems do not include banning all interest on loans.) Another way in which interest is alleged to "lend itself to speculation" is the (alleged) practice of borrowing at low rates to lend at higher ones. This (allegedly) disrupts "trade cycles" and interferes with economic planning and would be remedied by banning interest charges. Chapra also argues that "the erratic behaviour of interest rates" has caused "three decades" of "turbulence in the financial markets", citing a
Nobel Laureate in economics,
Milton Friedman. Islamist leader
Abul A'la Maududi—who was not an economist but has been credited with laying "down the foundations for development "of Islamic economics—preaches that interest (along with the lack of
zakat tax on savings) prevents economic progress and prosperity by rewarding savings and capital formation (the common idea that these things help economic development being a "deception"). they consume less, which decreases employment, which leads to still less consumption, creating a downward spiral Entrepreneurial profit and wages should be the only source of income in society. Siddiqi and Ganameh cite a hadith of "income devolved on liability" in this context. In reply, M.A. Khan argues • that the effective elimination of interest on loans for an extended period in the world's third largest economy (i.e. Japan, which lowered prime rates to 0.01% from about 2001 to 2006 in an attempt to stimulate its economy) failed to bring that country economic stability or prosperity; • that a
secondary market for financial instruments (which "unties" finance from real assets) "is a real, live need" of finance, even if it may pose a risk of speculation. The "alternative instruments of finance such as
sukuk and other Islamic bonds would also require a secondary market." And in fact there have been "efforts to create" these markets for Islamic financial instruments, but the need to follow the ideology of contemporary Islamic finance means that the markets "have ended up in a host of ruses, compromises and stratagems". this "has limited practical application"—limited to that small niche of Islamic banking that actually uses profit and loss sharing. In reply to Chapra's citing of Western economist Milton Friedman, M.O. Farooq notes that the
monetarist economists such as Friedman blame interventionist monetary policy in general rather than interest charges for the instability, and when asked specifically about any economic danger from interest charges Friedman himself stated that the work Chapra quoted did "not provide any support whatsoever for the zero interest doctrine" and that he (Friedman) did "not believe there is any merit to the argument that an
interest-free economy might contribute toward greater economic stability. I believe indeed it would have the opposite effect."
Accumulation of third world debt Usmani and other orthodoxists believe that the burden of
foreign debt incurred by
developing countries (including many Muslim countries) from loans by developed countries and institutions like the
IMF, is an illustration of the curse of interest. Usmani quotes a number of non-Muslim sources, stating that this debt service exceeds "resource flows to developing countries", and is still growing, has brought "structural adjustment" and "austerity programs", leading to "massive unemployment, falling real incomes, pernicious inflation, increased imports, ... denial of basic needs, severe hardship and deindustrialization", etc., and can be compared to indentured labor where the worker is "permanently indentured through his debt to the employer". (Usmani suggests the problem might be remedied with Islamic modes of financing, and that "assets-related loans" could be converted into "leasing arrangement[s]".) M.A. Khan agrees that the debt burden has created considerable hardship, but should be blamed on "mismanagement, fraud and corruption" in the misuse of borrowed funds, rather than interest charges. If interest
was to blame, Islamic financing would not be a solution (Khan argues), since it also involves costs (termed "profits" or "fees" rather than interest) to those in the developing world seeking capital.
