THE MODERN ARAB-ISLAMIC THOUGHTS ON INTEREST
DISSERTATION SUBMITTED E^ ^ DECREE OF MASTER OF PHlLoSOPHY
BY MVED AHMAD iCHAN
Under die Supmrvmon of Professor Mahmudul Haq
CENTRE OF WEST ASIAN STUDIES ALIGARH MUSLIM UNIVERSITY^ ALIGARH (INDIA) 1987 ^, -^omput** CHECrSD-:002
DS1213 CONTENTS
Introductior I - VI
Chapter I The Practice of Riba' in pre-Islamic Arabia 1-18
Chapter II Attitude of islam Towards Riba 19 - 43
Chapter III Riba in Fiqh Literature 44 - 61
Chapter IV Origins of Modern Controversy ^^ „Q -r 1- _ j_ O^ "X OO on Interest ^|.
Chapter v Muslim Criticism of Interest and Profit-sharing 89 -113
Conclusions 114 -116
Bibliography 117 -142 ACKK 0\\TJ EBGEMEM TS
In preparing this dissertation I ain deeply indebted to Prof. Mahfnadul Haq, Supervisor and Director, Centre of West Asian Studies, for his constant-help and encouragement. My thanks are due to .--'.r. Latafatullah Khan, Reader, Department of Economics, who has been my -co-supervisor, I am also grateful to Prof. M.A. E-aleem Khan and Dr. M.R.K, Nadvi who helped me in so many ways* 1 would also like to thank Prof. M. Nejatullah Siddiqi and Dr. A.A. Islahi who provided me use ful materials for the dissertation. My thanks are also due to my friends Ishtiaq Ahmad and Kr. Ahsanul Haq who heloed me greatly in correcting the typescript of the dissertation, I also wish to record my appreciation for the excellent typing work done by Mr.S.Masahab Ali.
AhlGAIiH JAVED AHMAD KHAN April 14 1937 INTRODUCTION
The prohibition of interest is an issue which is not only unique to islam. Almost all the religious thinkers and philosophers of the world, have condemned it. The Greek and Roman thinkers condemned interest in their times. Among the religious scriptures the Bible is full of condemnation of it. However^ with the growth of capitalism in Europe, christian ethics granted acceptability to usury in the form of interest. With the passage of time various theories of the rate of interest were put forward. Available literature on this issue is full of argument about the high and low rate of interest. In the Islamic World too theiie emerged differing views regarding the words 'interest' and riba (usury), i.e. riba relates to the consumption loan while interest relates to commercial loan or production loan. These efforts at distinction still prevail, but majority of Muslim economists and religious thinkers believe that Islarn prohibits interest in all its form and there is no genuine -XX-
economic or religious justification for making any distinc tion between interest and riba.
The word riba has been used in its literal sense in many places in the Qur'an and Hadith. Technically it denotes that excess on loans which the creditor receives in exchange for the period or the extension, therefore, given to the borrowers. Various definations have been given to the term riba For instance it is said that riba i? the excess which the capitalist receives from the borrowers for differing the recovery of his debt. Thus, to demand any excess over the sum lent is called riba. The Qur'an and Hadith are concerned with this excess. In the Shar'iah riba technically refers to premium that must be paid by the borrower to the lender. In this sense, riba has the seme meaning as inteiest, because interest is also an excess over the principal lent. But those v;ho favour the bank interest aie of the opinion that in modern commerce and industxy interest is an essential part, it is not like the Cur'enic riba. They argue that the prohibition of interest would be a very serious setback in the carrying of trade and coirmerce. It is also considered that the distinction between usury and interest is the product of industrial revolution when caoital came to play a leading role in economic field, urury came to -Ill-
be regarded as the primitive form of money lending, v/hile interest came to be justified as a reasonable charge fox the use of money employed in productive processes such as industry or trade.
The present study is about the modern Islamic thoughts on interest. Efforts hcve been made to find out the sources of conflicts and tensions over the subject.
The first chapter examines the economic and commercial conditions in pre-Islamic Arabia. This is intended to provide a basis to understand the commercial activities and as a result of this, the process of lending and borrowing both for consumption and productive purposes. This clarifi cation is important, because it refutes the idea that Qur'anic riba concerns with consumption loan only and, therefore, it is like usury, and not like interest. The second chapters deals with the Islamic policy towards interest, In this connection Quran verses and Hadith have been specifi cally quoted. Particular attention has been paid to the nature of riba and its consequences in the pre-Islamic Arabian Society. There are ample evidence to prove that the Arabs of the time indulged in riba practices. With the rise -IV-
of Islam the practice of riba was abolished. It is claimed that it was replaced by mudarabaK(profit-sharing).
The third chapters deals with the juridical viev/s of riba especially its meanings and kinds of riba, i.e. riba'l-tfasi ' ah and rlba'l-f adl. These are extremely contro versial issues, and l have avoided to go into detail as much have been written on this issue. I have tried to examine the different views of the jurists on the riba'1-fadl. Muslim jurists have produced volumes on these issues. In the fourth chapter I have attempted to find out the origins of modern controversies on interest. The debate pertaining to this subject is still going on. Muslim scholars still make a distinction between riba and interest and differentiate between consumption and pnoduction loan. Moreover, in view of the differences found in hadith literature modernists do not think that commercial interest also come under the cate gory of riba. But the contemporary Muslim critique of interest find commercial interest indistinguishable from riba. They think that "borrowed capital whose repayment to the lender is guaranteed takes no part in the enterprise in which it is invested and is, therefore, not entitled to any return even -V-
when the enterprise does maXe profit". ^he fifth or the final chapter discusses the contemporary Muslim critique of interest and profit-sharing system. However, the Muslim economists are still not able to present a viable alternative to the institution of interest. The debate on the interest- free economy is still going on. Though a number of Muslim writers think that elimination of interest is an important step tov;ards Islamic economy, the opposite view is held by others who believe that for a capital scarce economy, if the rate of interest is abolished it will cause harm to the economy.
As regards the idea of profit-sharing system questions are raised whether the concept of mudarabah as practiced in the Islamic economies of medieval time is still valid for the economies of the modern world. It is claimed that the experiments of various Islamic banks working on the principle of mudarabah go to prove that this concent is not totallv outdated. However, doubts are expressed that profit-sharing might generate profiteering activities leading to excessive profits and exploitation. The basic questions asked in this regard are s (a) will the economy be stable under the profit- sharing system ? (b) How the resources will be allocated in -VI-
the absence of interest and (c) Vlill the resulting allocation be more efficient than the one obtained in the interest-based system? Muslim apologists however, emphasize that Islamic economic system based on profit F,h< i.nq model will ensure stability in the economy. Ho\%'ever, this model so far, has not been tested on empirical ground and no rigorous work has been done to prove their assertions. At the end it must be pointed out that the present work neither claims to be comprehensive in scope nor extensive in content. CHAPTER - I
THE PRACTICE OF RIBA IN PRE-ISLAMIC ARABIA
From the earliest time the practice of usury has been the subject of contempt and condemnation.
It has been condemned not because it is contrary to scripture but also because it is contrary to nature,
•for it is to live without labour; it is to sell time, which belongs to God, for the advantage of wicked men; it is to rob those who use the money lent, and to whom, since they make it profitable, the profit should belong; it is unjust in itself, for the benefit of the loan to the borrower cannot exceed the value of the principal sum lent him? it is in the defiance of sound juristic principles, for when a loan of money is made, the property in the thing lent passes to the borrower, end why should the creditor deraond payment from a man who is merely using what is now his own* .
1 R.H. Tawney, Religion and the Rise of Capitalism (London : Penguin books, C~, Nickolls' Company ltd,, 1926), p.55. -2-
However, the condemnation of usury was not only confined to the religions but the ancient Greek philosophers also did not approve of it. They realised the significance of money and emphasized its importance as medium of exchange. Aristotle remarks that j
"... as the benefit of commerce were more widely extended, the use of a currency was an indispensible device. As the necessaries of nature were not all easily portable, people agreed for purpose of bartner naturally to give and receive some article as iron or silver, which was at first defined simply by size and weight, although finally they went further and set a stamp upon every coins to relieve them from the traviail of weighting it" 2.
The prohibition of usury is greatly found in the works of Greek and Roman philosophers. The Bible has severely condemned it. Up to the 13th century, the church rule was supreme and the (Charging of interest was strictly forbidden, but after the gradual decline in the power of the church and the rise of secular powers, the lending out on interest began to be toler^ited and consequently, the prohibition
2 Politics, BK.I, Chap, ix (Welldon) as cited by Lewis H. Haney, History of Economic Thought^ (New Delhi Surjeet Publication, 1979), p.66. -3-
against usury began to be renewed in Europe. In Engl?3nd the ban was renewed in 1545 when the word usury began to be 3 progressively replaced by interest.
Cotnmercial Relations of the Arabs with their Meighbours :
A geographical looX at the Arabian Peninsula will help us to understand the nature of the commercial transaction in the region. The Arabian Peninsula occupies a strategic position between the continents of Africa and Asia. To its north lies Syria and transJordan, and on the east Iraq and Persia. On the north-western side lie Egypt, and southern Europe across the Mediterranean Sea. In the south western direction adjoining the Red Sea are Ethopia and Somali land. In the south, the Indian Ocean separates the Arabian Peninsula from Indo-Pakistan subcontinent. 'Before the middle Ages, the trade between eastern countries such as India, China, Eastern Africa and Egypt, Syria, Greece and Rome passed through Arabian lands. There v;ere three important trade routes during that period. Firstly, the land route from Russia via Iraq and Syria; secondly, the sea route from the Persian Gulf, ell the ships that sailed along this
3 Anwar Iqbal Qureshi, Islam and the Theory of Interest (idarah-i-Adabiyat-i-Delhi, 1983), p.9 . -4-
route used to be unloaded in the eastern Arab coast. Lastly, the Indian Ocean trade route where goods passed via Yeman and Hadraniawt. The Arabs inhabited all the three trade routes. They kept themselves busy not only in carrying trade but managed to buy the trade goods from one place 4 and sell them at another'.
Thus, it has been historically proved that even the pre-lslamic Arabs were intimately connected with inter national market. As a result of this their trade routes developed and reached such a high level that trade carvan were organized, financed and protected and very soon the Arab economy, just before the advent of Islam, was trans- formed into a ruling commercial economy 5 . Moreover, a close look at the economic condition of pre-lslamic Mecca shows that Meccans were highly well-informed in the matter of
4 Ziaul Haq, 'Inter-Regional and International Trade in Pre-Islaraic Arabia', islamic Studies, (Islamabad), vol.7, 1968, p.206. 5 Ibid. -5-
cominerce and trade. Their relation with outside world provided ample opportunity in development of trade. Here is an authentic account given by Mohammad Ibrahim. He says
"Mecca's existence depended primarily on its location near the most important trade route in Western Arabia which linked the surplus-producing region of Yeman with Syria...... The commercially advantageous location of Mecca was enhanced further by the Zamzam waterwell which made Mecca a convenient stop in the trade of antiquity. Also the concept of harajn, the sacred area, and its centre, the Ka'ba, made Mecca the object of pilgri mage during the sacred month. During these months, pilgrims/merchants travelled with security of life and property and went to Mecca to trade their commodities.... Meccan merchants were also known to hire ships to carcy their trade in Red Sea and beyond... As Mecca's relation with outside world grew more complex, new and relevant institution began to appear in order to further the interest of Meccan merchants"?.
