Exploitation, Profit and The Riba-Interest Reductionism

Exploitation, Profit and The Riba-Interest Reductionism
Dr. Mohammad Omar Farooq
Associate Professor of Economics and Finance
Upper Iowa University 
June 2006

NOTE for fellow Muslims: Because this topic of Riba involves what is haram (prohibited) and halal (permissible) in Islam, every Muslim MUST do his/her own due diligence and conscientiously reach own position/decision in regard to personal practice. In doing so regarding this matter or any other aspect of life, Muslims should seek guidance from the Qur’an and the Prophetic legacy.

---

I. Introduction

The Islamic banking and finance (IBF) movement, now comprising of institutions in almost all the Muslim-majority countries and also in many other countries in Europe and North America, is a major Islamic phenomenon that is gathering momentum almost every day. The main motivation behind this pursuit of a banking system, distinguished from the conventional banking system, is the Islamic prohibition of Riba, which is commonly equated with interest by the Islamic orthodoxy. The primary rationale given by the proponents of Islamic economics and finance is that interest represents injustice and exploitation. Since Islam stands for justice and is against all kinds of exploitation, the traditional argument is that interest in all its forms is an abomination. Therefore, the goal of IBF is to reorganize economics and finance away from interest-bearing arrangements and on an alternative basis consistent with Islamic norms and guidelines.

In this paper, the assumed relationship between interest and exploitation is critically examined. By drawing on the literature about exploitation on the one hand and the Islamic literature about economics and finance on the other, we scrutinize whether the traditional arguments about the connection between interest and exploitation hold up. Furthermore, we seek to evaluate whether the concern about exploitation expressed by the proponents of Islamic economics and finance is serious and substantive.

II. Interest is unjust and exploitative: A Common and Traditional Argument

In the context of a categorical prohibition of riba, the Qur’an provides a fundamental rationale: “if ye turn back, ye shall have your capital sums: Deal not unjustly, and ye shall not be dealt with unjustly“. [2/al-Baqarah/279] Those who equate interest with riba invoke this same verse (and a few more) and conclude that interest is unjust and exploitative. It is important to note that in the traditional literature about Islamic economics and finance riba should be read as “interest.” [Farooq_1]

Syed Nawab Haider Naqvi, former director of Pakistan Institute of Development Studies and an eminent Muslim economist, asserted that “the abolition of riba is one … element of a comprehensive Islamic reform to establish an exploitation-free economic system” [p. 124] However, Naqvi is quite cautious in equating interest in all forms with riba. 

Sayyid Abul Ala Maududi, the founder of Jamaat-e-Islami, a leading, revivalist Islamic party, and a renowned authority on Islamic institutions and traditions, had a profound impact on the development of Islamic banking and finance movement. Among his notable books is “Sud” (Interest), in which he equated interest with riba and attempted to expose the evils of interest and articulate an alternative, interest-free framework. His views about interest are aptly summed up by Khurshid Ahmad: “The main reason why Islam abolishes interest is that it is oppression (Zulm) involving exploitation.” [pp. 253-254] 

Mohammed Nejatullah Siddiqi is a pioneering Islamic economist and the winner of King Faisal Award for his contribution to the field of Islamic economics and finance. According to him, “What is unethical about riba/interest to revoke such a response to interest-based banking from the Islamic civilization? The Quran (2:279) characterises it as unfair, as implied by the word Zulm (oppression), exploitation, opposite of adl (i.e. justice).”  [Siddiqi, 2000]

“The most important, and yet the most difficult, issue relates to the Islamic position with respect to the abolition of rib’a (i.e., usury, a positive rate of interest). It is important because the Islamic commandment to abolish it signifies a distinctive socio-economic philosophy, which abhors social exploitation in all forms, including ‘unbalanced’ and iniquitous financial relationships. It is difficult because the abolition of riba is in fact a signal for not only a financial rearrangement, but, even more fundamentally, for a restructuring of the entire economic system along Islamic lines.” [Zineldin, p. 49]

“All leading jurists throughout Muslim history have, … without exception, held justice to be so indispensable ingredient of maqasid al-shari’a.” [Chapra in Thomas, p. 96]

Muhammad Taqi Usmani is one of the leading Islamic experts serving on the Shari’ah expert boards of almost a dozen Islamic financial institutions around the world. According to him: “[T]he concept of Islamic banking was based on an economic philosophy underlying the rules and principles of Shari’ah. In the context of interest-free banking, this philosophy aimed at establishing distributive justice free from all sorts of exploitation.” [Usmani, p. 113]

“Riba is the most important issue of Islamic law in the modern world. It can, and does have, important consequences for the lives of each citizen. Indeed, if riba can in its various manifestations is prohibited, it can alter the entire structure of the system of distributive justice prevalent today.” [Nyazee, p. 2]

“With its inimitable and characteristic economy of words, the Quran clearly identifies riba … as an injustice, an economic evil, an impediment to spiritual growth, and a threat to the welfare of society. … Throughout the Quran, the theme of justice, including economic justice, echoes resoundingly.” [Thomas, pp. 2-3]

As Mahmud El-Gamal (Chair of Islamic Economics, Finance, and Management, Rice University) asserts: “The prohibition of Riba is not only about exploitation.” [2000] However, as corroborated above, throughout Islamic literature about economics and finance, the connection between interest and exploitation/injustice is regularly and consistently made. Often, the prohibition is explained in terms of zulm (as manifested in injustice, exploitation, etc.) as the primary reason. However, what is the exploitative dimension of interest as an allocative mechanism of capital in a modern economy? And, how genuine is the concern of the proponents of Islamic economics and finance about exploitation in general?

III. Riba, Exploitation and the Qur’an

Islam’s position regarding justice is unequivocal and universal. It sets the highest standard in this regard. 

O ye who believe! stand out firmly for justice, as witnesses to Allah, even as against yourselves, or your parents, or your kin, and whether it be (against) rich or poor: for Allah can best protect both. Follow not the lusts (of your hearts), lest ye swerve, and if ye distort (justice) or decline to do justice, verily Allah is well-acquainted with all that ye do. [4/an-Nisa/135]

While the Qur’anic message of justice and egalitarianism is categorically on the side of protecting the weak and vulnerable, the entire notion of justice in this regard is supposed to be blind, whether  dealing with the rich or the poor. As part of this quest for justice, Islam is against all kinds of exploitation of humans by other humans, whether individuals, groups or institutions. Therefore, anything, including Islamic economics/finance/banking, that takes exploitation as a serious and fundamental concern, can’t be belittled or ignored. 

According to the Qur’an, “O Believers! Do not consume riba, doubling and redoubling, and fear God so that you may prosper.” [3/ale Imran/130]

So, what kind of exploitative conditions or transactions were in vogue during the time of Qur’anic revelation specific to riba?  

“Explaining the meaning of the term used in verse 3:130, Tabari (d.310/923), the well-known commentator on the Qur’an, says:

Do not consume riba after having professed Islam as you have been consuming it before Islam. The way pre-Islamic¹ Arabs used to consume riba was that one of them would have a debt repayable on a specific date. When that date came the creditor would demand repayment from the debtor. The latter would say, ‘Defer the repayment of my debt; I will add to your wealth.” This is the riba which was doubled and redoubled.

The way in which riba was doubled and redoubled in the pre-Islamic period is expressed by the son of Zayd b. Aslam (d.136/754) as follows:

Riba in the pre-Islamic period consisted of the doubling and redoubling [of money or commodities], and in the age [of the cattle]. At maturity, the creditor would say to the debtor, ‘Will you pay me, or increase [the debt]? If the debtor had anything, he would pay. Otherwise, the age of the cattle [to be repaid] would be increased … If the debt was money or a commodity, the debt would be doubled to be paid in one year, and even then, if the debtor could not pay, it would be doubled again; one hundred in one year would become two hundred. If that was not paid, the debt would increase to four hundred. Each year the debt would be doubled.” [Saeed, p. 22; the above quotes are with the relevant references in Saeed’s work]

The exploitation and injustice of such riba-based transactions are obvious, and hardly require any further explanation or clarification. This type of riba is known as riba al-jahiliyyah, and according to some Islamic scholars, such as Imam Ahmad Ibn Hanbal, only such riba is unlawful without doubt from the Islamic viewpoint. 