Alternatives to interest ;Nature of interest-free finance A new
riba/interest free financial system would insure that no "increased amount was charged on the principal amount of a debt",
Mawdudi promised that zero return loans would allow the flourishing production of what was socially useful but which generated only a small return. On the other side, skeptical economist Maha-Hanaan Balala questioned how creditors would ever extend interest-free loans considering "the opportunity cost, erosion of value through inflation, risk of default by debtors"; and Fazl al-Rahman argued that an interest rate serves as a price for financing, limiting demand for it by borrowers, so that finance markets are not faced with limited supply and infinite demand. However, according to Taqi Usmani, emphasis on zero return was misguided. People not conversant with the principles of Shari'ah and its economic philosophy sometimes believe that abolishing interest from the banks and financial institutions would make them charitable, rather than commercial, concerns which offer financial services without a return. Obviously, this is totally a wrong assumption. According to Shari'ah, interest free loans are meant for cooperative and charitable activities, and not normally for commercial transactions ... . Another observer (M.A. Khan) has reported "a consensus" among Muslim economists that Islamic finance for commercial transactions "would not be free", but would have some kind of "cost" other than interest. In the 1980s the Pakistan regime of General
Muhammad Zia ul-Haq condemned the "curse of interest" and promised to eliminate it. This industry was concentrated in the
Gulf Cooperation Council (GCC) countries, Iran, and Malaysia. ;Modes Islamic banking replaced
riba/interest with accounts paying • a return varying according to the success of the project(s) the bank financed: for commercial finance the primary mode (in theory) of Islamic finance—called
profit and loss sharing—would replace interest with risk sharing between the investor, the banker and the entrepreneur of the project being financed, much like
venture capital financing. One form of profit and loss sharing is
mudarabah finance, where the bank would act as the capital partner in a back-to-back mudarabah contract with the depositor on one side and the entrepreneur on the other side. As the "loan" was repaid, the financier (
rabb-ul-mal) would collects some agreed upon percentage of the profits (or deducts if there are losses) along with the "principal" from the user of capital (
mudarib); mode of financing (also used are
Ijara,
Istisna, were some others) and they were to supplement the profit and loss sharing models. As Islamic finance grew, it became clear
Murabahah was not a supplement to
profit and loss sharing, but the mode used in about 80% of Islamic lending. (Explanation for this include that the structure and results of
Murabahah were more familiar to bankers, and that profit and loss sharing turned out to be far more risky and costly than proponents had hoped.) necessary because businesses "cannot survive where cash and credit prices are equal", and urges that bank interest not be judged
haram. Critics complained that in the eyes of
standard accounting practices and
truth-in-lending regulations there is no distinction between (for example) getting 90 days credit on a Rs10000 (cash price) product and paying an extra Rs500 (allowed), or taking out a 90-day loan of Rs10000 that charges interest totaling Rs500 (forbidden). Orthodox writers (such as Monzer Kahf) have defended the distinction stating attaching commodities to money in finance prevents money from being used for speculative purposes. Paying more for credit when buying a product does not violate sharia law—the reasoning goes—because it is "an exchange of commodities for money", while a bank loan is "an exchange of money for money" and forbidden unless interest is zero. The buyer in a credit sale is paying not "principal" and "interest", but "cost" and "profit". Other orthodox scholars M.A. El-Gamal), instead of giving a rationale, declare that the difference is knowable only to God, something humans must obey without understanding. The permissibility of the first [trade] and the prohibition of the second [usury/interest] are both quite clear and unequivocal ... Why one is permitted while the other is forbidden can only be fully known by Allah and whomsoever he gave such knowledge. As a practical matter, we should know what is permitted and use it to our advantage, and what is forbidden and avoid it. (The Pakistan state
Council of Islamic Ideology calls it "no more than a second best solution from the viewpoint of an ideal Islamic system;" According to Usmani an (orthodox) Islamically proper murabaha and other credit sale financing are only to be used • when profit and loss sharing is impractical, Critics/skeptics complain/note • that aside from the belying all the lofty theoretical talk of eliminating the injustice of fixed return in finance, • in practice not only do "
murabaḥah" transactions resemble loans, but most do
not follow scholarly restrictions, being merely cash-flows between banks, brokers and borrowers, with no buying or selling of commodities; • that the profit or mark-up is based on the prevailing interest rate used in
haram lending by the non-Muslim world; • that the risks taken by the financier are non-existent (being insured or covered by guarantees provided by the customer); • that Islamic banks have "found it impractical to obey their own charters" and that they have "disguised interest under a variety of charges"; Another source (Bijan Bidabad) suggests that "some public equity-based instrument" such as "Rastin Swap Bonds (RSBs)" be used for "non-usury open market operations". In modern economic theory many of the important models use interest as a key element, and in accounting interest rates are used to evaluate projects and investments. Islamic economics looks to find alternative variables and parameters—one suggestion has been for
Tobin's q to replace Interest (I). As a tool for comparing projects with countries where the interest rate is operated, however, it is argued that a profit rate could be used.
Non-orthodox approach The non-orthodox position emphasizes the difference between bank interest and the
riba of the Quran (sometimes arguing that contemporary "bank Interest" is a new financial technology not covered by classical fiqh), More recently the mufti of Egypt, Dr.