6 For details see H.A.R.Gibb and H.Kramers (eds.), Shorter Encyclopaedia of Islam, (Leiden, E.J.Brill, 1974), p.368. A detailed'account is given by A.A.Maodoodi.'The prohibition of commercial interest in Islam, l_slamic Thought (Aligarh), July-September, 1960/ voL7., p. 13 T Maudoocii has "collected the historical proof of trade relation between Arab and outside world. According to his documents, the Quraish began to play a prominent role in the foreign trade of Arabia ever since fifth century A.D. Till the emergence of the holy prophet they had vast commercial contacts with Yemen and Ethopia on the one hand, and Iraq, Egypt and Syria on the other. A large part of trade goods between persia and Yemen passed through Hera, Yamma (present Riyadh) via the region inhabited by Banu Tameen. Thus, it is contrary to reason to suppose in the context of hundreds of years of wide foreign trade contacts that Arabia had no making of the monetary and business practices prevalent in the outside world,(p.16). 7 Maharnood Ibrahim, 'social and Economic Condition in pre-Islamic Mecca, International Journal of Middle East Ltudies, (U.C.A.), vor.14, 1^7, p.343 . -6-
Market condition s
Thus from the early Middle Ages Arabia was a major part of v;orld trade and the commercicil supermacy was held by the Arabs. Who did not own any military power. They were engaged in a prosperous maritime civilisation in southern Arabia which served as a link between India and Africa. North Arabia gave birth to the rise of two great cities Petra and Palmyra on the trade routes. Both the c tov;ns in due course were destroyed, and both now magnifi- cant and notable ruin* a.
The commercial relationship of pre-lslamic Arabia Was linked with the market-fair where the traders from the different parts of the region used to come and display their goods in the market and where demand and supply of goods and services played a very important role in socio-economic
8 P.K. Hitti., The Arabs : A Short History (London, 1956), P.13. -7-
9 life of the Arabs.
There can be little doubt that the structure of the market in pre-Islamic days, as the author thinks, was that these markets were characteristically tribal market, where people from almost all the Arab tribes come not only for the purpose of religious, social and cultural activities but also for the important economic purpose of trade, exchange of debt payments, and for the transaction of credit, Moreover, importance of these markets were because it was held just before Hajj. Another reason for the gro\>rt:h of commerce, was that these markets formed a free trade area where exchange was carried on without any arbitrary
9 Ziaul Haq, 'Inter-regional and International Trade in Pre-Islamic Arabia'. Islamic Studies, ( Islamabad ) vol.7,1968, p.210. In Arabia these market-fairs were called 'aswaq' (£ing:L>uq) the origin and history of these fairs throughout the peninsula is unknown. The classical Arabic literature does not explain its genesis, and its historical economic role. The origin of these fairs, however, appears to be religious. They start from the congregation of pilgrims who gather around some holy shrine like that of K'abah in Mecca, an important Arab town which lay on an important trade- route. These fair-markets were really a universal economic phenomenon in the ancient times. Herbert Heaton, an economic historian observes that, "the periodical gatherings of buyers and sellers had been well-known to the ancient world. They were held on the frontiers of city-states, at neutral points or outside temples. The pilgrims formed a large body of custo mers, the gifts were exchanged and the goods and services were sold and divine protection was thought to 'hover' over trade as well as worship* See Herbert Heaton, Economic History of EuropejCliOndon, 1965), pp.169-70 ., as quoted in Ziaul Haq, p.210 . -8-
10 imposition of rules. Although, the Qurashites were merchants but their trade activities did not extend beyond Mecca. The foreigners used to bising their merchandise to their market and they used to buy from them. Thus tlje international exchange of goods and the development of commerce was the sign of their well- being, especially the Arab merchants of iMecca and Aden of pre-Islamic era. It is also said that trade partnership existed in the commercial activities. The trade organization of pre-Islamic Arabia was known as al-Qirad or al-Muqarada which means to advance to anyone the capital for the purpose of trade on condition that they will both share profit earned, Pre-Islamic Arabia had evolved during the course of time a unique method of "mobilizing capital and labour. Before the flourishing of commerce, the same person played the role of investor-merchant and that of the carrier-merchant. The Arab merchants took their merchandise to various markets and e'arned the profit. Later on they entered into a kind of partnership. The partners were of two types. The investor- merchant, who invested his capital in a trade venture and
10 Ibid., p.212. -9-
entrusted the merchandise to another partner-the merchant- carrier-who carried it to destined markets. He was given a fixed proportion of the profit earned in the enterprise. The investor-capitalist sometimes stayed at home and sent out his goods and sometimes he himself led the corvan 11 raarketin g his own goods as well as goods of others.
Prom the above passage, the point emerges that capital was invested in the form of partnership and the profit was divided between the investors - merchants and merchant carriers. This kind of enterprise offered great opportunity and scope for the Prophet of Islam who had an experience of accompanying his uncle Abu-Talib on trade journeys to Syria but who was at the seme time an ordinary trader and lacked necessary funds and capital.
11 Al-Zurqani;Sharh Muwatta' Imam Malik, vol.III (Kitab al-Qirad) (Egypt 1^64), p.345, as cited by Zioul Haq, pV228. According to this author, this partnership trade proved a very useful way of investing capital. There thus arose professional merchant-capitalist who invested their wealth in trade venture. Fixing of the shares of the profit before-hand shows an acute sense of cautiousness on the part of the merchant investors who strove to offset any loss or failure of the venture, for the reason that transport conditions were not secure. In girad, moreover, in case of a loss the carrier was not liable to suffer but instead got his wages as a labourer, (p.229) . -10-
The above mentioned commercial activity in pre-Islamic Arabia, makes one to think about the consequences of the expansion of trade, especially in the form of accumulation of wealth. Because, as a rule, the growing power of money and its fluctuation must have resulted in the form of big gap between the rich and the poor. The verses of the Qur'an point out that the circulation of money should continue so as not to v;iden this gap. Likewise, in the Qur'an many verses reflect the condemnation of greed and undue love of v;ealth.
i - Lo .' man is an ingrate unto his Lord ii - And Lo I he is a v;itness Unto that; iii - And Lo .' in the love of wealth he is violent,
( Al-'Adiyat : 6-8 )
and i - Rivalry in wordly increase distracteth you ii - Until ye come to the graves
( Al-Takathur : 1-2 )-^^
12 For details see Hasanuzzaman., "Islam and the rate of interest", islamic Culture, (Hyderabad), vol .4,No.40 (1) January 1966, pp. 1-12. 13 The meaning of the holy Qur'an : tr. M.M. Pickthall, (crescent publishing Co., Aligarh), n.d. p.448. -11-
Practice of Riba :
Historians are of the opinion that practice of usury in pre-lslaniic period has been very little mentioned. Though the conunercial transaction in pre-Isleinic Arabia has been mentioned in detail and it can be argued that the practice of usury must have been inevitable. Besides, this the Qur'anic prohibition of interest clearly indicates that interest-transac tion before the advent of Islam was popular among the Arabs. But what were the rate of interest if it was practiced ? We have not any clear proof of either of tlie interest rate or of the rate of profit, and to cover that the Quraysh of Mecca or the Jev/ish tribes of Arabia indulged in the compound rate that were prohibited in the Qur'an. It is meaningless without supporting it with historical evidences;1 4 Ta'if, Mecca and Madina were the three important commercial cities of Arabia 14 Historians are of the opinion that the practices of usury in pre-Islamic period cire very little mentioned. Contrary to this, European history has a good deal of literature on this subject. S.H.Zaman shares this view and he writes that while all phases of economic endeavour in western Europe and to some extent in Byzentine Empire have been studied with meticulous care by three or four generation of competent scholars. Very little has so far been accomplished in the elucidation of fundamental economic facts and trends in medieval Asia, Africa end Spain - what at the most early historians have tried to find out is the mode and nature and not the rate of interest. Similar has been the case with the rate of profit, vThich can only be worked out with a confusing proliferation of documents. The references in books on Tafseer and Hadith do not present sufficient materials to indicate the prevailing rates of interest and reflect only a few of the so many forms end rates that have always been prevalent everywhere. See for detail account on interest rate structure of various countries with which Arab traders were associated. S.K.Zaman, 'Islan* vis-a-vis interest rate, Islamic Culture, (Hyderabad), vol.40, 1976,pp.1-12 -12- v;here interest trensactior took olace. In Taif Banu Thaqif used to advance loans to Banu Mughira and they had to pay an additional sum, if some extension was granted to them. Tabari says that \.
"in pagan times the Banu Thaqif used to advance loans to another person for a fixed period. At. the expiry of the fixed time the creditor demanded from the debtor either his principal or en additional sum for the exten sion. The debtor either repaid his debt if he had mone^with him or requested an exten sion in the oeriod of repayment, with the result that if one year old she-camel was due, at the expiry of the extended period, he would be required to give a two-year old she-camel? and at the second extension, he would return a she-camel which has passed her third year but was not four-year old. If this were impossible, for the third year the creditor demanded a camel which had passed its fourth, but was within its fifth year, and so on and so forth". The same thing prevailed in transections of Gold or silver. The debtor, on his failure to repay his debt after one year, v;as bound to pay double the principal loaned out. For ins tance, if a sum of Rs.lOO were borrowed, in the second year the creditor demanded Ri;.200 in the third year 400 and so on, -c until the debtor discharged his complete debt"
Another example of charging interest was in Ta'if, v/nere a family of Banu-Thaqif used to advance loans on interest to a particular branch of Banu Hughira, who v;ere
15 J ami 'el-Bay an (Taf sir-Tab ari), iv.55 (Cairo edition) as cited by Qureshx, Op. cit., p.60. -13-
residing at Mecca. When the Prophet reached Ta'if, they embraced Isjlam. They afterwai'd demanded their outstanding dues from their debtors, the Banu-Mughira. The latter refused to make the payment on the ground that Islam had abolished receiving interest on loans. As a quarrel ensu ed between them, the matter was referred for opinion and decision to the Prophet. The sum was very large. It was at that time that the following verse was revealed to the Prophet^^
"Give up what remaineth of the Usury"
(Gfur'an. 11:278) hecca I
The citizens of Mecca were known for interest transaction Qureshi has quoted from the Tafsir Kabir of Razi where he says that with the conquest of Mecca, when most of its citizen embraced Islam they were enjoined to take only their principals advanced and to give up those sum v/hich had accumulated by way of interest. The Prophet's uncle 'Abbas and Khalid bin l^'alid.
16 Khazin, Tafsir, 1.23 0; as cited by Gureshi, Op. Cit., p.61. -14-
the general of Islam, used to participate in interest transaction. They' used to have such dealings with Bani Amr, who belonged to Thaqif clan of Ta'if. At the advent of Islam a huge amount had been due to them from them debtors by way of interest.
Another example of interest - charging is of the Uthman b. 'Affan, the third Caliph, and the Prophet's uncle Abbas b. Muttalib, both had been "known for their possession of dealing in dates. At the time of plucking the fruit, the cultivatea would submit that if they (the creditor) took half the produce leaving the other half to him and his family, he (the debtor) would give double the quantity next year, to which request both of them agree. In the following year they would receive the 'additional' quantity according to the terms of agreement. The matter was reported to the Prophet, who forbade them to repeat this again with the result that 18 they received only their principal due . He further quotes s
"The manner in which 'Riba' was acquired at Mecca during the pagan days was quite similar to that prevailing in Ta'if, that is, when the time fixed for repayment of a loan arrived, the creditor v/ould enquire whether the debtor was ready to repay his loan or was he ready to pay 'the additional'. If
ITTafsir Kabir - (1) 20?, as cited by Oureshi, p.6?.