“The Qur’an vehemently condemns riba, but provides little explanation of what that term means, beyond contrasting riba and charity and mentioning exorbitant ‘doubling.’ Commentators describe a pre-Islamic practice of extending delay to debtors in return for an increase in the principal (riba al-jahiliyya). Since this practice is recorded as existing at the time of the revelation, it is one certain instance of what the Qur’an prohibits. Hence Ibn Hanbal, founder of the Hanbali school, declared that this practice – ‘pay or increase’ – is the only form of riba the prohibition of which is beyond any doubt.” [Vogel and Hayes, pp. 72-73, quoting Ibn Qayyim al-Jawziyya, d. 1350, I’lam al-muwaqqa’in ‘ala rabb al-‘alamin, ed. Taha ‘Abd al-Ra’uf Sa’d, Beirut: Dar al-Jil, 1973, 2:153-4]

Subsequently, riba was categorized as either riba al-nasi’a (related to deferred payments) and riba al-fadl (related to exchange of commodities), and the latter was added primarily on the basis of Hadiths (prophetic narrations).  Gradually the scope of riba in Islamic jurisprudence was extended in modern times to include all forms of interest (high or low rate, nominal or real, etc.) and riba al-fadl, based on qiyas (analogical deductions), was extended to more than six commodities – barley, date, wheat, salt, gold and silver – covered by the prohibition of riba. 

IV. Interest and the Exploitation Argument

The orthodox view behind the IBF movement – that, interest in all forms is prohibited – is based on a definition of riba that is much more expansive than riba al-jahiliyyah. The expansion of meaning is based primarily on hadith, even though, contrary to common claims, no clear definition can be established to justify the riba-interest equation. [Farooq_1] This creates a new challenge of rationalizing the broadened definition, especially in terms of the exploitation argument. While  exploitation and injustice involving riba al-jahiliyyah are obvious and undeniable, the same is not true of interest in general. Please refer to an article of this author “The Riba-Interest Equation and Islam: Reexamination of the Traditional Arguments,” in which the traditional arguments are examined and demonstrated that those do not seem to hold in light of our contemporary context. [Farooq_2] 

Let’s take one such common/traditional argument offered by the orthodoxy as a rationale for the prohibition of interest..

“The lender is very likely to be wealthy and the borrower poor. If interest is allowed, the rich will exploit the poor, and this is against the spirit of mercy and charity. (This is the social aspect of the prohibition of interest).” [al-Qaradawi, p. 266]

The observation that the “lender is very likely to be wealthy and the borrowing poor” is based on stereotyping of the lending-borrowing process at the personal level. In the institutional context, savers are lenders to the banks and financial institutions, as these deposits are treated as liabilities of the banks on their balance sheets. Many of these savers are not necessarily rich. Indeed, until savers have sufficient capital to invest in the capital market (long-term securities, such as bonds, stocks or mutual funds), which includes many younger or not-so-well-off people, they stick to the savings accounts of the banks. Based on US data in 2001, top 1% income class constitutes 44.1% in stocks/mutual funds investments; next 9% income class constitutes 40.4%; and bottom 90% income class constitute 15.5%. In terms of bank deposits (all categories included), top 1% provide 21.7% of bank deposits; next 9% provides 35.5%; and bottom 90% provides 42.8%. [See Table 6 in Wolff, 2001] Thus, stereotyping lenders as rich and borrowers as poor is not supported by the changed reality of our modern times. “Today … debt is not necessarily associated with poverty.” [Saeed, p. 29]

There is another important twist to this “lenders are rich and borrowers are poor” argument, especially when it comes to the actual practices of the Islamic financial institutions [IFIs]. Either required by the central banks of the respective countries to maintain certain level of reserves with the central banks or due to lack of appropriate investment opportunities, many IFIs deposit their funds in interest-bearing accounts, even in foreign countries, for which Shariah-experts have provided the necessary fatwa of Shari’ah-compliance based on the rules of necessity (darurah). 

“Scholars in Islamic finance and banking have invoked necessity to permit exceptional relaxations of rules. They have issued fatwas (opinions) allowing Islamic banks to deposit funds in interest-bearing accounts, particularly in foreign countries, because these banks have no alternative investments at the necessary maturities. Typically, however, they place conditions on such fatwas, such as requiring that the unlawful gains be used for religiously meritorious purposes such as charity, training, or research. Such fatwas are particular to the circumstances in which they are issued.” [Vogel and Hayes, pp. 38-39]

Many Islamic banks have been explicitly and openly earning interest on their excess funds, often invested in safer, debt or debt-like instruments overseas. Even Islamic Development Bank (IDB), a “multilateral development financing institution, established to foster social and economic development” in its 55 member countries, follows this practice. 

“Some Islamic institutions have steadfastly refused to receive interest, whereas others, including the Islamic Development Bank and the Faisal Islamic Bank of Egypt (FIBE), have always placed their excess funds in interest-bearing accounts, usually overseas. … The Saudi Arabian Monetary Agency (SAMA) acts as the depository institution for IDB funds. One occasional source of controversy has been the fact that those funds were receiving interest – in fact becoming the main source of profits for the bank. The bank’s charter expressly permits it to invest excess funds ‘in an appropriate manner’, and the criterion of overriding necessity (of development in the Islamic world), in addition to the lack of suitable investments has been repeatedly used to defend the policy.” [Warde, p. 50, 144]

Thus, when simply extended from an argument against riba, the traditional argument against interest – poor borrowers are vulnerable to exploitation by rich lenders – doesn’t hold. One of the vital problems of most Islamic laws is that they are rarely supported by empirical data. [Farooq_3] All these traditional arguments against interest are generally polemical at best. Actually, Islamic finance and banking is probably the only field where the pertinent Muslim experts and scholars seem to apply themselves from an empirical perspective. There are many empirical works on the performance as well as other issues pertaining to Islamic finance and banking. However, there is hardly any empirical work done by these 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.

Let’s consider various situations where exploitation is alleged. For examples, what makes a contract or transaction unfair?  Do big-time college athletic programs “reek of exploitation”, as claimed by the President of Stanford University? Does the legalization of human organ sales involve exploitation? While Muslim scholars may have specific fatwa (juristic opinions) on any such issue or problem, it is important to note that Muslim scholars do not really have a clear and consistent theory of exploitation to help understand, analyze and address the situations where exploitation allegedly occurs. 

Generally, the field of exploitation is dominated by Marxian or neo-Marxian theories. Since the Marxian approach to exploitation is widely known, it is not necessary to explore in this essay.² Alan Wertheimer, a scholar of political theory, law and ethics, offers a broader  non-Marxian framework to analyze the issue of exploitation in a book, Exploitation.

	Mutually Advantageous	Harmful
Fair	A	B
Unfair	C	D

Based on the above typology, there are four different scenarios. Transactions or contracts that are  mutually advantageous and fair or unfair; transactions or contracts can also be harmful (to at least one party) and still it could be fair or unfair. What a society has the most interest in is to prevent or eliminate transactions or contracts that are both harmful and unfair (Type D) to at least one party. For example, riba al-Jahiliyya is both harmful (to one party) and unfair. Thus, its prohibition by Islam is quite obvious. In the Qur’an God has even declared war against those who practice such type of riba. [2/al-Baqarah/279] This is further reinforced by a fundamental precept of Islam, as enunciated in a hadith: “Let there be no harm nor reciprocating harm” [la darar wa la dirar; Musnad Ahmad, Vol. I, #2870].

The Islamic orthodoxy that equates riba with interest and regards interest in all forms prohibited have not been able to offer any defensible rationale or empirical evidence that even in case of mutually-agreed, fully disclosed, profit-oriented loans in a competitive, regulated environment, interest is harmful to one party or that it is unfair. Indeed, in a competitive, regulated environment, interest-based transactions are generally mutually advantageous and fair. The grand mufti of al-Azhar, Shaikh Tantawi’s fatwa on this issue went one step further. He argued that interest-bearing bank deposits are more Islamic than what is offered as Shariah-compliant products.. 