Muhammad Sayyid Tantawy, issued several
fatawa permitting bank interest in 1991. In 1997 Shaykh Nasr Farid Wasil (Grand Mufti of
Dar al-Ifta al-Misriyyah at the time) also declared bank interest permissible provided the money was invested in
halal avenues: "there is no such thing as an Islamic or non-Islamic bank. So let us stop this controversy about bank interest." Dr Abd-al-Munim Al-Nimr, an ex-minister of 'Awqaf in Egypt, publicly stated that banking interest cannot be considered
riba. This has been explained as in keeping with the tendency for rulers to get the fatwas they want on "key policy issues" (Historians note the practice is not new and that jurists legitimized interest for
awqaf (religious endowments) during the late period of the Ottoman rule (as mentioned above).
Modernist position In addition to service to government, another motivation of jurists opposing the formulation interest=riba has been the arguments of
Islamic Modernism of the 20th century Modernist jurists, mentioned above. (Other Modernists interpreters of
riba include those on the India-Pakistan subcontinent including: Tamanna Imadi, Rafiullah Shihab, Yaqub Shah, Abdul Ghafur Muslim, Syed Ahmad, Aqdas Ali Kazmi, and Abdullah Saeed.)
Islamic Modernists tend to "emphasize the moral aspect of the prohibition of
riba, and argue that the rationale for this prohibition as formulated in al-Qur'an was injustice and hardship." Modernists believe
pre-Islamic lending practices in
Makka constituted
riba and are much different from and more problematic than contemporary bank lending, which do not involve
riba, according to sources such as M.A. Khan
Muhammad Asad, Sa'id al-Najjar, Sayyid Tantawi, Abd-al-Munim Al-Nimr, also argues that
riba must involve harm to the debtor. In his fatawa permitting bank interest and declaring it non-
riba,
Muhammad Sayyid Tantawy argued it makes little sense to suggest that modest saving account holders are exploiting sophisticated multibillion-dollar banks that pay them the interest on their accounts. ;Practicality Economic arguments that bank interest is needed for efficient allocation of resources and economic development, also mean that it serves the public interest. Because public interest (
Maslaha), is one of the bases of divine law (ranking below other sources: Quran, Sunnah,
ijma' (scholarly consensus) and
qiyas (analogy)) this may exempt bank interest from charges of being
haram and
riba. Turkish-American economist and Islamic Studies scholar Timur Kuran questions whether an economy without interest has ever existed: "As far as is known, no Muslim polity has had a genuinely interest-free economy." Feisal Khan notes that the Islamic banking industry is under criticism not just from non-orthodox who think Islam does not call for a ban on interest, but from "ultra-orthodox" who believe it has not truly excluding all forms of interest from finance. He notes complaints about the authenticity of Islamic banking from strict Muslims (Taqi Usmani has argued that the industry has "totally" neglected the "basic philosophy", undermining its own ''raison d'être''; and that other banks (such as the
Meezan Bank and
Al Baraka Bank) were "full-fledged" Islamic commercial banks who would be promoted by the state bank. Despite this "rebooting", Khan states that the new, purified, full-fledged Islamic banks are the same in "form and function" as the old Islamic banks, and that eleven years later (as of 2013), use only a minuscule amount (3%) of profit and loss sharing, and make up only about 10% of the country's banking sector.
Reply to Modernists Most of these arguments have been criticized by Islamic revivalist writers, including Siddiqi, Zarqa, Khan & Mirakhor and Chapra, and especially by Taqi Usmani's "Judgement on Interest Delivered in the
Supreme Court of Pakistan". Taqi Usmani argues that commercial, industrial and agricultural (as opposed to consumption) loans could not have been unknown to Arabs in the era of Muhammad since
ahadith mention large loans and large scale caravans used by Arab traders. Arabs of Muhammad's era also had "constant business relations" with the adjacent
Byzantine province of Syria (Arabs used its silver dirhams and gold dinars for currency) where interest bearing loans were so widespread that a separate law was enforced to fix their rate of interest. He also points out that there are a number of references to "all"
riba being forbidden in
ahadith, and all excess over principal being
riba, but no mention of some smaller amount of interest being permissible.