18 Razi, Tafsir Kabir, oart III, as cited by Qureshi, p.64. -15-
the debtor had means, he imii.ediately discharged his debt, otherv/ise, he would procure 'an easing- tirr.e' of another year for repayment of debt'... In this way "creditor naturally demanded repay ment of his debt at the appointed time, but if the debtor v;ere unable to pay he would apply for another year's 'extension', in return for an •addition'. Both agreed;•and that was the vague of compound interest"19
Among pagan Arabs if anyone ov/ned something to another, the later v/ould demand repayment of his dues at the fixed time. The author also quotes the Bayhaqi that in pre-Irlamic Arabia. "if a person contracted a loan from another for a fixed time, the creditor would enquire at the expiry of the period whether the debtor would repay his loan or pay interest. If he was able to repay, the debt was discharged, if not, extension in the time of repayment was granted on 'additional' interest. 20
Such were the interest transactions that prevailed in the pre-lslamic Arabia, and 'like alchohal rib a was deeply ingrained in the life^ texture of the Arabs of pre-lslamic days. It was much more deeply laid than alchohal. It meant a lucrative business which brought quick and plentiful return to the persons who used to charge interest. That is why
19 Tabari, Jami' al-Bayan, iv, 55, as cited by Qureshi, p.64. 20 Baihaqi, As-Sunanu'1-Kubra (Diratu'1-Ma'arif, Hyder?,bad)« as cited by Qureshi, n.64. -16-
^^^jle its prohibition, like that of liquor, v;as introduced gradually, cind xts denunciation v;as much more severe'2. 1 But. the queEtioni3 that historians as well as thinkers ask are what sort of loan transaction were found in pre-Islamic period ? Was it common knowledge among the Arabs that the loans could be transacted for productive purposes also ? and did the Arab use a term other than "fe-ba' to designate a change on such loan ?
Types of Interest :
There were two types of interest practiced by the Arabs daring the pre-Islamia period j
(1) Manifest, or real (Jal 'yy) (2) Concealed or implied (Khafiyy)
The first category of riba was directly prohibited by islam v/hile the second kind of riba was indirectly prohibited. The manifest riba is, in reality, the riba in which the credit is involved. The various examples suggest that this kind of riba was popular among the Arabs, and in the Qur'an it has been declared harem (illigal) so strongly that those v/ho
21 Fezlur Rahman, "Riba and Interest", Islamic Studies, (Karachi), vol.3,1964,p,8. -17-
indulyed in it v/ere threaitened with v/ar by the Prophet.. It was considered an atrocious practice because the creditor v?ent on multiplying his interest In a manner that the poor debtor, inspite of his regular payment, could not pay off the interest let alone the capital. It can be clearly under stood that the effects of interest on the pre-Iel erriic Arab Society were disasterous. That is why, If-lam totally nrohibited it and declared war against thoee who practised it2. ?
2? Ibn Qayyim, al-Jaxvjiwah-J'larr al-Mi'waqqi'in, (Delhi;i313, A.H. 1,200; Citea by Fa^lur Rahman.,Op. cit.,r>.34. The manifest - rib a is, in reality, the riba in which the credit is involved. In Pre-Islamic times it consirted in the payment of a debt being delayed which led to an increase in the amount loaned out. The result was that the original sura lent[the principar] was increased in proportion to the delay that took place in the payment of debt. This went on until a sum of one hundred increased to thousands. In most cases the debtor was a destitute and needy person who had no alternative but to delay the payment of debt and the creditor agreed to postpone his demand (for the clearance of debt), and choose to wait so that he might obtain more profit on the principal invested by him. Tlie debtor, on the other hand, was forced to pay the increased uinount, so that he might ward off the pressing demands of the creditor and danger and hardship of ptison - house. Thus, time passed and the monetary loss of the debtor v;ent on increasing, vjhile his trouble multiplied and his debt accumulated, until all his possession and belonging were lost to the creditor. In this way, the debt of the poor man increased without his earning any profit; on the other hand, the v;ealth of the creditor went on multiplying v;ithout this being shared by his brother the debtor . The creditor in this manner acquired by unlawful means the wealth of his brother (debtor) and his brother suffered loss upon IOSE'. Therefore, God in His Mercy and v/isdom and out of unbounded "kindnesr- to yiis creature prohibited riba and condemned its consumer, its payers, he who drafted documents concerning it and those who were not ready to give up riba were asked to be prepared for a war from God and his Prophet"./p a\ -18-
As one author has pointed oat 'Riba was mainstay of the rich in the pre-lslamic Arab Society v;ith all its related evils, vvhicli was love oL money as against love for one's fel.lov;uien, secondly, lure of idle life and the exploitation and opp- 23 ression of the needy by the wealthy'
There can be no doubt that as a result of the Divine command a sweeping change took place in Arabian society.
UKury was banned. The Prophet ran to the indebted people to provide them relief by remitting the dues that had accuFoulated by way of interest, becaure the usuier were asked to "give up what remained of their demand for usury" (Al-Qur'an, ?;?78)
The Qur'anic ban applied to usury in all its forms and operations and Prophet Muhammad had the evil practice eradi cated v/here there existed even the slightest semblance of it
•namely forward trading in grain before it actually arrived in the market for sale, buying goods from a market through the midole man in time of famine, and exchanging fruit on trees
for fruit in baskets and taking a fixed amount of grain from the produce of land given on lease, even if there is a mutual
agreement therefore.
23 Muhammad Sami'^ulleh, "Prohibition of Riba Interest and Insurance in the light of Islam", I siamic Studies, (Islamabad), vol .xxi, 1982, p.60 . 24 Ibid., p.61. CHAPTER - II
ATTITULL OF ISLAM TOWARDS RIBA
What is Islamic attitude tov;ards ndba ? This question
assumed special importance in the minds of many modern muslim
thinkers, especially vhen commercial banking began to play
an important role in the process of economic development.
This discussion about cominercial interest and riba has
resulted in a serious controversy among the Islamists. It
is claimed that Islamic prohibition of interest was directed,
primarily tov;ards the Jews and Christians of Madina.
According to W. Montgomery Watt s
"In the first year or so after the Hijra the Jews had refused to give contributions in response to Mohammad's appeal but had said they were willing to lend money at interest. By adopting this position they were refusing to acknowledge Muheammad's claim to be pro claiming a religious identical with theirs; and this was probably a large part of the reason for the prohibition of usury"V
1 W. Montgomery Watt, Bell ' s_ ^ijjt_£t^duc ti on to the Qur'an, CEdintaurgh s University Press, 1970,^ P.IS^. -20-
It cannot be denied that a large number of Jev;5 in ^ odina were practising usury. They used to provide loan on interest at a very high rate; It is reported that even some companions of the Prophet were engaged in this practice. However, unlike Jews, there were cordial relations between the Muslim and Christian tribes v/hose settlements were mostly in northern Hijaz and southern Arabia. The relation betv/een the Christians and Muslims were regulated through agreements. The most famous agreement was the one wliich was concluded with the Christians of Najran. 'By its terms the Christians v;ere permitted to practice their religion and run their o\'m affairs, on condition that they paid a fixed tribute, gave hospitality to the Prophet's representatives, provided supplies to Muslims in time of war, and refrained 3 from usury*. There can be no doubt that the practice of riiDa was fairly common in Arab Society, and it was not the privilege of any particular community. 'The practice of
lending at interest, with the development of financial
capitals, was well-known in the Meccan Society. It was
2 H.A.R. Gibb., Shorter Encyclopaedia of Ir'lam, (Leiden'.E.J. Brill, 1974), P.472.
3 Bernard Lewis, The Jews of Islam,(London s Rontlege Sc Kegan Paul, 1934), p.11. -21-
"practiced very extensively despite the Cur'3nic prohibition of riba' . As far as the commercial activities c.re concerned, theae were in full bloom among the Arabs. Even Prophet Muhammad, in his early youth, was engaged in business. He used to undert a> f a trade journey carrying the mercliandise of Khadija, the merchant lady of Mecca, who used to advance her capital to the traders.
Riba in Islamic history :
V/e have very little account of usurious transactions 5 in pre-lslamic Arabia. Unlike European history, Irloinic
4 Maxime Uodinson, Islam and Capitalism (tr. by Brian Pearce, suffolkiAllen Khane, 1^74) ch.3, provides a wealth of evidence on economic practices in early Islom. The author shows that especially after Islam's first few decades the QurVanic prohibition of interest was routinely violated throughout the Muslim world, even by pious individuals. Violation occured in the context of various ruse-*? (hiyal) v;hidT v^cre developed by Muslim Jurist to circumvent the prohJbition of interest while safeguarding the letter of the Qur'an; The following example illustrates a widely practiced ruse. Person A sells an object to person B for Rs.llO, to be paid after a year, but promptly buys it back for Rs.lOO, payable immediately. While technically no interest payment is involved, this double transaction is equivalent to ci single transaction in which A lends Rs.lOO to B for one year at 10 per cent. Evidently, people were exhibiting such a pressing need for borrowing and selling at interest that the Jurist found it prudent to legitimize their roundabout methods. 5 For a detailed discussion on the usury in Chrirti^n Ethics., See 'Religion and the Rire of Capitalism, by R.H.Tav/ney, (Penguin Books, T^TbTT -22-
history provides us with little informations as to v;hat the methociS of lending and borrowing v/ere adopted, what was the rate of interest and more importantly, the position of the existing capital. 'As far as scarcity of capital is concerned, it cannot be denied that every knov/n society has, since Eden? had some limit as its supply of capital goods'. As far as the early Islamic society is concerned, there is not any clear picture of the nature of investment policy of that society. The classical literature suggest that in place of riba Islam promoted mudarbeh. It was an alternative to usury as a means of capital gain. It was a form of business investment through partnership. By means of this mechanism a person with capital invested in a business venture, from the proceeds of this business. He took his share of profit according to the ratio fixed at the time of the formation of the partnership. As a result of this, however, the possibilities of a high rate of return on the capital investment were greatly enhanced by legal acceptability of the working partners to trade on credit.
After the advent of Islam, usurious transactions were always condemned, and to a great extent, it was banned
6 Paul A. Samuelson; Economics (MC Graw-Hill,Inc 1985), P.28G. ~~~ -23-
Jn t-he Islamic society. But the ban was not very effe^ctlve.