In 1989 [Tantawi] declared that interest on certain interest-based government investments was not forbidden riba (because the gain is little different from the sharing of the government’s profits from use of the funds or because the bank deposit contract is novel), thus joining the thin ranks of prominent religious figures who have issued fatwas declaring clear interest practices permissible. … Later he went even further, saying that interest-bearing bank deposits are perfectly Islamic, and more so than ‘Islamic’ accounts that impose disadvantageous terms on the customer. Laws should change the legal terminology used for bank interest and bank accounts to clarify their freedom from the stigma of riba.” [Vogel and Hayes, p. 46]

Generally, any stipulation of increase or excess over the principle – i.e., interest – is considered as riba in the context of debt instruments. As Maududi defined this as:

“Abul Ala Maududi defined riba as: ‘predetermined excess or surplus over and above the loan received by the creditor conditionally in relation to a specified period.’ This definition entails the following three elements: (a) excess over and above the loan capital; (b) determination of surplus in relation to time; and (c) stipulation of this surplus in the loan agreement.” [Quoted in Ali, pp. 2-3]

The above definition simply reflects the way classical Hanafi jurists, such as al-Sarakhsi (d. 490 AH), had defined riba earlier. “Riba in its literal sense means excess … and in the technical sense (in the Shariah), riba is the stipulated excess without any counter-value in bay [sale].” [Nyazee, p. 24, quoting al-Sarakhsi’s Mabsut, Vol. 12, p. 109] 

However, there is a difference in nuance in the above two definitions. Al-Sarakhsi’s definition focuses on sales (exchanges) without any mentioning of loan. Maududi’s definition focuses on loans, which is more directly related to interest in a modern economy. However, there are two aspects that are common to the above definitions: (a) “stipulation” of excess and (b) no reference to any injustice, unfairness or exploitation. Here, stipulated or predetermined excess in loan or exchanges – without any counter-value – is assumed to be unfair, harmful and exploitative.

As we have mentioned above, there is no theory of exploitation offered by the Muslim scholars and jurists. God is Just. His revelation, thus, is just, and its implementation guarantees prevention of exploitation. Therefore, there is no need to discuss the issue of injustice or exploitation separately. What the jurists and scholars need to focus on is knowing what the divine dictate is and identifying its criteria and scope of application, and then applying or implementing it. That takes care of any underlying problem of injustice or exploitation!

One real problem with this commonly-held perspective is that, while from the Islamic perspective, the Qur’an provides certainty of knowledge in regard to verses that are legal in nature (muhkam), the Qur’an rarely defines any term and the human understanding of the Qur’an in regard to its definition and scope or context of application is not infallible. It is important to note that beyond the Qur’an, hadith (mostly ahad or solitary) yields only probabilistic knowledge. [Farooq_4] There is no consensus on the definition about Ijma (consensus) itself and it is an overused and sometimes even misused doctrine and tool. [Farooq_5] The other foundation of Islamic fiqh (law) is qiyas (analogical deduction), which also yields only probabilistic/speculative knowledge.  [Farooq_6]

Thus, the premise or approach that merely knowing, identifying and applying the Islamic guidance automatically ensures that the laws, codes, instruments, structures, etc. address injustice and exploitation is simply presumptuous. Let’s keep this presumption in perspective and examine the issue of “stipulation of excess” and the lack of any “counter-value”.

There is a reason why, compared to definitions by earlier jurists,  more recent definitions focus on interest-bearing transaction. This is because barter transactions are less common now, and there is a simplistic tendency to equate riba with interest. For illustrative purpose, let’s focus on the more recent definitions that have been influential in the emergence of the Islamic finance and banking movement. 

a. The Stipulation of excess

The stipulation of any excess in the loan agreement is a constituent element to identify riba, and therefore interest-bearing debt instruments are considered prohibited in Islam. However, quite ironically, as in the case of riba al-jahiliyyah, discussed above, the exploitation element comes from not the presence, but a lack of stipulation, of a predetermined excess in the contract. That’s why at the time of settlement of debt, if the borrower is unable to pay, he is given an option to defer, but the principal owed is doubled or quadrupled, at the mercy of the lender. 

There are two opinions about the nature of the riba al-jahiliyyah. 

Abul A�la Maududi the chief of the Jamaat-i Islami assumes that for the first term the credit was granted free for interest but one fails to understand how this is intelligible in a social set-up such as the commercial Meccan society or the Jewish Medinese society, where the riba system was quit normal. How could the usurers, who were keen on doubling and redoubling their capital, forgo the initial interest by way of charity so to say? 

Mufti Muhammad Shafi expresses an opinion contrary to that of Maududi. He says, ‘The prevailing practice in Arabia was that a certain amount of money was advanced for a fixed period at a fixed rate of interest. If the debtor paid the loan within the prescribed time the matter was settled on the payments of interest otherwise he had to pay more interest.’However, the … statement of Zayd b Aslam, which is recorded not only by Malik but also by al-Bayhaqi, Razi and other Muhaddithun and fuqaha, shows that the initial interest itself was not usurious and was, therefore, not considered riba.” [Rahman, “Riba and Interest”]

In either case, for profit-oriented financing, it is not the stipulation of excess over the principal that is necessarily the source of exploitation or vulnerability of the borrower; of course, if the issue of exploitation has anything to do with the prohibition. Indeed, when a borrower knows what would be the total amount to repay the borrowing, he can assess the contract and make the decision voluntarily whether to enter into such a contract. In absence of a stipulation of predetermined excess (rate or lump-sum), the borrower doesn’t know what kind of excess would have to be faced, if the debt is not settled at the end of the contract period. Knowing and accepting the terms of a contract are not sufficient to ensure fairness, but they are necessary conditions.

Tracing the historical background of “stipulated excess” in Islamic discourse, Abdullah Saeed points out that Qur’anic commentaries as well as Prophetic narrations in Tabari (d. 310 AH), Ibn al-‘Arabi (d. 1148 AH) etc. did not associate riba al-jahiliyya with any stipulate excess. 

“These reports indicate that the riba as pracises in the pre-Islamic period (riba al-jahiliyyah) involved adding an amount to the principal against an extension of the maturity of an existing debt due to the debtor’s inability to repay on time. None of the reports quoted by Tabari, one of the earliest exegetical sources available to us, suggests that any increase was added at the time the debt was contracted. All reports available suggest that the increase in the debt occurred after the contract was concluded and at the maturity date and was due to the inability of the debtor to meet his obligation. These reports refer to debts but do not reveal whether they were the result of loans or deferred payment sales.” [p. 23]

So, how did this “stipulated excess” become part of the definition of riba? According to Saeed,  almost two centuries after Tabari, 

“A contrasting view was expressed by the Hanafi jurist Jassas (d. 980 AH): ‘The riba which the Arabs knew and practised meant lending money [dirhams and dinars] with a specified maturity at an agreed upon increase over and above the sum borrowed.’ ” [p. 23, quoting Jassas, Ahkam al-Qur’an, I, p. 465]

“As Jassas’ assertion is not supported by historical evidence or reports and is, furthermore, not in line with earlier reports quoted by Tabari, his interpretation may be regarded as unreliable. The view of the current study regarding the fundamental nature of pre-Islamic riba, therefore, remains valid. … The term riba as used in these (2:274-8) verses does not differ from its earlier usages in the Qur’an, according to early exegetes such as Tabari (Jami, III, pp. 67ff]) Zamakhshari (d. 1144 AH; Kashshaf, pp. 179-80), and Ibn Kathir (d. 1373 AH; Tafsir, I, pp. 334-6). Tabari, for instance, interpreted riba in these verses, with reference to what was practised in the pre-Islamic period, saying: 

‘God has forbidden riba which is the amount that was increased for the capital owner because of his extension of maturity for his debtor, and deferment of repayment of the debt.’ (Jami, III, p. 69).” [Saeed, pp. 23-24]

In terms of the history of Islamic discourse, Jassas’ view of interpreting riba al-jahiliyyah in terms of “stipulated excess” – a view without any corroboration³ and also contradicted by earlier works – became the basis of subsequent expansion of the definition of riba, used by the orthodoxy behind Islamic banking and finance movement. Those who believe that interest is riba and thus prohibited routinely refer to al-Jassas, but neither provides the corroboration for the view of Jassas nor raises any question about it. See for example, al-Amin, p. 17. For a detailed essay on al-Jassas’ commentary on riba, please see “Stipulation of Excess in Understanding and Misunderstanding Riba: Al-Jassas Link.”

