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Islamic Financing, Riba Usury: Debate-2

Non-equivalence of interest and Riba: Nine Arguments
INTEREST is popularly defined as “price” of capital or more precisely as return, income, profit or dividend accruing to this important factor of production. Since capital happens to be the most heterogeneous category as well as a time-based factor, its rate of return namely interest rate has a wide diversity and a multiplicity.
A comparative analysis of the two basic concepts namely interest and Riba as defined above could lead to a host of arguments establishing their non-equivalence. In the context of the on-going debate on the issue, nine important arguments are summarised in the discussion that follows.
  1. First, interest is basically a measure and a barometer. In its broadest sense, it represents the premium which a borrower has to pay for using a specified amount of loan for a given period of time. Contrarily, Riba is primarily a malady or a social aberration which is measured by the degree of exploitation in any dealings and transactions between the two parties. In a specific sense, market interest rate can be used as a measure to judge that between a lender and a borrower which party has been exploited and by how much.
  2. Second, interest is a parameter of the economic system, reflecting the reward of the services of a factor of production i.e. capital. Riba, on the other hand, is a phenomenon reflecting social imbalance or unequal exchange between contracting parties. If “interest” is abolished in the strict sense of the word, the society would lose one primary pricing parameter along with the allocative efficiency associated with all pricing parameters such as wage rate, rent and profit. When Riba is abolished, the community moves towards social harmony because it tantamounts to elimination of the basic sources of economic imbalance, or “expropriation of surplus value” by a specific class in the community.
  3. Third, interest is a rate or a datum, while Riba is a structure and a manifestation. Interest is the rate of discount which equates the prospective yield of investment equal to the present cost of the project in which investment is made. Riba at the micro-level reflects the element of undue advantage in one particular transaction or one activity while at the macro-level it is indicative of the aggregate or social “exploitation” plaguing the community.
  4. Fourth, interest is one of the legal norms deployed in the conduct of all legitimate business as it is an integral constituent of all loaning transactions. Riba, on the other hand, represents all deviations from the normal business conduct. It is the sum total of all illegitimate activities or illegal earnings associated with such activities. Elaborating the contents of verse 39 of Surah Al-Rome, Abdullah Yusuf Ali defines Riba as “any increase sought through illegal means, such as usury, bribery, profiteering, fraudulent trading, etc. All unlawful grasping of wealth at other people’s expense is condemned” as it represents Riba.
  5. Fifth, interest is a value-neutral yardstick which is used in measuring the fluctuations in the supply and demand for loadable funds or the relative scarcity of capital stock. Logically, high interest rates are associated with capital scarce economies and low interest rates with capital abundant and industrially mature countries. On the other side, Riba is a value- oriented concept because it is the generic name given to the “surplus value” enjoyed by one class at the expense of the other. Riba is not a function of capital stock; rather it is determined by the nature of the socio-political system and the ethic-religious values and norms practised by a community.
  6. Sixth, interest being a contractual obligation, is linked to the future payment of debt. As the nuclear element of financial superstructure, it sustains the entire banking and loaning industry. Riba, contrarily, represents the violation of contractual obligations and the associated illegal profits and earnings. Riba is generally the outcome of the weakness, ignorance or lack of bargaining power of one transacting party which is abused by the other.
  7. Seventh, interest is universally recognised as an important policy instrument of monetary management, price control and wealth distribution while elimination of riba is a policy oriented target. All civilised societies, including the Islamic, are committed to eliminate all forms of Riba or social injustice but no civilised community would opt to abolish an effective instrument like interest. If elimination of interest is accepted as an objective, the resulting confusion between instruments and objectives could bring about tremendous loss of efficiency and equity.
  8. Eighth, interest being a scientific ‘tool’, its usefulness and applicability relates it to positivism and pragmatism while Riba as a social phenomenon falls in the normative realm of theology and ethics. Because of these fundamental differences in the domains to which they respectively belong and the absence of criteria and standards common to both science and ethics, equivalence between interest and Riba cannot be established even, as a ‘prima facie’ case or on an ‘ad hoc’ basis.
  9. Ninth, there are perceptible differences between interest and Riba in terms of their scope and mapping. Interest is germane to capital whether money or real while Riba is more extensive and comprehensive in scope as it can apply to any mode of payment and transactions. Thus Riba pertains not only to capital but also to wage payments, rent accruals and profit charges. Under this topology, an industrialist or a landlord who pays his workers less than their “due” share of wages, a businessmen or trader who fails to pay the taxes due to him and a doctor or a lawyer who charges “abnormally high fees” are all indulgent in the practice of Riba.
Furthermore Riba and interest can be differentiated from the point of view of dispensability. Riba can be eliminated from the society by conscious policy actions, but interest being a price of a factor of production namely capital, cannot be eliminated from the economic system. “Capital without a price” or “free capital” does not make any economic sense. That explains why none of the Islamic countries including Saudi Arabia, Pakistan, Iran, etc., has succeeded in removing interest from the economy even through the names like “mark up”, “rate of profit”, “rate of return on capital”, ”commission” and “profit-loss sharing” have replaced the simple “interest”. But it is high time for the jurists to shed the thin veneer of self-delusion provided by this practice of changing the nomenclature of interest and to accept that interest being the yield (return) on capital cannot be abolished under any circumstances.
Interest as a scientific concept or idea has grown along with development of banking and institutional credit and this has led to a gradual demise of “usury” which is one manifest form of Riba. Analogously, if interest is abolished, it must inevitably lead to a resurrection of the evil of “usury”. The observations on this issue made by Adam Smith in his chapter magnum opus “The Wealth of Nations” published in 1776, are highly instructive and perceptive:
“In some countries the interest of money has been prohibited by law. But as something can every-where be made by the use of money, something ought everywhere to be paid for the use of it. This regulation, instead of preventing, has been found from experience to increase the evil of usury; the debtor being obliged to pay, not only for the use of money, but for the risk which his creditor runs by accepting a compensation for that use. He is obliged, if one may say so, to insure his creditor from the penalties of usury.” (An Inquiry into the Nature and Causes of the Wealth of Nations, Volume I, Liberty Classics, Chapter IV, Page 356)
If we extend the argument of Adam Smith to its logical conclusion , it would suggest that the existence of institutional credit and evolution of interest as a policy instrument have helped eliminate usury, clearly showing that interest and Riba are mutually exclusive and incompatible. Riba by definition is “excess” or “surplus”. To determine “excess” you need a norm. But you cannot take “excess” as a norm to determine what “excess” itself is. Interest in turn can serve as one of the norms to determine one particular type of Riba which is popularly known as “usury”.

This is the opinion of author, Dr.Aqdas Ali Kazmi holds a Ph.D in Economics from Boston University, USA, and has earlier served State Bank of Pakistan, CBR and Planning Commission. E Mail:

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