The denunciation of interest V;QS made in the Cur' an in the foil ov;i ng v/ords :
"0, believers I fear God, end give up the interest that remain outstanding if you are believers (11:288) "If you do not do so, then be sure of being at v/oi" with God and Hir mersenger. O'll", i. f vou icotnL you can have princiyial . Neither should you commit injustice nor Fhould you be subjected to it"
Thus the Qur'an very explicity denounced the practice of riba and ordered to prohibit it. This sura also indi cates the warning of God t'o those v^ho practiced it. Here v;e will again say that the condemnation of riba in the
Qur'an as well as in other previous scriptures show that this practice v;3S banned because it brought disastrous conse- 7 quences in the society. In the early society, when banking
7 Even in modern times the consequences of interest rates have not altogether good impression. In the modern capitalistic system/ the economic theory predicts, and empirical studies show, that the demand for money will be sensitive to interest rates - v;ith higher interest rates leading to a lower demand for money. The real impact of interest is seen in business. The era of high interest rates since the 1970's has ushered in corporate"cash management" in v;hich banks help their corporate custoiners keep their cash constantly invested in high yield asset ratlser than laying follov; in low yield checking accounts. And with higher interest rates, corporation vjork a little h~,rd to keep their cash balance at a minimum. See Samuelson P.A.Economics (Tv.elfth Edition), esp. ch .7 . (Mac Gra Hill .1985) . " •••""'• -24-
fecilities were not available, the rate of inteiest was going very high v;hich resulted in hardships and misery. The situation in Arabia on the eve of Islam was specially alarming. The following passage depicts the prevailing situation in pre-Islamic Arabia in a very clee-r Wdy :
"The situation in Arabia was th.at a part of wealth was loaned initially on interest for a definite period, but on the expiry of that period, in the case the debtor was unable to pay, the term of payment was extended v/ith an enormous increase in the principal amount, it often happened that, v/here big sums were involved, the debtor went on paying interest alone in instal ment and yet could not pay off even the usurious interest, let alone being able to return the principal.^
These were the conditions when the Qur'sn prohibited riba. Its main purpose was, it seems, to create a just umma 9 based on co-operation and brotherhood.
8 Fazlur Rahman, Op. Cit., p.6 9 It would be proper here to compare the Chrirtian views on interest and that of Islam. In this context Sayed Ahmad Ali writes that unlike Islam, the Christian doctrine on usury collasped simply because it had no alternative but to accept the reasoning of the economists of the time and also because it had no conception of 'welfare society' such as Islam has in respect of social and economic matters. For such matters, the church seems to have adopted an attitude of hesitation. Islam./on the contrary is founded on r j gid set of definite codes of conduct in such matter, because it is not confined to the mosque alone, but has to be lived' and the v;ay it is liveo, must continue to be subjected to security by those who are n authorities as well as versed in Islan. E^ee Ghaikh Fiahmud Ahmad, Economics of Islam, (idarh-i-Adabiyat-i-Delli, 1980) ch .1 ~ "~* -25-
Islamic alternative to interest, 'wjudBtbeH 'vias popular not only in the early Islamic period as we have mentioned earlier, but it continued to be practiced through out Islamic history. Historians have provided us evidence to suggest that even credit system was common in Islamic history, and credit arrangement of various types constituted an important feature in both trade and industry. Its importent function was to finance trade by providing capital 10 goods for those v/ho did not have means of carrying out tx'ade.
Economic Structure of Early Islam :
In order to understand the Islamic denunciation of interest, it would be proper to consider it alongv/ith the economic set up prevailed in early Islam. Especially, what
10 The earlier Muslim legal sources justify the assertion that already in the late eighthcentury and possibly earlier, credits were used to be utilized in a productive and profitable way. Credit helped in expansion of trade by providing merchant a means of doing business in an age when the supply of coin was not alv/ays adequate. See for detail Abraham L Udovitch, "Credit as a means of investment in Medieval Islamic Trade" Journal of Americna Oriental Society, (U.S.A), vol.87. Mo.3 (July-September 1972), p.?60. -26-
was the financial system, which in modern term is 'known as 'Fiscel policy*. How the commercial translations were carrie:d on ? Moreover, how interest-free consumption loans and profit-sharing ventures were common among early Muslnn.g? From the economic history of early Islamic '"'eriod, V7e get the information that free competition, prohibition against monopoly, end non-intervention in the market were common. The government intervention v/as only in time of crj sis so that normalcy can be restored in the market. ' The commercial and fiscal policies of the political authorities, that is, the tribal lords and the rulers brought an accelerated growth of trade activities which generated a process of increased proauction of commodities1.1
Af. f «r the economic of early Islam, it is known that the economiy throughout this period was primarily agricultural.
11 There are numerous report in the classical Arabic Literature which clearly tell us how the Meccen merchants managed new markets and how they safeguarded their economic interest. As trade was the •msinstoY of Arab Life, its discontinuation and stoppage meant unemployment, misery and starvation. TheyTtherefore, strove hard to improve and main tain trade relation through all possible means. The commer cial rivalries, the struggle to control the market-areas and strategic trade routes to gain economic supermacy over other; and search for new markets - all there points to the same mercantilist policy of protection. For detailed discription of these, see shorter Encyclopaedic of Islam, Op. cit."Mecca". -27-
There is nothing in the literature to indicate active intervention in urban economy other than the control of the quality of the fl|uhtasib (supervisor of the iriarket) . Throughout the period a tendency prevailed to let the market elone determine the prices. In general, prices v.'ere determined by a free interaction of supnly and demand. But in the time of crisis indirect intervention v/as common, such as reducing taxes or- increasing supplies; and in this case calip'h set the price by order. As long as the government v/as simple, expenditure limited, and the booties of v;ar accumulating, the problem v;as to dispose of surpluses. Different methods were utilized to raise revenue, some of v/hich v/ere based on abuse of pov/er, corruption and oppression. While various attempts 'to reduce expenditure v/ere mr.de, the emphasis to obtain a balance v/as mainly on the side of 12 revenue. It seems that the state had a limited role in determination of the market structure. Hovever, when intervention by the state was necessary it was usually kept at a minimum and exercised through market.
1? E.H. Tuma, "Early Arab Economic Policies", Islnmic Studies, (Islamabad), vol.4, Mo.l, (March 1965), pn". 1-23. -28-
Is1 amic Policy towards Interest
The Irlamic society raises the ethical and economic question about the interest. In the belief that the Qur'an bans interest, it has been maintained throughout the Islamic history that interest should be prohibited regardless of its level and of the nature ond purpose of the loan involved. The principal reason why the Qur'an has delivered such a harsh verdict against interest is that Islr 13 all ethos, goals and values is bound to create confusion". The above statement implies that abolition of riba is a necessary for Islamic policy to establish a welfare state. But merely rib a v;ould not be sufficient because it is not the only value which Islam stands for. The earliest Islamic society, as we knov; from the history, was, to a great extent, against interest; not only consumption loans, but even production loans were considered against the Islamic: principle. Instead, the business were done on the profit- sharing .' _•• ; basis. "Partnership and profit-sharing were in practice throaghout the period, and the companions, trained by the Prophet and obedient to liim, adopted these methods. The Prophet did not prohibit, on the contrary, he expressed approval, of these methods of business. He himself adopted some of them, a fact that is of itself the 13 Umar Mohammad Chapra, Towards a Just Monetary System, (Leicester : U.K.,1985), The Islamic Foundation, p.64 -30- 14 greatest proof of their legitimacy" The above Ftatement implies that Iflamic society's rejection of riba provides an alternative in form of orofit- sharing, a system existed even at the earliest Islamic period. Indian Islamic value system riba represents as a source of unjustified advantage. 14 Ibid., P,12. Here it is to mention that the Prophet undertook trade-journey carrying the merchandise of Khadija to the market of B§.sra. This was a partnership-venture of qirad. Ibn Hishain treats in detail this partnership trade '(al-mudarabah) . He says that Khadija, the merchant lady of Mecca, who used to advance her capital to the traders on the partnership principle, heard about the Prophet's truth fulness, loyalty and nobility of character. She sent for him end offered him her merchandise to be taken to Syria as ; trade-venture; and that she would give him profit greater than the profit she had been giving to other merchants.... The Prophet accepted her offer and took her goods. He went out on a trade journey and reached Syria. The Prophet sold out all the goods he had brought there and v/ith them bought v;hatever he wanted and then brought his carvan to Mecca... when he reached Mecca, Khadijah sold all her goods, thus making cent percent profit on the capital involved; see Ibn Hishara : Sirah, vol.1 (Egypt; Matb'a Hejazi), p.203. This English translation is taken from Ziaul Hag., Op.cit., P.210. -31- Riba in t-he Qur'en Qur' ?n has gradually condemned riba. Qur'anic prohibition against riba became a subject of controversy from the early time of Islam. Though Prophet Kubammed at numerous places has cleared the doubts relating to it, but two main concept about riba were developed in the time of Prophet Muhammad. That was ftiba'l yiasi'ah and jtiba'l -fadl. We wil] discucs this issue'latter. As far as the question of Qur'anic verse? are concerned there is no distinction between any type of riba. The first statement of the Qur'en about riba is as follows j "That which you give as interest to increase the people's wealth increases not with God; but that which you give in charity seeking tne goodwill of God, multi plies manifold. (XXX : 39, Surah Rum) It is generally believed that this is the earliest condemnation of riba and it was revealed during the fourth or fifth year of the Prophet's mission. In that period. Prophet's mission was not politically powerftal and in this rurdh the Qur'an passes only a moral structure on ftiba. V/hien Islam became a political force after the Prophet's -3 2- rnigration to Madina, riba was prohibited and in the second stage the Qur'an forbade in the follov/ing verses. "And for their taking interest even thougVi it was forbidden for them, and their wrongful appropriation of other peoples' property, we have prepared for those among them who reject faith a gxievous punishment" (Sura al-Kisa', verse 161) Later on, in another sura God threatened to those indulged in this practice. "0 believers, take not doubled and redoubled interest, and fear God so that you may prosper. Fear the fire which has been prepared for those who reject faith, and obey God and the Prophet so that you may receive mercy". (Cura al-'Imran, verse 13O732) In the last stage, the prohibition of interest is mentioned in the surah al Baqar, where God has threatened in a very strict manner. "Those who benefit from interest rhall be raised like those who have been driven to madness by the touch of the Devil; this is because they says Trade is like interest: Hence those who have received the admoni tion from their Lord and desift, may have what has already passed, their case bfeing entrusted to Goo; but those v;ho revert shall be the inhabitants of the Fire and abide therein for ever. (11 : 277 ) ii "0 believers ', fear God, and give up the interest that remains outstanding if you are believers. (278, "If you do not do so, then be sure of being at war v/ith God and Hi? messen ger. But, if you repent, you can have, your principal. Neither should you commit injustice nor should you be subjected to it (279) "If the debtor is in difficulty, let him have respite untill it is easier, but if you forgive out of charity, it is better for you if you realise.