Interestingly, Ibn Qayyim (d. 751 AH), almost 350 years after al-Jassas, ignores the view of al-Jassas and approaches the issue of riba in light of the pre-Jassas sources, such as Tabari, Zamakhshari and Ibn Kathir:

“In the pre-Islamic period, riba was practised by giving extra time to repay a debt and adding a charge against this extension [thus, increasing the amount of debt] until one hundred becomes thousands. In most of the cases, only a needy individual would keep doing so as he would have no choice but to defer the payment of the debt. The credit agreed to defer his demand for repayment of the debt, and waited so that he might gain more profit on the principal. On the other hand, the debtor was forced to pay the increased amount to ward off the pressing demands of the creditor and the risk of the hardships of prison. Thus, as time passes and the loss of the debtor went on increasing, his troubles multiplied and his debt accumulated until all his possessions and belongings were lost to the creditor. [Ibn Qayyim, A’lam al-Muwaqqi’in, II, p. 154, quoted in Saeed, p. 28]

Apart from this missing corroboration, this stipulation issue is misplaced, due to a confusion involving general financial contracts and benevolent, interest-free contracts (Qard al-Hasanah). If anyone wants to help another through lending, the idea of excess (in the form of interest) does not make any sense. Similarly, in such case of benevolent or charitable lending, there must not be any stipulation of excess. Such a contract would be null and void from the Islamic viewpoint. However, erroneously, this matter of stipulation or excess in case of charitable financing/loan has been expanded to profit-oriented financial contracts or transactions, where both parties may or do benefit.

It is obvious that if it is the matter of stipulation itself, then hardly anyone can sensibly or rationally argue that whether in terms of excess in value or deferment of time, stipulation would be unfair or exploitation. Indeed, it would be just the opposite. Fair contracts should include full disclosure of all the pertinent terms. However, there is another related aspect of the orthodox definition: lack of any counter-value.

b. The lack of any counter-value

In the literature pertaining riba and interest, it is commonly argued that stipulation of excess constitutes riba, when it is without any counter-value. I have explored this and other traditional arguments/rationales pertaining to this issue in a separate essay. [Farooq_2]

This specific issue of lack of a counter-value is articulated and rationalized as following. Referring to al-Razi, an eminent authority of 12th century, al-Qaradawi asserts: 

“The taking of interest implies appropriating another person�s property without giving him anything in exchange, because one who lends one dirham for two dirhams gets the extra dirham for nothing. Now, a man�s property is for (the purpose of) fulfilling his needs and it has great sanctity, according to the hadith, �A man�s property is as sacred as his blood.� This means that taking it from him without giving him something in exchange is haram..” [p. 265]

One can argue that, in trade, taking something from someone without giving something in exchange is haram (prohibited). However, the argument is misleading and erroneous. When a non-charitable transaction is involved, both the parties know what the lending and borrowing entail. The borrower is borrowing for some commercial or personal benefit and the lender is lending for profit motive. In such non-charity context, the lender is giving up or foregoing the purchasing power, a part of the lender’s accumulated capital, for a specific period. In other words, the lender is �renting out� the purchasing power of his/her capital for a specific period of time and interest constitutes the �rent� that is paid by the borrower. Even without taking into consideration the time value of money argument (and many Islamic jurists and scholars flatly deny the time value of money) [Farooq_2], why would a profit-orientated lender lend at zero interest? Actually, it is not just the time value of money, the very notion of opportunity cost is also being denied here. We will ignore here the issue of nominal vs. real interest. Also, such traditional arguments deny money any other function than being a purely medium of exchange, even though the contemporary Islamic financial institutions rarely function in an economic/monetary environment or system, where money functions only and strictly as a medium of exchange.

So, contrary to the traditional argument, In case of the extra dirham, it is the agreed/stipulated compensation to the forgone purchasing power for the fixed duration. The lender is getting interest for transferring for a specified duration something (the purchasing power); it is not something for nothing. In this context, the claim of a lack of a counter-value in an exchange is not valid.

That’s why assuming that the very definition, based on fallible human interpretations (yielding only probabilistic knowledge), automatically addresses any underlying issue of injustice or exploitation is presumptuous. 

From an Islamic perspective, any exchange or transaction that is based on mutual consent, without (a) any coercion/deception, (b) involving any prohibited products (e.g. alcohol), and (c) any vulnerability to one of the parties due to a situation of compulsion (poverty/need) that makes one eligible for Zakat (aid), is valid. Riba, as explained in the context of riba al-jahiliyyah, would be invalid, because it generally involved the condition (c), which made at least one party vulnerable to bankruptcy, total financial ruin, and even enslavement. In that context, one can easily understand and appreciate the wisdom and value of the stern position of Islam against riba. However, modern interest-based transactions, in a regulated, competitive environment do not violate any of the aspects that would make such transaction invalid.

O you who believe! do not devour your property among yourselves falsely, except that it be trading by your mutual consent; … surely Allah is Merciful to you. [4/an-Nisa/29]

Abu Sa’id Khudri is reported as saying:
Allah’s Messenger (pbuh) said, ‘A transaction is valid as a result of mutual
consent.’ [Innamaa al-bay’u ‘an taraadi; according to al-Zawaid, its isnad is sahih and its authorities are reliable (and authentic). Ibn Hibban transmitted it in his Sahih.  [Ibn-i-Majah. Sunan Ibn-i-Majah, trans. by Muhammad Tufail Ansari, New Delhi: Kitab Bhavan, 2000, Vol. III, #2185, p. 306]

In a book In Pursuit of Justice: The Jurisprudence of Human Rights in Islam, the authors (Maher Hathout, et al.) argue:

“We argue that the Quran does not mandate equity over debt financing, and allows transactions that are mutually beneficial. The usury verse is not the only verse in the Quran on business. Much more prominent in the Quran is the command to engage in honest business, in particular to give ‘full measure’. Specifically, the Quran says, ‘Woe to those that deal in fraud; those who, when they have to receive by measure from men, exact full measure- but when they have to give by measure or weight to men, give less than due’ (Quran 83:1-3). This command requires that both parties to any business transaction pay the full and fair values of what they are purchasing. Failure to do so is a profound violation of Quranic commercial principles. Debt financing, when done in accord with this principle is permissible. When the lender gets more than he is entitled to, he commits the sin of usury. When he gets less, he is engaging in charity. But charity is a voluntary act, and not one required in business transactions.” [http://www.islamicvoice.com/March2006/Islam&Economy/index.php]

V. Exploitation as rhetoric

In regard to interest, as in some some issues, Islam has become a victim of overly legalistic approach, where form has overtaken the spirit and substance. If exploitation is truly a concern, and it definitely should be, then it is important to note that the riba-interest equation actually suffers from a myopic reductionism. In the Islamic literature on interest-free economy and finance, one finds animated polemics about exploitation caused by interest, but little in terms of the structures and processes of exploitation in general. Ironically, as much as the exploitation argument is polemically invoked in the pertinent Islamic literature, focused attention to or studies of exploitation is rather absent. Khurshid Ahmad’s [ed., 1980] book includes a rather comprehensive bibliography of Islamic economics, finance and banking. The bibliography, Muslim Economic Thinking: A Survey of Contemporary Literature, by M. Nejatullah Siddiqi includes 700 entries under 51 subcategories over 115 pages, and exploitation or economic exploitation is not one of those categories. Indeed, a rather comprehensive index at the end of the book does not include exploitation or injustice at all. The same is true about Khan’s book [1983; 221 pages] on annotated sources for Islamic economics. 