Time value of money One concept instrumental in explaining (and defending) the justice of charging interest on loans is the
time value of money—the idea that there is greater benefit in possessing money in the present rather than the future. The concept justifies the idea that later payment should be discounted and savers/investors/lenders be compensated for deferring the benefits of consumption, or—as mentioned above (
see: Injustice of fixed return)—compensated for "renting out" the purchasing power of their capital, much as any rental agency providing something valuable/useful is paid rent. Maududi has called the difference "between the psychological values of the present and the future ... nothing but an illusion", Taqi Usmai has declared unequivocally that "in Shariah there is no concept of time value of money". Irfan argues that the value of money diminishes very little over time because some consumption—such as eating—can only be done over time. Furthermore, discounting for time may lead to negative outcomes such as unsustainable agricultural production with planting and grazing that causes
desertification and erosion, since these bad outcomes occur in the discounted future. However, Islamic banking also calls for rewarding delayed gratification in the form of "return on investment" Critic Farooq complains that this rationalization is contradictory, and amounts to denying time value in theory while embracing it in practice, and that the accepting of the theory in practice explains the large (and successful) move of non-Islamic western banks into Islamic banking.
Islamic concept of money Answers to the argument (of economists such as Farooq) that lenders of money are due some kind of rent-like compensation; Orthodox scholars, such as M.U. Chapra and M.T. Usmani, have written that money can only be a "
medium of exchange" and must not be treated as an "asset or commodity". Trading a commodity/asset, or paying a fee for its use is right and sensible (they argue), but trading or renting a medium of exchange is wrong, because money is "unproductive" has "no intrinsic utility". This being the case, no return for the use of money can be justified, and explains (at least in part) why it is
riba. Usmani quotes condemnations of speculation by various Western sources In response, M.A. Khan questions • whether the distinction between asset and medium of exchange proceeds from a need "to prove that all types of interest are unfair", • if there is any good way for enforcers of Islamic law to differentiate between productive trading and the speculation which is forbidden by this definition. Reduction of debt for early payment is considered
haram by the four Sunni schools of jurisprudence (
Hanafi,
Maliki,
Shafi'i,
Hanbali), but whether there is a consensus of Islamic jurists is unclear. According to Ridha Saadullah, such reductions have been permitted by some companions of the Prophet and some of their followers. This position has been advanced by
Ibn Taymiyya and
Ibn al-Qayyim, and it has, more recently, been adopted by the Islamic
Fiqh Academy of the
OIC. The Academy decided that `reduction of a deferred debt in order to accelerate its repayment, whether at the request of the debtor or the creditor is permissible under
Shariah. It does not constitute forbidden
riba if it is not agreed upon in advance and as long as the creditor-debtor relationship remains bilateral. ...
Inflation Whether or not compensation to lenders for the erosion of the value of the funds from inflation is allowed (and how to provide that compensation in a way that is not considered
riba), has also been called a problem "vexing" Islamic scholars, since finance for businesses will not be forthcoming if a lender loses money by lending. Volume 1 of
Investment Laws in Muslim Countries Handbook, states "an interest rate that did not exceed the rate of inflation was not
riba according to classical Islamic jurists." However, many scholars believe indexing is a type of
riba] and that it encourages inflation. Others state that using "interest to neutralise inflation would be tantamount to using a bigger 'evil' [interest] to fight a smaller one [inflation].
Delinquent payments/Defaults While in conventional finance late payments/delinquent loans are discouraged by interest that accumulates while the loan is delinquent, the price for credit payments can "never be increased" no matter how late the lender/buyer is in repaying (according to Usmani) because late fees are payment "against money", which violates the principal that credit payments must be "against commodity and not against money". According to Ibrahim Warde, Islamic banks face a serious problem with late payments, not to speak of outright defaults, since some people take advantage of every dilatory legal and regal and religious device ... In most Islamic countries, various forms of penalties and late fees have been established, only to be outlawed or considered unenforceable. Late fees in particular have been assimilated to riba. As a result, `debtors know that they can pay Islamic banks last since doing so involves no cost` Warde also complains that "Many businessmen who had borrowed large amounts of money over long periods of time seized the opportunity of Islamicization to do away with accumulated interest of their debt, by repaying only the principal—usually a puny sum when years of double-digit inflation were taken into consideration. ==Riba al-fadl==