(280) "And fear the day when you shall be returned to the lord and every soul shall be paid in full what it has earned and no one shall be wronged. (281) . The prohibition of itiba in Qur'an has been a subject of debate eimong the commentators also. A number of commentators of Qur'an have presented their views and have tried to prove its significance and its effect on society. 16 16 Famous-.Egyptian Islamic writer, 5yed Qutub believes that by prohibiting riba or interest, Islam is true to its fundamental belief on Human nature, and v;elfare of society. Moreover, Islam does not allow wealth to beget wealth. Qutub thinks that no man can live off interest and still have a true nat\ire. He elaborates this point by saying that anyone who gives me one dollar in order to demand a return of two dollar is my enemy. I can not have any friendly (reeling for him nor can I bear him any affection. According to liim interest destroys mutual help. Therefore, Islam is opposed to this practice, see Sayyid Qutub, 'aT^-Riba (Interest) Liwa'al Islam (Cairo) vol.8. No.10 February 1955T'pp'.648-G57, _ -iq _ In fact, there: is no specific classification of ftib^o in the Dur'an. The first declaration in Cur'an about *iba is in Surah Ruin. 11 ir believed that this is the fiist oroliibition order. As this surah viar. revealed in Mecca, in the early period of Prophet Muhammad's mission, when Rib a vras condemned. According to Fazlur-Rahirian j "The Meccan verses of the Qur'an are replete with denunciation of the economic injustice of contemporary Meccan society, the profiteering and stinginess of the rich, and their unethical commercial practices such as^cheating in v;eight and measurement, etc. Hov/ever, this first Qur'anic surah, as we may notice does not mention the prohibition but it merely focuset on the moral structure on riba. This has raised question among the scholars that what is the reason behind it ? VJliy Islam did not mention to demolish this practice ? or, vras there any other reason behind it ? In this connection Fazlur Rahman thinks that 'v/hen Islam became politically dominant after the Prophet's migration to Medina riba was categorically prohibited. 17 Fazlur-Rahman, Op. cit., p.3 18 Ibid., p.4. -35. "0 you who believe do not consume £i_ba with continued redoubling and protect yourself from God, perchence you may be blissfull".1^ Although the Qur'an does not give any rnecific definition nf rib a, its characteristic feature? can be reen in v^^rious riba verses which were revealed on different occasions. Regarding the categorical prohibition of riba in Cur'an, scholars are of the opinion that when Islam triumphed alter the Propheti migration to Hadinal"!, the first revelation come in the following v;ords of Sura al-Imran. 0' Ye believe '. Devour not usury^ doubling and quadrupling (the sumleni;), observe your duty to Allah, that ye may be successful. (Al-Iraran : 130) In i-urah al-Baqra this prohibition was later strengthened and given an emphatic form. From the above verse it can be assumed that the Qur'an prohibited only such kinds of pre-Islamic riba as used to make the principal sum several fold with the passing of time. 19 The Meaning of the holy Qur'an : tr. by M.M. Pickthall (crescent Publishing Company,Aligarh), n.d. -3 6- In al-Bp.'^i^a ver5es,-t^:e ls?t to be revealed in the rer'eF, the term riba has found its place in opposition to both bay' and j^gdaqa. As Qur • an says : Allah hatli biighted usury and made almsgiving fruitful. Allah loveth not the impiou"s and guilty. (Al-Baqra : 276) It is sufficient to say that Sadaqah Involves no proEit motives; in its narrow sense it implies act of benevolence and alms giving and in its wider perspective it evokes in the muslim mind a moral force to build up a system of economy based on j^adaqa, i.e. voluntary cooperation and mutual help irrespective of private gain. Bay and riba amounts to trading in capital and both involves profit motives and increase in capital investment. V 20 Differences between Sadaga and riba have been pointed out by various writers. It is said that one is oDDOi^ite to other, for while in Sadaqa a person giver out (in charity) the additional part of his wealth to another, and in riba he acquires for himself the additional ^art of another's wealth. In other words, riba adds to the wealth of the creditor, and sadaqa reduces the giver's wealth, but really speaking the case is reverse for ultimately sadaqa add to man's wealth, while the ultimate end of the devours of riba is poverty and misery. See. Manzur Ahsan Abbasi, £ud aur Qarz' (Interest and loan), Islam Ta'lim, (Lahore) vol.1, No.l, January, February I972mpp.3 1-4 1. -37- Eut rlba is opposed to bay*, in the sense that former amounts to making increase in price or debt for the time involved in paying or repaying it. Bay' al?o involves increaJ^e, but it is due to transaction itself, not due to time factor. Ziauddin Ahmad, while highlighting it says that 'In Qur'an both bay and riba amount to making increase in the capital and both are prone to profit motive. Therefore, the factors of opposition between .them could be nothing but the fact that riba is related to debts stipu lated with increase on the amount, which is not true in the case of bay, and the Qur'anic verses clearly indicate that it was the debt stipulated v;itri an increase v/hich was the basic cause f-r the prohibition of riba'2. 1 Vie have seen that prohibition of riba appears in the Qur'an in four different revelations. The first of these (11:39) in Mecca, em.phasised that while interest denrived xxjealth of God'? blessing, charity raised it manifold. 'The second (111:61) in the early Madinah neriod severely disapproved of it in line with its prohibition in the previous scriptures. It placed those v;ho took riba in 21 Ziiauddin Ahmad, 'The Theory of Riba', Islamic Studie::, ('Islamabad), voll7, 1978, p . 175 -38- juxtaposition with those who wrongfully annronriated other people's propecty and threatened both with E^evere punish ment from God. The third revelation (III s 130-3?), around the second or third year after Hijrah, enioined Musiiirrtp keep away from riba if they desired their ov;n welfare. The fourth revelation (IIs275s81), near the completion of the Prophet's mission severely censured those who take £iba, established a clear distinction between trade and riba, and required Muslims to annul all outstanding riba, instructing them to take only the principal amount, and fcr- give even this in case of the borrowers hardship. The controversy that prevails among scholars is probably that, Cur'anic injunction against riba is meant for the riba of jahilliyyah period. They argue tjiat the very denunciation of riba by Qur'an is simply the consumption loan, Hov.'ever, their argument in this regard has been defended by a good number of scholars, who claim that Gur'an does not specify riba, and that even in that time of early Islfjn the commercial loans were available for the productive 22 M. Umar Chapra, 'The Nature of Riba in Islam*. Harndard Islamicus, (Pakistan) vol.7, 1984, p.4 . -,39- purposes. In fact this controversy is a product of capi talistic development in the early eighteenth certurv. It v;,ii: the time v.'hen the importance of capital as .i factor of r>roduction vjas established in Europe, and they had very convincingly tried to prove that usury is not .like interest. Rib a in HaditVi Literature s Rib a, as it appears in Hadith literature, has three dimensions. First, it has been condemned ^nd its consequences have been mentioned. Secondly, rib a is divic^ed in two categories namely, jliba 'l-flasiah and ftjba M-^l^adl. The former is related to the Qur'anic prohibition of doubling and redoubling of principal sum, and the later concerns v;ith the barter or exchange, and this riba, i.e. tU-ba'l fadl has been the subject of difference of opinion among the jurists, and latter, among Muslim scholars, who in the light of Various traditions were in doubt that v;heth.er riba mentioned in I'.adith also included the commercial interest ? We v.'ill separately discuss these topics later. However, riba found in the Hadith is as follows. 1. From Jabir s The Prophet cursed the receiver and the payer of interest, the one who records -4 0- it and the tvro vitnesres to the trans^iction ^nd Sold : "They are r,n p.] l"ke ( in guilt) "•'•^ 2. Jabir ibn 'Abd All eh/ giving a report on the Prophet's Farewell pilgrimage, said : The Prophet addressed the people and said s All of the riba of Jahilliyyah is annulled. The first riba that I annul is our riba, th^it securing to •Abbas ibn Abd al-Muttalib; it is being 24 cancelled completely. 3. From Abu Hurayrah : The Prophet said : "On the night of Ascension I came upon peoole whose stomach^ were like houses v/ith snakes visible from the outside. I asked Gabriel v.'ho they were ? He replied that they were peonle who had 25 received interest". 4. From Abu Hurayrah s The Prophet said : "God would be justified in not allowing four persons to enter 23 Muslim, vol.3, p. 1219 ; 106, as cited in M. Uniar Chcipra, Op. cit., pp.14. 24 Muslim, vol.2, p.889, ibid., p.15. 25 Ibn Haja, vol.2, p. 763 s 2273, Ibid., p. 15. -4l- paradise or to taste its blesrnng; he vho drinks habitual ly, he v/ho takes riba, he v-hiO eatc cin orphan'r property without right, and he who is undutiful to his parents". ?6 The following traditions ere related to the |^ba 'l-Oasiijn 1. From Usaii-a ibn Zayd j The Prophet said : "There is no £ibji except in nasi'ah. (waiting). 2. From Anas ibn Malik : The Prophet said • "if a man extend a loan to someone he shou] d not ecce{.''t a gift ^'"d if the borrower offers ride on an animal, he should not ride, unless the two of tViem have been previously accustomed to exchargir.g favours 28 mutually" . 3. From Abu Burde ibn Abu Husa : I came to Mad in ah and met 'Abd-AH ah ibn Sal'am who said s "You live in a country where rib a is rarripant; Vience if any one owes you something an(i presents you with a load of hay, or a load of barley or a rope of straw, do not accept it for it is riba" . 26 Mustarak al-Hakim, vol.2, p,3 7. Ibid., p. 15, 27 (Bukhari, vol.5, p.93; Muslim, vol.3, p. 1218:102 and 104),Ibid., p.15. 28 (Lunan al-Bayhaqi), vol.5, p.1350), Ibid., p.16 29 Mishkat, vol.2, p.91:2833? Ibid., p.16 _42- Riba'l F3dl j Rlba '1-Fe.dl is related to the charging of exti a qu.ntity in exchange o<^ thp same rru.rintity. TVii."? ii a controversiel issue among the jurists as to v;hich good V'ould be included in this- category because in the Hadith tliere are merely six times v;hich the Prophet has mentioned a, ^^ ^al feabwi^ As for as the question of juridical discussions ^re concerned we v/ill discuss it- in the third chapter. First, let us consider the related Hadith. 1. From Abu Sa'id al-Khudrij The Prophet said s"Do not sell .gold for gold'except when it is like for like, and do not increase one over the other; do not sell silver for silver except when it is like for like, and do not increase one over the other and do not sell what is away (from among these) for what is ready"." 2. From 'Umar ibn al-Khatteb : The last verse to be revealed was on riba and the Prophet, peace be on him, was taken without explaining it. to us;, so give 30 (Bukhari, vol.3, P.92, and Muslim, vol.3, P.l20at75), Ibid., P.16 up net only rib a but also ribah (vjhotever raisec ''I doubts in the mind about its rightfulness) From 'Ubada ibn al Samit : The Prophrt .'r.id : "Gold for Gold, silver for silver, v.heat for whept, barley for barley, dates for dates, and rnlt f^-r Salt, like for like, equal for equal, and hand-to- hand, if the commodities differ, then you may sell o as you v/ish, provided that exchange .is hand-to-har r^"' 31 'Ibn Maja, vol. 2, P. 764 ; 227 6), Ibid.,p.l 32 (l:U5lim, vol.3, p.1211 : 81), lbid.,p.3f;. CHAPTER - III RI3A IK FICH LITERATURE definition : The literaly meaning of the term £i_t)_a is 'to increase' but in Shcjri *ah it has acquired a much wider connotation. In tVie Holy Qur'an/ there is no specific reference to the term riba. It has been condemned because of its doubling and redoubling of the principal sum. i:i: Dur ' an £ ays : "vjho is it that v;ill lend unto Allah a goodly loan, so that He may give it increase manifold? Allah straiteneth and enlargeth. Unto Him ye v;ill return" . (11: ?45) "Those who spend their wealth for the cause of Allah and afterward make hot reproach and injury to follow that which they have spent; their reward is with their Lord, and there shall no fear come upon them, neither shall they grieve (11:262) 1 TVie McTjning of the holy Cur'nn : English tr. by M.M.Pickthall, (Crescent Publishing Co.), n.d., p.55. -45- According to Abu Bakr al-Jassas, the Our'an commentator end Hanafi jurist; God has prohibited covers all transactions to v/hich the connotation applies in the Shari'ah even though the indulgence of the Arabs in riba, as mentioned above, related to loan in dirha.ms and dinars for a specified period with the increase ^s a conoition. Another Qur'an commentator Muhanmad b.'Abd. Allah b, al-'Arabi v;ho is a Malikj. jurist "Riba literally means increase, and in the Cur'anic verse (11:275) it stands for 3 every increase not justified by the return...." The Muwatta of Imam Malik records on the authority of Zayd b. Aslam as follovrs : "In the pre-Irl?mir days riba operated in this manner : if a man ov/ed another a debt, at the time of its maturity the creditor vould ask the debtor: will you pay up or v;ill you increase ? If the latter 2 Ahkam al-Qur*an, (Cairo : Al-Matba'a al-Bahiyyah al-Misriyya, 1347, A.H.), vol.1, cited in M. Umar Chapra, 'The nature of riba in Islam', Hamdard I si amicus, vol.7, 1984, p.23. 