A more recent work by Mohammad Nejatullah Siddiqi (2004), Riba, Bank Interest, and The Rationale of Its Prohibition, is no different in this regard. Even though it emphatically makes the same  connection between interest and exploitation, its rather detailed index does not include exploitation as a separate entry.

Thus, while, taking the cue from the Islamic polemicists, anti-exploitation rhetoric in the IBF literature is  commonplace, no specific empirical or focused studies on economic exploitation is listed in such bibliographic works. In reality, I am not aware of a single book or paper to date by the advocates of Islamic economics and finance that has dealt with exploitation as a general theme. Indeed, the background of the IBF Movement and the record of the IFIs to date are not consistent with their anti-exploitation rhetoric. 

Most IFIs originated with the capital contribution of wealthy individuals of countries that already have a very high concentration of wealth in the Muslim world, a reality that is contrary to the Qur’anic guidance that wealth should not:  “… (merely) make a circuit between the wealthy among you.” [59/al-Hashr/7] Several of these IFIs are in international off-shore centers, not in areas of the Muslim world that are really suffering from serious capital-deficiency. 

IBF Movement also was expected to contribute toward broader economic development. “An interest-free Islamic system of financial intermediation will be more just and fair. This will make it more conducive to growth and development as all members of society will be assured of a fair treatment.” [Siddiqi, 1983, p. 113] However, instead of focusing on poverty alleviation and development, many IFIs, similar to the case of Egypt, have shown a bias toward the urban and the rich. “… [M]ost of the activities of Islamic banks have been in large cities as opposed to the countryside, where they are most needed; and that their main customers were likely to be well-to-do, and not the poor or the lower middle class.” [Warde, p. 174]  Usmani, with his personal and direct experience with a dozen of Islamic banks in the capacity of a Shariah expert echoes: “Unlike the conventional financial institutions who strive for nothing but making enormous profits, the Islamic banks should have taken the fulfillment of the needs of the society as one of their major objectives and should have given preference to the products which may help the common people to raise their standard of living. They should have invented new schemes for house-financing, vehicle-financing and rehabilitation-financing for the small traders. This area still awaits attention of the Islamic banks.” [p. 115] It should be noted that these incisive comments of Usmani are not from the earlier decades of 70s or 80s, when it was popular to argue that these institutions were in their infancy, but reflects a more contemporary period in the 21st century.

Another pertinent issue is the investing behavior of the rich.  The capital flight, away from where capital is needed most and to safe financial havens of the West or offshore facilities elsewhere, is often due to such investing behavior of the rich. They feel constrained by various structural factors in their own economies to feel comfortable to take risk. 

�Short of special political conditions, it seems that Islamic banking suffers the structural effects of incurring greater risk for domestic lending than the conventional banks. In the absence of major economic reform and consequent reduction in monitoring costs, which would benefit Islamic more than conventional banks, it may be more interesting to view the former (and conventional) banks, too, for that matter) as vehicles for mobilizing overseas investment or �capital flight�.� [Henry in Henry and Wilson, p. 125]

But it also has to do with the reality that many of the leading financial patrons of the IFIs are interested in Shari’ah compliance only in a legalistic sense – without really any concern for injustice or exploitation.

�In most respects, the investment behaviour of the estimated 200,000 high net worth individuals from Saudi Arabi and the Gulf is little different from that of their counterparts elsewhere. Their aim is to generate income and wealth from their assets which benefits their families and themselves, where the funds are invested being a less important consideration. How funds are invested is for many more crucial than where, as most Saudi Arabian and Gulf citizens like Muslims elsewhere, are concerned about deriving income from interest, even though for the majority this concern does not translate into positive action. Some cleanse or purify interest income by donating it to charitable causes; others invest part of their funds in a shari�a-compliant manner to ease their conscience, while investing the remainder conventionally. In this respect, Islamic investors are little different to Western ethical investors, who tend to adopt a partial approach rather than deploying all their funds ethically.� [Henry and Wilson, p. 126]

Thus we see that the concern and commitment of the major players in the IFIs about injustice and exploitation is rather ambiguous. Some proponents of interest-free (or Islamic) finance regard the matter so revolutionary, like the anti-riba challenge was to the Qurayshi dominance during the time of the Prophet, that current movement for interest-free economy and finance is to be the same toward the dominant economic and financial powers of our time.

“The revolution inherent in the attack on riba is broad and has policy implications beyond the personal morality issue. … In Makka at the time of the Prpohet, this revolution meant that the Quraysh, the dominant merchant tribe of the time, had to change their habits and share their dominant financial role. In our modern Islamic world, whether in the Arabian east or in America, interest-free or riba-free finance pose the same challenge.” [Thomas, p. 132]

If that prognosis if valid, the Islamic economics and finance ishould be bitterly opposed by the global powerhouses of finance or capitalism. On the contrary, it is now established that the major financial institutions/corporations of the world are offering similar services, without either making any substantive changes in their products or adapting their existing products and services to be offered to their conventional clients. 

Indeed, as Islamic finance generally denies the time value of money in theory, but embraces it in practice helps to explain the growing western fascination with “interest-free” banking. Indeed, they are becoming the patrons or partners of the Islamic financial institutions. It is not because the conventional western banks are now convinced about the claimed superiority of Islamic finance/banking in general, and Islamic financial products in particular, but because from their perspective they don’t find any substantive difference between their conventional banking and the current practice of Islamic banking, which has shifted away from profit-loss sharing (PLS)/Risk-sharing-based transactions. With basically comparable performance of Islamic banks, it is just another vast untapped market for the western conventional banks to penetrate. In this regard, they also have serious comparative advantage in terms of credibility, experience, and capitalization

“You’re a pious Muslim with a few million in oil dollars to invest. So would the perfect Islamic bank for you be Citigroup, perhaps? HSBC?

Actually, yes. Giant Western banks�or, rather, their Islamic subsidiaries�are leading the market for financing that complies with Qur’anic laws forbidding lending money for profit, or sponsoring un-Islamic activities such as gambling or smoking.” [Matthew, Newsweek]

Indeed, the global powerhouses of finance are now dominating the Islamic financial market and they have become the avid patrons of this niche. Is this due to a “challenge” or “potential challenge”, especially in a revolutionary sense, to the dominant powers in finance in our time?

VI. Profit and exploitation

It should be noted that the principle of justice is not relevant merely to financial contracts or transactions, but to all commercial transactions as well. The reality is that, while the pervasiveness of exploitation that has existed and continues to exist in the world is due more to the pursuit of greed and profit in general, pertinent Islamic literature is preoccupied with interest as the source of exploitation and focused primarily on the financial sector. 

For example, just consider the case of the British East India Company. It was a joint stock company that received its royal charter from the British crown in 1600. In one and a half century, the “Company transformed from a commercial trading venture to one which virtually ruled India as it acquired auxiliary governmental and military functions, until the Company’s dissolution in 1858.”⁴ The world knows the rest of the story, as that Company’s role ultimately led to complete subjugation and colonization of South Asia. This entire British venture, driven by the quest for power and profit, serves as one glaring example of exploitation. What role did “interest” play in this as well as other ventures to colonize? While the colonial period is gone, during the post-colonial period, especially in the era of globalization led and controlled by the corporate multinationals, exploitation in different forms is as rampant as before. However, what role is interest playing in causing or facilitating such exploitation around the world? It is important that any pertinent explanation must not be limited to merely the polemical level. 

Through almost an exclusive focus on the presumed interest-exploitation connection, the proponents of Islamic economics and finance have entrapped themselves into a seriously myopic reductionism. Indeed, global financial and corporate power houses of the world that also play a vital role in worldwide exploitation are becoming the patrons of Islamic banking industry, and these Islamic financial institutions have no concerns about exploitation in this context, because their focus is actually on rendering the world interest-free, not exploitation free. 