3 Is^a al-BaLi al-Halabi, Ahkam al-Gur' an, (Cairo), 1957, P.242, cited in M.Umar Chapra., Qp.cit., p.23 -46- pai d up, the creditor received back the sam; otheri-.'i?e the principal was increased on the stipulntion of :•-. L'lrLher teun . A Hanbali jurist, 'Abd-Allah b. Ahmad b. Cadam.i al Maqdisi sayt; : " H.iba is of two kinds : rib a 'I-gaol and ribci'i Kasi ' ah. The prohibition of riba'l-f adl^ involves the excV'iange of one comniodity against itself and covers all commodities v.'hich are exchanged by volume or by v.'cight regardless of v/hether the quantity exchanged, is sm^ll, like one date for two dates or one grain for two grains. Riba '1-Nasi 'ah is involved in the excViange of tvro commo dities one of which is not the price". A Ja'farL jurist, Hasan b. al-Mutahhar has defined riba in the following term : "Riba literally meanr increase and, technically, it refers to the increase in the exchange of tvjo commodities, one against its o\m kind .... Riba is of two kinds j riba'l-f adl and riba'1-nasiah and the jurist are agreed on their prohibition. 4 Kitab al-Buyu', Bab al-Riba, cited by Fazlur Rahman, Op. cit.,p.5". 5 Al-Muqni' (Qatar : Matabi ' Qatar al-V/ataniyya, 1973), vol.2, pp.64-77., cited in M. Um.ar Chapr a., Op.cit., p. 24 6 Tadhkirat al-Fuqaha, (Najaf : Matba'a al-Ka i af, 1955) vol.7, p.84; cited in Ibid.,p.24. -47- An D 1 • Riba'l-Nc^yj 'ah i i-. Hibo '1-Fadl As mentioned earlier, in -^Igh terminology riba rtieans an increase in one of the two homogeneous equi valents being excViariged, vjithout this increase being accompanied by a return. Vie have t;een that the Qur'an has prohibited interest in very clear and severe term;;, but most of the controversies have risen due to the reference of riba in Hadith where two types of riba have been mentioned. In fact the jPiqh discussion revolves around these tv;o arguments. So far as tie question of Qur'anic prohibition of riba is concerned, it has never been in doubt among the muslim jurists. The difference? of opinion th.jt^ finds expression in Tradition regarding the relevant fact is continued in the earliest stage of development of Huhammadan Law'. Hov/ever, it cannot be denied that some people indulged in taking interest in such a tricky way as not to come directly under the pro hibition of riba. This form of practice was common among 7 i^ee, ohiorter Encyclopaedia of Islam (Leiden, E.J. Brill,1974Trp.472. -48- the early Muslims. Though the opinion of jurintr differ on this, unanimity prevails regarding the main lines of the limitation to be imposed upon the exchange of goods capable of riba, it is only permitted if transfer of owner ?V"iip takes place at once and, so far as goods of tVic same kind are concerned, only in equal quantities. In the case of a loan it is forbidden to make a condition that a larger quantity shall be retiarned without regard to the kind of articles. The jurist:- of Islam have distinc:!uished two kinds of riba in the light of Qur'an and Hadith. The first is rib a' l-nasiah which is prohibited purn,T.<:t;lY bccoure of its exploitative nature. There is no difference emong the Muslim jurists about the prohibition of rjbe '1-nasi ' ah. This is established by the KolyiQur'an, the Lunna of the 8 For a detailed discussion sec Mir 5iadat (Mc;),Ali Khsn, 'The Mohammedan lavs against usury and hov they are evaded'. Journal of Comparative International Lav;, 11-(19?^-') "P.23''-?-44; See also Maxim Rodinsons, I si air. an"d~C apit rl i em, ' c'h.3; In fact these violation^occured in tHe context^oT various ruses (hiyal) which v/ere developed by Muslim Jurist to circ^um- verit the prohibition of interest whiile . safeguarding .the letter of Gur'an. The following examples illustrates a widely practiced rusoL, Pert on A tells an object to person E for Ri.llO, to be paia after a year, but promptly buys it back .for R. .100, payable imi.^ediatel y. l.'hile technically no interest paym.ent is involved, this double transaction in v.'tiich A 1 cndj: h:.. lOU to B for one year at 10 percent. Lvidtutly, people v;ere exhibiting such a pressing need for borrov.ing and se.ll- ing at interest that Jurist found it prudent to legitimize their roundaboat methods. -49- 9 Prophet and the consensuE of the UrmiBh. The other kind of rlba is knovm as riba*l-fadi . It has been prohibited as precautionary measure so that it may not become a means of taking actual interest. This kind of riba has been the subject of controversy among the jurists of Islam. It means the charging of extra quantity in exchang £>f the same quantity. Riba*l-Kasi * ah (Riba on loan) There are a number of verses in the Qur'an which condemn riba *l-nasi ' ah : '* Those who swallow usury cannot rise up save as He ariseth whom the devil hath prostrated by (his) touch. That is because they say : Trade is just like usury; whereas Allah permitteth trading and forbiddeiV* usury. He unto v/hom an admonition from his Lord cometh^ and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past, and his affair (henceforth) is with Allah, 9 This is a claim by majority of Muslim writers. For a detailed analysis, see"M.N. Siddigi, Muslim Economic Thinking, Ch. 5 . -BO AS for him who returneth (to usury)- sncY) are rightful owners of the Fire. They v.dll abide therein". (ll:?75). "A13 ah hath blighted urury end made almsgiving fruit ful. Allah loveth not the impious and guilty" (lis 276) . "ho I those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no feer come unon them neither shall they grieve". (11-277). "0 Ye who believe .' observe your duty to Allah, and give up what remaineth (due to you) from usury, if ye are (in truth) believers". (11:278). "And if ye do not, then be warned of war (against you) from Allah and Hif messenger. And if ye repent, then ye have your principal (v/ithout interest) . Wrong not, and ye shall not be wronged", (lis 279) "7ind if the debtor ±s in'straitened circumstances, then (let there be) postponement to (the time of) ease; and that ye remit the debt as almsgiving would be better for you if ye did but know" (11:280) -51- "And guard yourselves sgainst a day in vhich y-- v.'ill be brought back to Allah. Then every soul v;il 1 be naid ir full that v;hif;h it hath earned, and they vil"i not t>e wronged. (11:281)'^'^ AS is clear from the above verses, the Qur'an condeirins the practice of riba in the strongest possible term. Linee riba'1-nasi'ah means the giving of a principal airiount on loan for a given period against the payment of interest in percentage term on a monthly or annuel basi^ 11 thit; type of riba was comjnon in pre-Islamic Arabia. V7e quote here the well-known remarks of Ibn Goyyim a1-."law^iyvah for the better understanding of the true nature of this riba. He says : •"Riba' 1 -Nasi * ah is, in reality, the riba in which credit is involved. In pre-Islamic times it consisted in the T-'aym.ent of a debt being delayed which led to an increase in the amount loaned out. The result was that the original sum lent ( the principal ) was increased in proportion to the delay that 10 The Meaning of the holy Qur'an : English Tr. by M.M. Pickthall, (Crescent publishing co.) n.d., p.59. 11 M. Umar Chapra, 'The Nature of Riba in Islam', P.20. -52- took place in the^payment OF the debt. This went on until a sum of one hundred increaped to thousands, In-.roost case5 the debtor v^es a destitute and needy perron who had no alter native but to delay the payment of the debt and the creditor agreed to postpone his demand ( for the clearance of the debt ), and choose to wait* so that he might obtain more profit on the principal invested by hini. The debtor on the*pther hand, was forced to pay the increased ^amount, so that he might ward off the pressing demands of the creditor and the dangers and hardships of the prison house. Thus, time passed and the monetary losses of the debtor went on increasing, v;hile his troubles multiplied and his debt accu mulated, until all his possessions and belong ings were lost to the creditor. In this way, the debt of the poor man increased without his earning any profit; on the otherhand, the wealth of the creditor went on multiplying without this being shared by his brother (the debtor) . The creditor' in this manner acquired by unlawful means the weeltVi of Y\iz brother (debtor) and his brother suffered loss upon loss".12 Thus riba'l-nasi'ah is unanimously rejected by every Muslim jurist. According to Ahmad b. Hanbal : "The mani fest rib a (riba-al-If asi'ah) about which there could be no ambiguity is this : that someone is indebted to another and the creditor asks the debtor whether he is ready to pay the debt or would alternatively agree to an increase in the principal loaned out to him. If the debtor is not able to pay, then the creditor increases his principal as well as the term of Payment" . •'•"^ 12 Ibn Qciyyim, I 'lam-al-Muwaqqin (Delhi: IJ13 A.H, 1:200) as quoted by Fazlur Rahman., p.34 13 Ibid., p.34. -53- Kov; it becomes clear that what Gur'an : nrohibit? is the riba that was common in pre-Islamic Arabia vhich in fact v/as the credit transaction in the sense that if a poor person cannot repay his debt even after the nassage of a long time, the amount he owes will increase manifold. The prohibition regarding this form of riba is quite clear. The Muslim jurists who were always critical of non-Islamic practices prevalent among the Muslims never quote a single example of the taking of interest by Muslims. Nevertheless, in spite of its prohibition some people still indulged in the boirowing and lending on interest in such a fraudulent manner so as to show that this did not come under the 14 definition of riba. Riba'1-Fadl (riba on barter Transaction) Riba'1-fadl means charging of extra ouantity in exchange of the same quantity. Riba'l-fadl had no substantial effect on transaction because of the rarity of its occurrence. It is not the objective of the peoole to buy or sell one thing in exchange for same thing unless'there was some thing extra 14 See Abdul Azim Islahi, Economic Thought of Ibn Al-Oayyim, ) (Jeddah : lnternationar~Centre Tor Research in Islemic Economics, King Abdul Aziz University,1984),p.12. -54- from which each one of the parties may benefit. It has been nrohibited because it might lead to the 'defrauding or deception of less sophisticated nersor'. To make this more clear we vrould present a hadith where the Prophet is reported to have said that "gold for gold, silver for silver, v;heat for v;heat, barley for barley, date for date and salt for salt be exchanged the same thing tor the same thing, in equal quantity anci hand to hand. One who demanded extra or paid extra, he had indulged in interest. 1 ft The tiadition further reports "... when their kinds differ, then sell them as you like (with the difierence of quantity) provided that it is hand to hand".(i.e., the inequality or late payment, in this regard, is termed as rlb'1-fadl. This statement implies that barter exchange of the same products were unlawful, unless the exchange took nlace hand to hand and in the spot market. The differences of opinion about the riba'l-fadl are found, but maiority of ^he 15 M. Umar chapra. Op. cit,, p.20. 