As Joel Bakkan in The Corporation: The Pathological Pursuit of Profit and Power and Daniel Litvin in Empires of Profit: Commerce, Conquest and Corporate Responsibility have demonstrated, one can find a compelling portrayal and understanding of exploitation, where the driving force behind such exploitation is not “interest”, but the unbridled quest for power and profit to dominate and exploit others.⁵  

“The idea that some areas of life are too precious, vulnerable, sacred or important for the public interest to be subject to commercial exploitation seems to be losing its influence. Indeed, the very notion that there is a public interest, a common good that transcends our individual self-interest, is slipping away. Increasingly, we are told, commercial potential is the measure of all value, corporations should be free to exploit anything and anyone for profit, and human beings are creatures of pure self-interest and materialistic desire. These are the elements of an emerging order that may prove to be as dangerous as any fundamentalism that history has produced. For in a world where anything or anyone can be owned, manipulated, and exploited for profit, everything and everyone will eventually be.” [Bakan, p. 139]

Indeed, IBF movement does not seem to have any clue about the global corporate powerhouses and their ever widening reach in terms of power and exploitation. They are even welcoming and hailing the involvement of these global financial corporations in Islamic finance, by which these Islamic financial institutions are making themselves vulnerable to be the facilitators of “The Pathological Pursuit of Profit and Power.”

In Empires of Profit: Commerce, Conquest and Corporate Responsibility, author Daniel Litvin portrays a picture of the multinational corporations that is somewhat balanced. Even colonialism has brought certain benefits to the respective colonies. Even those multinationals that run sweat-shops in various poor countries may benefit the child labor – relatively, because those children might be worse off without such sweat-shops. However, Litvin also points out the fact that “these firms – arrogant, imperialistic, and corrupt – were often malevolent forces in their host countries: they arranged assassinations, waged wars and exploited native workers.” [Publisher Weekly review; Link]

Dr. Syed Nawab Haider Naqvi, a leading Pakistani economist with a PhD from Princeton, former Director, Pakistan Institute of Development Economics, Islamabad (1979-1995), and author of Ethics and Economics: An Islamic Synthesis, undertook an empirical research based on Pakistan data. About the role of interest and profit, what he presented in the essay “Islamic Banking: An Evaluation” about the role of interest and profit is quite illuminating.

It has been widely noted by Muslim economists that the rationale (‘illat al-hukm) of the prohibition of riba is not just the mathematical formula per se used to compute it; it is rather the alleged adverse consequences of it on the distribution of income and wealth This is a correct position to take because, contrary to the Nozickian non-consequentialism (Nozick, 1974), Islam evaluates the correctness (or their opposite) of specific policies in terms of the acceptability of their consequences from the moral, economic, and social points of view. However, such an assertion is essentially a refutable hypothesis, which needs to be examined from the theoretical and empirical points of view.

Here I examine this argument, using Pakistani data, …. The situation in other Muslim countries can be examined likewise. It should be clear that the information given in the table does not unambiguously verify the hypotheses noted above. Instead, it shows that both the profit and interest incomes � as well as all other types of incomes identified in table � accrue more to the rich than to the middle-income and lower- middle-income groups; while the lowest of the low-income group gets nothing of interest and next-to- nothing of profits. The reason is that the initial distribution of income is highly unequal … . Thus those who have more already shall be given even more! The table even makes clear that, relatively speaking, interest income is more important than profit income for the low-income and lower-middle-income groups (in the Rs 1001 to Rs 4000 range) and the reverse is the case for the high-income group (in the Rs 4000 and above range).

Even though this is based on just one country, the results of Naqvi’s research are quite contrary to the popular perceptions and claims. If both profit and interest incomes accrue more to the rich, then focusing exclusively on interest is misplaced. Also, if interest income is more important to the lower income groups, and profit (not interest) is more important to the high-income group, then the common and popular claims by the proponents of Islamic economics and finance require much closer scrutiny and further empirical examination.

Does this mean that interest has no role in exploitation? No, interest may have some role in exploitation. Indeed, usurious transactions can still be observed in USA in certain areas of consumer finance. Internationally, the debt burden can also be linked partially to the problem of interest. However, the problem in both cases often relates to borrowing beyond one’s capacity and sometimes the terms of borrowing are predatory in the sense that the initial terms (if paid within certain stipulated period is very attractive, but if not paid within that period, the interest rate can jump to an exorbitant rate). 

However, the ongoing exploitation of human beings by others (individuals, groups, institutions) is a much larger story than interest. The myopic reductionism involving riba-interest equation and the search for exploitation primarily within that equation are causing the Islamic economics/finance movement to miss the mark in a big way. It is no wonder that many oil rich Arab countries that stand squarely on the foundation of tyranny and exploitation have been the primary source of capital for the Islamic banking movement. It is also not surprising that the Islamic movements that have been spearheading the Islamic banking/finance movement are also patronized by those tyrannical regimes and the movements are silent against them.

One of the fundamental quests of Islam is to take a stand against injustice and exploitation. However, the reductionism of riba-interest equation, which buttresses the Islamic finance/banking movement and provides its basic rationale while it completely ignores the larger picture of exploitation, should be a matter of serious concern.

One of the economic principles laid out in the Qur’an is that the wealth should not get too much concentrated. “What God has bestowed on his Messenger (and taken away) from the people of the townships, – belongs to God, – to his Messenger and to kindred and orphans, the needy and the wayfarer; In order that it may not (merely) make a circuit between the wealthy among you. …” [59/al-Hashr/7]

The reality of the Islamic finance is, of course, otherwise. “The ownership structure of the Islamic financial industry is highly concentrated. Three of four families own a large percentage of the industry. … This concentration of ownership could result in substantial financial instability and possible collapse of the industry if anything happens to those families, or the next generation of these families change their priorities. Similarly, the experience of country-wide experiments has also been mostly on the initiatives of rulers not elected through popular votes.” [Iqbal and Molyneux, p. 122] 

VII: The Qur’anic Principle of Justice Undermined

Qiyas (analytical reasoning) is the fourth source of Islamic law. The core process of qiyas involves finding illah (effective or efficient cause) that can be used to identify broadened scope of a particular permission or prohibition in Islam. The Text of the Historic Judgment on Interest by the Supreme Court of Pakistan is an important legal pronouncement, a relevant part of which was authored by Justice/Mufti Muhammad Taqi Usmani. It is illustrative of how such scholars sometimes inadvertently undermine the Qur’anic principle of justice, while they invoke it in arguing for the prohibition of interest. Usmani is one of the leading religious experts on Islamic finance and much sought after by Islamic financial institutions for their Shari’ah Boards. In the Historic Judgment, he identifies “excess over principle” as the illah for the prohibition of interest and argues that zulm (injustice) can’t be used as an illah (efficient cause). In that Historic Judgment he distinguishes between ‘illah and hikmah (underlying rationale/wisdom). Mufti Usmani did not probably realize that this distinction as well as the way the argument is made for this distinction undermines the very Qur’anic concept of justice (‘adl or qist). 

” … after prohibiting the transaction of riba, the Holy Qur’an has mentioned the Zulm as a Hikmat or a philosophy of the prohibition, but it does not mean that prohibition will not be applicable if the element of Zulm appears to be missing in a particular case. The Illat (the basic feature) on which the prohibition is based is the excess claimed over and above the principal in a transaction of loan, and as soon as this Illat is present, the prohibition will follow regardless of whether the philosophy of the law is or is not visible in a particular transaction.” [Supreme Court of Pakistan, Section 120]

“Any relative term which is ambiguous in nature cannot be held to be the Illat of a particular law because its existence being susceptible to doubts and disputes, it would defeat the very purpose of the law. The Zulm (Injustice) is a relative and rather ambiguous term the exact definition of which is very difficult to ascertain. Every person may have his own view about what is or what is not Zulm.” [Section 121]

If the above assessment of the notion of justice/fairness (adalah) is correct, then basically the pristine Islamic concept of justice as mentioned in the Qur’an does not really have any functional relevance. The Qur’an categorically calls for justice as one of its hallmark principles and values. 