16 Muslim, Sahih Muslim, "Bab al Sarf" , (Cairo: Maktabah M. Ali Salim wa Aul aduh, ) n.d. part ?,p.44. -55- Muslim scholars and jurists are of the opinion that by riba the Prophet had meant not only usury but al] charqirg of 17 interest and this view is generally accepted. Riba*l-fadl ; Its legal position j According to all the four schools of Islamic juris prudence riba'1-fadl is prohibited. It is consic.ered as contrary to barter. The primary aim of this injunction is, however, to eliminate the possibilities of exploitation and injustice implied in the prohibition of interest on money-loans. However, in Islamic jurisprudence there is some controversy regarding the scope of this prohibition. The question has been very often raised whether riba covers every commodity or it is confined to such commodities as mentioned in the Hadith, namely, gold, silver, wheat, barley, dates and salt. Thus, it is on this issue tVie four schools of Muslim jurisprudence differ. According to some the pro hibition is not confined to the six items only as mentioned above. The source of the differences among the jurists lies in their analogical interpretations (%Lya£) or the basis of 17 See for detail in Encyclopaedia of Re] igiori_ and Ethics, (Nev; York : Charles scribner's sons, 19647, vol .VII, n .R75 -5 6- which most of the Muslim jurists except the Zehiriyyah :up!)urter thdt riba'l-fadl is prohibited for all commodities wherev>:^j. the analogy holds. 18 While the existence of the Our'anic prohibition of riba has never been doubted, the difference of opinion that finds expression in Tradition regarding the relevant facts 'continued in the earlier stage of develoDinent of Muhammadan law,1 9. Islamic law as we know it today did not exist in the time of the Prophet Muhammad. It came gradually into exis tence during the first century of Islam. It was during this period that nascent Islamic society created its own legal system and institutions. Arab customary law, in general, continued unaer the first successors of the Prophet the -^ caliphs of Mcidina. The Prophet's legislation, too, was a complete innovation in the law of Arabia. Muhammad, as a Prophet, had little reason to change the existing customary law. Hif aim was not to establish a nev? legal order but to teach man what to do in order to achieve their salvation. 18 'Abd al-Rahman al-Jaziri Al-Fiqh'Ala Madhahib al-Arab'a (Cairo : Al-Maktaba al-Tijariyyah al-kuHra, 5th ed., n.d.); vol,2, po. 245-8, as cited by M.nmar chapra. Op. cit., p. 22 19 Shorter Encyclopaedia of Islam., p.472. -57- •That is why Islamic lav; is a system of duties of ritual, legal and moral obligations, all of which are sanctioned by the authority of the same religious command'. About riba*l-fadl the Muslim jurists have exnressed their viev/s' as follov;s : According to the Hanafis and Zaydis (also Al-Awze'i), gold and silver represent examples of the class of things defined by weight (mawzun) and the four other things are 21 sold by measure (maXil) . Thus a Hanafi jurist Abu Bakr al-Jassas says s "The term riba signifies different meanings. One is the riba prevalent in the Jahilliyya; the second is the dis parity or differential (tafadul) in the volume or weight of a commodity (in spot transaction)... and the third is al-Nisa'Vj This iirplies that it is not permitted to sell a commodity against future delivery of the same volume weight or other measure of the given commodity".22 According to the Malikis and the vShafi'is, gold and silver represent the clas?- of precious metals and the four 21 Shorter Encyclopaedia of Islam., p.47?., 22 Ahkam al-Qur'an, (Cairo, Al-Matb'a'a al- Bahiyya Al-Mikrfyya, 1^47 A.H.), vol.1, po.551-52 as cited in Umar Chapra, Op.cit., P.2:'. -58- other things - wheat^Darley et-e,the class of foodstuft : the latter, in the Maliki view, include actual estables so far as they can be preserved " according to the older vievj of al-Shafi'i, provisions v/hich are sold by weight and measure; according to this later view, v.'hich is also that of his school, foodstuffs vdthout any qualifications. The teaching of the Hanbalis correspond to that of the Hanafis; as regards the "four kinds", tv/o further opinions of Ahmad b. Hanbal are handed dovm which correspond to the two views held by al-Shafi. In these, wheat and barley are regarded as two different kinds by the Hanafis, the Shafi'- is, and the better known tradition of the Hanbalis ( as well as Zahiris, Zaydis and Imamis. The Zahiris, as a result of their refusal on principle to accept analogy (Qj.yas) assumes that the prohibition applies only to the six things especially named (the other kinds are rejected as not well 23 attested). Unlike Zahiris, other schools of law consider the kinds mentioned in tradition only as examples of the variety 23 Shorter Encyclopaedia of Islam, p.472. -59- o£ things that came under mal rabvri. If it i? desired to exchange such articles, the tv;o courses are possible ; 1. Regarding the two articles not of: the same kind (e.g., gold and silver, or dates and barley), delivery must take place on both sides atonce, but the parties are not 'bound to give each other the same Quantity. If they expressly make condition of postponement, this must be regarded as rib a' l-fi asi ' ah 24 (i.e. usury with regard to the conditional postporeanent; 2. If, on the other hand, two articles of the same kind are exchanged (eg. gold for gold and silver for silver), the parties must immediately hand over to each other tne same quantity. It is, therefore, possible by the exchange to be guilty of riba in three ways : (a) If one of the oarties receives more than the other, this is riba*l-fadl (i.e. usury, because of the greater payment)r 24 Encyclopaedia of Religion and Ethics., Vol. VII. -60- (b) If the two parties do rot receive the payment due to them at the same time, they are guilty of riba' *1-Yad (i.e. usury with regard to the possercion); (c) 'The purpose of these regul ations of; Muf^lim law was apparently to prevent men from making them selves guilty of usury by means of exchanges customary in Muhammad's time, by which the debtor, after the expiration of the period agreed upon, had to pay.back a greater amount of money or of articles of sale than he had received'. Thus there is hardly any disagreement that riba refers to that practice of taking in increase of the amount due from the debtor which was prevalent among the Arabs and was familiar to them at the time of revelation of the Our'an. A number of learned jurists of different ages have clearly defined riba, and in the light of their analysis it can be said that riba which was prevalent in pre-Islamic era consisted in extending the •time limit and increasing the amount due so much so that borrower would at the end of the period of the loan return to the lender double or even more of the principal sum. -61- To sum up the prohibition o'' interest ir very clear and severe in the Gur'an. A^ far as iftiba' 1-f^ esi ' ah i? concerned, every jurist confirms its illegality. Rut the fciba'- fadl has raised some doubts, mainly due to the variation in Hadith literature. 'However, it is commonly agreed- that precious metals and foodstuffs mentioned in the tradition and the reason behind the prohibition of unequal exchange of the same kind of precious metal is that their purpose of 'moneyness' will be destroyed, and the reason behind prohibition of unequal exchange of the same kind of food stuff is that it will destroy their purpose of serving as diet, because diet is the most important end basic need of man. If equal exchange of these commodities in the same kind had been allowed, it v;ould have distorted their natural purpose and there would have been hording and holding back of these commodities. Thus the nurpose of 'moneyness' from precious metals and diet from foodstu-^fs vrould have been defeated and these commodities would not have been easily 75 available for which they are naturally meant'. 25 A..A. Islahi., Op. cit., p.16 CHAPTER - IV QKIGINL OF MODERN COMTiZf^VERSY OF IF;T£RE:.T As it has been mentioned above, throughout the history, interest has been an important c' discuFsior everywhere. Even in the modern world interest creates "liquidity preference" for speculative purposes and results in keeping a large part of the money supply in hords waiting for the rate of interest to rise. Among the "Islamic school of economics" the prevalent view is that the institution of interest is neither indis- pensible nor ineradicable. Most of the muslim economists 1 Ernest Mandel, Late Capitalism, (Narfolk : The Thetford Press Limited, Thetford, U.K.,1983), ch.l4. The author, while tracing the evolution of capitalism, gets the conclusion that ongoing increase in the nominal rate of interest combined with permanent infl^ation may forbid long- term investment project altogether, i.e.; both reinforce the reduction in the turnovertime of fixed capital due to the acceleration of technological innovation, end oostpone indefinitely certain projects which are too risky because of the long duration of turnover involved in them (p.454). -63- think that interest should be prohibited regardless of its level and of the nature and purpose of the loan involved. However, there are still many Muslims for whom it is not at all clear vjhether the Qur'anic ban also covers that institution of interest as it exists today. They doubt that what Cur'an banned was the ancient Arabian practice of riba, which allowed the doubling and redoubling of debt when the borrower failed to make restitution on time. They think that in pre-lslamic Arabia, riba was resoonsible for the effective enslavement o^ peonle. The purpose of the Qur'anic ban, in their view, must have been the elimi nation of this potent source of inequality and coirmunal 2 friction'. Whether the ban was in fact intended to apply on all the forms of interest, this was not clear even to the early 3 Muslims. Hov;ever, a controversy that is often raised is regarding the defination of riba. While explaining the 2 Timur Kuran, "The Economic System in Contemporary Islamic Thought", International Journal of Middle Ear.t Studies (U.S.A.), vol.l8~Tl986), pp. 135-164. ,•3 The doubts concerning this issue have been documented by Fa^lur Rahman, "Riba and interest". Op. cit., pp. 1-43. -64- controversy on riba, as a result of some cor.flicting Hadith, some modern writers have started thinking that the contro versy on riba is not due merely to the meaning attached to it by some translators of the Qur'ar; for if that vera the case then the insertion of the word 'interest' for 'usury' in the translation v/ould have resolved the matter. The fact that there was room for different irterprttation? of the Qur'anic injunctions against riba is traceable to the time of Caliph 'Umar in the first century of the Islamic period, who was quoted having said ; 'The last to be revealed was the verse of usury (riba) and the Prophet expired v.dthout explaining it to us. Theref;jre, give up 4 usury or anything resembling it. In this way, it is implied that not only Umar v;ished there v/ere a greater explanation regarding all aspects of riba, but also that he wanted an interpretation according to which one must avoid anything which might resemble riba. One writer, on the basis of Caliph 'Umar'r views writes that 4 This report is recorded in the Musnad of Ahmad b. Hanbal the Cunan of Ibn Majah, Musannaf oFTFr Alii Shaybah, Dala' i 1 al-Nubuvnvah of al-Bayhaqi and similar other compi lation of the Muhaddithun of the later Period. See 'A]i al-Muttaqi, Kan?, gil-'ummal, 1317 A.H., 11;''31 (Fo.49S4)., as cited bv FaT'fur"Rahman., On. cit., p.8. -65- "If he (umar) meant that riba i.^ usury then islemic behaviour v/ould require tvo kinds of patterns, one a follovdng of the qiven interpretation case by case af est ablished by fiqh (systematic interpretation of Qur'anic injunctions), and the other, in case of doubt, in v;hich a person must follow his best judgement until assessmert is given by ifta (the scholarly exercise of such judgement) . If, on the otlier hand, *Umar meant meant interest in his state ment, then only nonmonetized trans ructions In the form of barter may involve some prob lems of interpretation. For monetized transactions any interest above zero v.