“O ye who believe! stand out firmly for justice, as witnesses to Allah, even as against yourselves, or your parents, or your kin, and whether it be (against) rich or poor: for Allah can best protect both. Follow not the lusts (of your hearts), lest ye swerve, and if ye distort (justice) or decline to do justice, verily Allah is well-acquainted with all that ye do. [4/an-Nisa/135]

“O ye who believe! stand out firmly for Allah, as witnesses to fair dealing, and let not the hatred of others to you make you swerve to wrong and depart from justice. Be just: that is next to piety: and fear Allah. For Allah is well-acquainted with all that ye do.” [5/al-Ma’ida/8]

The Qur’anic call to stand for justice presumes that people know and understand what justice is. Islamic scholars themselves explain the concept of justice (adl or qist) as “universal justice.” [Kamali, 2002, publisher’s introduction; Osman, 2006; Badawi, 2005] When the Qur’an refers to justice in the context of the humanity [an-Nas], it can’t be taken in a parochial sense. 

“We sent aforetime our apostles with Clear Signs and sent down with them the Book and the Balance (of Right and Wrong), that the mankind may stand forth in justice …” [57/al-Hadid/25]

How can the mankind may stand forth in justice, especially in an universal sense, if it is so relative. If justice (or injustice) is such an elusive, ambiguous or relative thing, then basically such a clarion call is rendered vacuous. In other words, Muslims could polemically argue that interest is unjust and exploitative and the non-Muslims could disagree, while neither side has to be incorrect. How can we then make the world understand the issue of justice, for example, in the context of Israel and Palestine, if justice is so relative? How can we expect to explain to the world or persuade it that interest is unjust and exploitative? It’s all relative! Curiously, even Mufti Usmani also seems to recognize this notion of “universal justice”, as it is the title of one of his speeches, presented not just before Muslims, but at the 1999 Parliament of the World’s Religions. [PWR99-094] Do we understand justice in Islam as universal when we are at such Parliament, and not universal, when we are not? Well, we can’t claim that Islam stands for universal justice and then turn around and assert that justice is relative so much so that “Every person may have his own view about what is or what is not Zulm.” Mufti Usmani in writing the Historic Judgment and others sharing his view about such relativity may not have thought of such ramifications.

One of the best articulators of centrality of justice in Islam is Ibn al-Qayyim.

“The principles and fundamentals of the Sharia concerning the injunctions and the good of humankind in this life and the next are all based on justice, mercy, the good of man, and wisdom. Every situation in which justice succumbs to tyranny, mercy to cruelty, goodness to corruption, wisdom to foolishness, has nothing in common with the Sharia, even if it is the result of an allegorical interpretation [tawill]. For the Sharia is the justice of God among His servants, the mercy of God among His creatures, His shadow upon His earth, and His wisdom, which is both the proof of His own existence and the best witness to the authenticity of His Prophet.” [Ilam al-muwaqqiin an rabb al-alamin, vol. 3, Cairo, p. I, quoted in Ramadan, p. 42]

Unless there are reasons to take issue with Ibn Qayyim’s perspective, to approach legal issues in Islam without taking into consideration the matter of justice can very well be counter-productive and in some cases may be produce results that are just opposite to what is intended by Islam. Quite legitimately, there can be a lively discourse about how to better incorporate the equity perspective into formulation of laws and pertinent legal analysis, but there is simply no room or basis to delink the legal issues, including the determination and application of illah, from justice.

Claiming that interest is prohibited because of the Qur’anic prohibition on the basis of “no excess over the principal”, but delinked from “Deal not unjustly, and ye shall not be dealt with unjustly” – both in the same verse – is an eye-opening illustration of a mechanical and legalistic approach, where it is expressly asserted that the jurists’ task is to apply illah without any regard to rationale or wisdom. As Mohammed Ariff eloquently asserts “The bottom line is that,” beyond the divine injunction, “Muslims need no ‘proofs’ before they reject the institution of interest.” [Islamic Banking] Such indifference or even antipathy toward rationale (hikmah) is rather deep-rooted. “Saeed explains: 

“Since almost all exegetes belonged to schools of law, and rationales were generally ignored in these schools, the exegetes did not seem to find it an attractive option to interpret the meaning of riba in the light of its rationale, particularly a rationale based on the second statement, ‘la tazlimuna wa-la tuzlamun.’ The attitude of the exegetes towards the statement, ‘la tazlimuna wa-la tuzlamun‘, is indicated by Razi’s [d. 1209 AH) view on the rationale of the prohibition of riba. He says: “The prohibition of riba is proved by a text [of the Qur’an]. It is not necessary for mankind to know the rationale of duties. Therefore, the prohibition of riba must be regarded as definitely known even though we do not know the rationale for its prohibition.” [Razi, Tafsir, VII, p. 94, quoted in Saeed, p. 27]

The position of al-Razi is understandable, because the Qur’an is explicit and categorical about the prohibition of riba, regardless of the rationale we can identify or not. However, when contemporary scholars and experts assert the same type of attitude about rationale, it is tantamount to indifference or even antipathy, because unlike riba, the prohibition of interest is based on subsequent interpretation, which is probabilistic.

Thus, while the exponents of Islamic finance and banking routinely offer pious statements about Islam’s prohibition of riba (and interest, as part of the riba-interest reductionism) based on the injustice and exploitation argument, when it comes to the application or the reality, suddenly the issue of injustice and exploitation becomes immaterial or irrelevant. [For details, see Farooq_2, “Riba, Interest and Six Hadiths”]

VIII. Conclusion

So, why is it easy to understand the rationales for the prohibition of Riba, but not the rationales for the blanket prohibition of interest? Why have the evolving Islamic financial institutions, contrary to their own polemics, marginalized the equity-based, risk-sharing modes and have embraced debt-like instruments as the mainstay? Why are these institutions still concentrating on short-term products rather than on long-term products, where the latter is more important for production-oriented projects? Why is the Islamic banking movement facing an increasing need to resort to Hiyal (legal stratagem) to claim Shariah-compliance of its products? Why are the conventional western banks not only penetrating, but also becoming backers and even financiers of this “Islamic” niche? 

Some common explanations offered by the Islamic banking movement are that (a) the problems and challenges are part of its learning curve, and (b) Islamic banking and finance can’t operate in its essence in a society and environment that is not Islamic. This essay’s limited scope will not allow us to examine those explanations here. 

However, there is another explanation that also is, in my view, more relevant and applicable, and that’s the one explored here. That the Riba-interest equation is not tenable from Islamic viewpoint and, maybe, that explains why the traditionally offered rationales for prohibition of interest do not hold up. Through the Riba-interest equation, it is not just that the Islamic financial institutions have entrapped themselves into a situation where they often have to resort to Hiyal [legal stratagem, trick or even gimmick] to maintain an Islamic veneer, but also that they have to adopt things (e.g., fixed rate of interest; or a mark-up that is indexed, pegged, benchmarked to the interest rate) that they have otherwise rejected as Islamically unacceptable. 

Interest can be riba (and thus prohibited in certain situation), if it has an exploitative element or dimension. Indeed, in such case, a more relevant equivalent of riba is usury. Also, the relationship between riba and exploitation/injustice is evident, but the relationship between riba and commercial bank interest (in a competitive environment and under government regulation that protects the borrowers) is not. In any case, if one is to generalize about the prohibition of all interests (commercial and non-commercial, nominal and real), then we have to come up with better and more convincing rationales. Furthermore, the discourse has to be elevated from a polemical level to a more substantive level, supported with empirical analysis, especially surrounding claims about the deleterious effects of interest on western economies.

Finally, while the traditional rationales for prohibition of interest are indicative of an anti-exploitation concern, the reality is that the intellectual and theological framework, within which the interest-free economy/finance movement places exploitation, does not really show a genuine and adequate understanding of the extent and nature of the ongoing exploitation in the contemporary world. Beyond the orthodox discourse of Islamic economics and finance focused on freedom from interest, there is a critical need for a more refined and substantive discourse about freedom from exploitation. 

---

Notes:

1. The expression “pre-Islamic” appears only in quotations from others. When various authors use “pre-Islamic”, they basically mean before the period when Muhammad (p) became a prophet. Thus, it could be described as pre-Muhammad. From the Islamic viewpoint, there is no “pre-Islamic” period in human history, as Islam began with Adam/Eve and continued through the prophets all the way to the last Prophet and Messenger, Muhammad.  

“The same religion (deen) has He established for you as that which He enjoined on Noah – the which We have sent by inspiration to thee – and that which We enjoined on Abraham, Moses, and Jesus: Namely, that you should remain steadfast in religion, and make no divisions therein: to those who worship other things than Allah, hard is the (way) to which you call them. Allah chooses to Himself those whom He pleases, and guides to Himself those who turn (to Him).” [42/ash-Shura/13]

2. An excellent summary is provided at Reference.com. 

3. Readers can read the translation of al-Jassas’ commentary on riba in his exegesis. The translation is by Imran Ahsan Khan Nyazee, a Pakistani scholar of Islamic jurisprudence. It is available online, but requires a password (nyazee). See the bibliography below. Jassas’ commentary is interesting as it does not refer to any earlier commentaries (Tabari, Zamakhshari or Ibn Kathir) on or understanding about this issue. It does not even document with proper citation any of the narrations that it presents as “hadith”. The translator does not bother to add the citations either. 

4. http://en.wikipedia.org/wiki/British_East_India_Company 

5. Also see Hannah McCann. Review of Jonathan Neale What�s Wrong with America? Vision, London 2004; .A. Waller Hastings. Historical Background � European Colonization and the Colonial and  Postcolonial Worlds [September 5, 2003]

Bibliography:

Khurshid AHMAD. (ed.) Studies in Islamic Economics [Leicester, UK: The Islamic Foundation, 1980]

Engku Rabiah Adawiya Engku ALI. “Riba and Prohibition in Islam,” International Islamic University, Malaysia [undated] 

Hassan Abdullah al-AMIN. Shariah Ruling (Hukm) on Contemporary Banking Transactions with Interest [Background Paper, No. 7; IDB Islamic Research and Training Institute]

Abu Bakr al-Jassas, Excerpt on Riba from Ahkam al-Qur’an, trans. by Imran Ahsan Khan Nyazee, December 2000.

Yusuf AL-QARADAWI. The Lawful and the Prohibited in Islam [New Delhi, India: Hindustan Publications, undated]

Jamal BADAWI. “Muslim and Non-Muslim Relations Reflections on Some Qur�anic Texts,” April 05, 2005

Joel BAKAN. The Corporation: The Pathological Pursuit of Profit and Power [Free Press: 2004]

M. Umer CHAPRA. “Why has Islam prohibited interest? Rationale behind the prohibition of interest,” in Abdulkader Thomas, Interest in Islamic Economics: Understanding Riba [Routledge, 2006], pp. 96-111]

Mahmoud El GAMAL. An Economic Explication of the Prohibition of Riba in classical Islamic Jurisprudence, Proceedings of the Third Harvard University Forum on Islamic Finance, Cambridge: Center for Middle Eastern Studies, Harvard University, 2000, pp. 31-44.

Mohammad Omar FAROOQ_1. “Riba, Interest and Six Hadiths” [Unpublished, June 2006]

Mohammad Omar FAROOQ_2. The Riba-Interest Equation and Islam: Reexamination of the Traditional Arguments [Unpublished, November 2005]

Mohammad Omar FAROOQ_3. Islamic Fiqh (Law) and the Lack of Empirical Foundation [Unpublished, July 2006]

Mohammad Omar FAROOQ_4. “Islamic Law and the Use and Abuse of Hadith” [unpublished; June 2006]

Mohammad Omar FAROOQ _5. “The Doctrine of Ijma’: Is there a consensus,” [Unpublished; June 2006]

Mohammad Omar FAROOQ_6. “Qiyas (Analogical Reasoning) and Some Problematic Issues in Islamic Laws,” [unpublished; June 2006]

Mohammad Omar FAROOQ_7. “Stipulation of Excess in Understanding and Misunderstanding Riba: Al-Jassas Link” [Unpublished; August 2006]

Maher HATHOUT, Uzma Jamil, Gasser Hathout, and Nayyer Ali. In Pursuit of Justice: The Jurispurdence of Human Rights in Islam [Muslim Public Affairs Council, 2006]

Clement HENRY and Rodney WILSON (eds.). The Politics of Islamic Finance [Edinburgh University Press, 2004]

Munawar IQBAL and Philip Molyneux. Thirty Years of Islamic Banking: History, Performance and Prospects [Palgrave, 2005]

Mohammad Hashim KAMALI. Freedom, Equality and Justice in Islam [The Islamic Texts Society, 2002]

Muhammad Akram KHAN. Islamic Economics: Annotated Sources in English and Urdu [Leicester, UK; Islamic Foundation, 1983]

Daniel LITVIN. Empires of Profit : Commerce, Conquest and Corporate Responsibility [Texere, 2004]

Owen MATTHEWS, “How the West Came To Run Islamic Banks,” Newsweek [October 31, 2005] 

Imran Ahsan Khan NYAZEE. The Concept of Riba and Islamic Banking [Online document, 2000]

Syed Nawab Haider NAQVI. Ethics and Economics: An Islamic Synthesis [U.K.: The Islamic Foundation, 1981]

Syed Nawab Haider NAQVI. “Islamic Banking: An Evaluation,” IIUM Journal of Economics and Management, Vol. 8, No. 1, 2000. [available online]

Imran Ahsan Khan NYAZEE. The Concept of Riba and Islamic Banking [Online document, 2000]

Fathi Osman. “Muslims and Non-Muslims,” [online excerpts from Contemporary Issues: An Islamic Perspective, Pharos Foundation, forthcoming 2006]

Fazlur RAHMAN. �Riba and Interest,� Islamic Studies (Karachi) 3(1), Mar. 64:1-43.

Tariq RAMADAN. Western Muslims and The Future of Islam [Oxford University Press, 2004]

Abdullah SAEED. Islamic Banking and Interest: A Study of the Prohibition of Riba and its Contemporary Interpretation [New York: E. J. Brill, 1996] [A MUST reading for anyone interested in the contemporary discourse on Riba and interest, especially from a critical perspective]

Mohammad Nejatullah SIDDIQI. Issues in Islamic Banking [Leicester: The Islamic Foundation, UK, 1983]

_________ SIDDIQI, Riba, Bank Interest, and The Rationale of Its Prohibition [Islamic Development Bank, Visiting Scholars Research Series, 2004]

Supreme Court of Pakistan. The Text of the Historic Judgment on Interest [1999; exact date: 14 Ramadan, 1420]

Abdulkader THOMAS (ed.). Interest in Islamic Economics: Understanding Riba [Routledge, 2006]

Muhammad Taqi USMANI. An Introduction to Islamic Finance [The Hague: Kluwer Law International, 2002]

Frank VOGEL and Samuel Hayes, III. Islamic Law and Finance: Religion, Risk and Return [The Hague: Kluwer Law International, 1998]

Ibrahim WARDE. Islamic Finance in the Global Economy [Edinburgh University Press, 2000]

Alan WERTHEIMER. Exploitation (Princeton: Princeton University Press, 1996)

Edward N. WOLFF. �Changes in Household Wealth in the 1980s and 1990s in the U.S.� in Edward N. Wolff, Editor, International Perspectives on Household Wealth, Elgar Publishing Ltd., forthcoming. [draft: http://www.econ.nyu.edu/user/wolffe/WolffWealthTrendsApril2004.pdf] 

Mosad ZINELDIN. The Economics of Money and Banking: A Theoretical and Empirical Study of Islamic Interest-Free Banking [Stockholm: Almqvist & Wiksell International, 1990]

*At the Study Resources Page of this author, there is a collection of works that deals with the issue of equating interest with Riba from a critical perspective. See the entries under Islamic Economics/Finance/Banking. http://globalwebpost.com/farooqm/study_res/default.html