-ould qualify as riba. In the case of nonm.oneti 7ed transaction there are also tv;o types of behaviour patterns under the latter intex- pretation of riba; first, avoiding exaii.pl es involving barter which had been declared as constituting riba by the Prophet Muhanrr.ad, and second, monetized transactions through the market arid thus avoiding problems of interpretation".5 m fact, the m..iin issue of thijr controversy it: the distinction betv;een riba and interest. The conflicting Hadith literature (which we will elaborate later on) do not help to define riba in exact manner. But at the same time the view m.ay be taken that the Qur'anic injunction against riba are absolute and thus the prohibition must be accented 5 M, Siddieq Foorz£>y, "Islamic Lav/s on Riba (In+ercst) and their Economic Implications", l^nternationaT Journal of Middle East Studies, (U.S.A.) vol. 14 "719877, on.3-177" -66- as they stand. Imam Razi and other scholars of Islamic lav/ have presented a variety of arguments for these injunctions. In the final analysis they are reduced to the tv/o tyT'cs of loan transactions on consumption and investment, and the reasons attacV)ed to the prohibition of rib a on these typer of loans. Among the contem.porery v;riters, both views ere found; one is that the positive rate of interest is accept able for the modern com.mercial transaction, whereas economic rate of interest occupies the same place as price and regu lates the supply and demand for credit, and in this way ration it among the customers. Yusuf Ali, an eminent translator of the Qur'an translates riba as 'usury' and states that "My defination (of usury) would include profiteering of all l<;irds but exclude economic credit, the creature of modern banking 7 and finance". However^ this view is rejected by several modern writers. They generally interprete riba to mean interest rather than usury, and thus argue for a zero rate 6 £^ee M.A. Mann an. Islamic Economic t "^heory and practice, (Idarah-i Adabiyat-i Delhi, 1980) , DD. 157-159. and Gureshi, Islam and the Theory of Interest, pp. 45-48. 7 Holy Cur'an, tran. (Srd ed.) Yusuf Ali, p.Ill, n.3?4, -67- 8 of interest on all transactions. Meaning of Riba : As mentioned above the Arabic vord riba li-terolly means 'increase or addition of to any thing'. It also 9 means 'expansion and growth'. The Cur'anic rura.*^ as quoted earlier clearly indicate the meaning of riba : 8 Lee for detail M.N. Liddiqi, Muslim Economic Thinking ; A Purvey of Contemporary Literature, "iLeicester : The Islamic Foundation, 1981), The author~'has presented the vievjs.of Islamic writers v?ho have analysed the role of interest in the economy and have traced the consequences of its abolition. Muslim scholars compare interest and "profit share" as means of mobilising saving and channe lising them into the productive process. They have pointed out that the institution of interest introduces as essential duality of interest between the capitalist and the entire: preneurs, which is a source of fluctuation in the systems. According to them, by abolishing interest and bringing the capitalists end the entWpreneurs together on the basif; of profit-sharing, Islam ends this duality and harmonises the interest of two classes. However, their main argument against the interest is that the borrov;ed capital whose repayment to the lender is guaranteed takes no part in the enterprise in v/hich it is invested and is, therefore, not entitled to any returns even when the enterprise does make a profit. This capital does not expose itself to the risks and uncertainties of the ent0Cprise Cp-64) . 9 See the word riba in Ibn Man^ur Lis ' an al-Arab (Beirut : Dar Sadir Li Taba's wa al-1'ashr, 1968), vol.14, pp. ''04-7, as cited by K. Umar Chapra, 'The Nature of Riba in Islam', Hamdardl si amicus, vol.7; 1934, p.4. -68- "God destroys riba but makes alms prosper" (13:276) and "And whatever you invest in riba so that it may increase upon the people's v/ealth, it increases not with God". {xxx:39) Thus, it is not every increase or growth v;hich has been prohibited. In Islainic jurisprudence it is defined as "an increment in money or goods having no compensation in a transaction". In other words it is a predetermined excess or surplus over and above the loan capital received by the creditor conditionally in relation to a specified period. Thus it includes all types of interest resulting due to late payment or due to unequal exchange of the scime commodity. The question whether the ban on interest should also apply to commercial bank interest charges had for long been lo debated. Those who support the commercial interest think that Islam prohibited interest only on consumption loan, which entitled exploitation of the needy and the 10 Abu'1-A'la Maududi, "The Prohibition of Commercial Interest in Islam", Islamic Thought,(Aligarh), vol.7 (July-September I960), p.36. -69- underprivileged. So far as commercial and productive loans are concerned, Islam has no objection to them. As sucV; there is nothing wrong with modern banking. Although the debate has continued for long time, especially in the christian v;orld after the industrial revolu tion, but it did not carry much weight with the Islamic people. The early Muslim modernists opposed riba but defended interest. Now the idea is gaining ground among many muslim writers and economists that interest is prohi- 11 bited in all its form. The Islamic injunction against riba is in fact a special case of a more general rule which prohibits all financial deals which promote social ineoua- lities. A contemporary muslim economist has asserted that : "Prohibition of riba is the Islamic rejection of a particular mode of capital pricing, namely through positive interest rates, which offends the Ij^lamic ethical philosophy instruments. It follows that to enforce the Islamic injunction, alterna tive means must be found to price capital 11 Mohsin S. Khan end Abbas Nirkhor, "The framework and practice of Iclaniic banking". Finance & Development/ September 1986), P.33., also in detail, see Khursheed Ahmad (in forward), A Survey of Issues and a Programme for Research in Monetary and Fiscal Economics of Islam, T Islamabad : Institute of policy studies, 1981),p.2. It is nov/ a general viev; that Islam is opposed to the principal of a fixed pre-determined return on capital, whether used for consumption or productive purposes and whatever be the rate of this pre-determined return, normal or exorbitant. -70- approprlately, satisfying the requirements of Islamic ethics".!? The concept of the cost of capital is a controversial issue among many Muslim scholars. In modern context, the cost of capital originates from the concept that money is a limited stock and it cannot be a free commodity, hence there should be a price for it. 12 S.N.H. Kagvi, Ethics and Economics, (LeicesterJ Islamic Foundation, 198iT, p.43; Muslim Scholars, generally do not accept the cost of capital, because, if a saver deposits his money in a bank, he can always draw his money from the bank and avail of the 'opportunity* that he may have come across. Therefore, there is no opnortunity cost involved - In fact the concept of opportunity cost of capital was raised by the money-—lender to legitimise to their unlawful interest earnings. Originally there was a lot of resistance on the part of Church to allow usury. Then the opportunity cost argument was coined to persuade it to al ] ov; interest in those cases where a lender losses an opportunity to invest, if it arises during the period his money is being used by the borrower. The church agreed to relax the prohibition of usury on the basis of this argument. From this relaxation followed the wholesale legitimisation. L.ee Muhammad Akram Khan, (Reviev;) "A good discussion paper on interest-free economy". Impact Inter national, (London) (November 14-27,1986), p. 13-14 -71- Modernist Views on Interest : It is generally asked \vhether there is any distinction between riba of the Qur'an and the interest of the capitalist world. 13 This is an important question because it makes one to further ask whether an interest-free economy can come into existence and further that what is the alternative of interest and whether the elimination of interest from the economy can be replaced by profit-sharing system. The modernists "think that the prohibition on borrov7ing and lending at interest can only be enforced in a primitive 14 Islamic society with Islamic morals. This important assumption is considered necessary before interest-based system is eliminated. The main reason for the modernist 13 M.A.Mannan, Islamic Economic ; Theory and Practice, (idarah-i-Adabiyat-i-Uelli, 1980) , p.lS8; A searching crIExcism of some recent attempt to justify interest has been made by Mahmud Abu Saud, who also warns against the tendency of treating money capital as if it were capital goods or real assets, a tendency that has become quite frequent in modern literature. V^estern writer, particularly, equates the price with the rental use of money, giving the impression that to use the service of money is exactly as to use the service of a doctor. The obvious objections to treating interest as rent are that money as a medium of exchange is not supoosed to depreciate and thatyou do not rent something that perishes or disappears once you use it. See for detail, Abu Saud, Mahmud, "Interest free banking". Paper presented at the First International Conference on Islamic Economics, Mecca, 1976, Mimeo., p.164. 14 For an excellent discussion see; S.M .H.Naqvi, Ethics and Economics : An Islamic Synthesis, (Leciester : Islamic '' Foundation, London, 19821 -72- to defend interest is that, the economifr of the Irlamic World have shifted to a greater extent into the western block and no doubt; for this, 'many obstacles of religious nature come in their way to reach the v;estern standard of living and to adopt the monetary instruments and the insti tution of the West. But so far as monetary conditions are concerned, the main facts to be noted is that the Cur'an prohibited riba which according to traditional inter- pretation should also cover interest'. 15 The modernists believe that what Islam prohibits is riba and not interest. In their opinion interest paid on loans for investment in productive activities would not contravene the laws of the Qur'an, for it refers only to riba on non productive loans v;hich prevailed in pre-Irlemic times when people were not familiar with productive loan. The basis of the injunction against riba on consumption loan is that those who borrows are assumed to be in need of such loan for purpose of maintaining some standard of living. To make loan to another without riba, then, is an act of charity. Thus, those with higher incomes, therefore, higher savings. 15 Ulgener, Sabri F., MgDCrtQiy conn • *..i on of Icor ^n.ic Gxov.th , nd Lhe-li^loiuic concept of Inl 'xcs*-;', xLl..niic Keview Clondor), rol/J5, Fo.?, February I9b7, ,..T^.ll-l/^. -73- are asked to make loans to those with lower income who are in need without having to extract riba from the" . The prohibition of riba on consumption loan is also clearly aimed at the allocation of purchasing power from the rich to the poor. The loans can be classified into consumption loan and production loan and that riba forbidden by the Qur'an is that which is connected with consumption loan only. It is thought that in the case of prodaction loan, where, due to investment in productive projects of lucrative return, there would be no sin in demanding interest. Production Loan : Regarding the controversy over the productive and non-productive loans in pre-Islamic Arabia*there are still difference of opinion on this : the modernists argue that 16 Sir Sayyid Ahmad Khan, Tafseer al-Qur'an, vol.1, pp. 298-313, Aligarh 1882., The Indian Modernist, Sir Sayyid Ahmad's viev; is that interest on production loan is not riba and that interest on consumption loan would be riba only if debtor was poor and not if he, was rich and able to" pay interest. This common argument is re;^ cted on the ground that the Qur'an makes no distinction between consumption procJuction loan. They present the Prophet as saying that 'every loan entailing a benefit is rib a" . The Prophet did not differentiate between situation where borrowed capital had relieved borrower's distress, or had been invested in some productive enterprise. -74- people of the pre-Islamic Arabs resorted to riba for meeting their consumption requirements only. Therefore, in their view, the Qur' anic prohibition of riba, in any case, cannot apply to such economic practices v/hich v.'ere not present at that time. 17 Among the Muslim modernists Muhammad 'Abduh is considered as the first among the prominent ulama of modern times who initiated a discussion on the problem. He if: quoted as having recommended bank interest as lawful according to the Shari'ah. it is said that he gave this opinion at the request of the Postal Authority of Cairo. 'He gave a verdict that the profits on the postal saving 17 Cf. Ziauddin Ahmad, 'The Theory of Riba, islamic Studies, vol.17, 1973. The author ha^~mentioned t.Ke Egyptian ulamas, v?ho v;ere in favour of bank interest merely on the above gr:iund. All of them suppose that bank interest is not ' riba'l-fjasi ' ah, hence lawful. They also regarded it as subject to ritlHad as ltiba'1-fadl . The author has presented the view of 'modern Arab 'urema, some of whom held the post of Shaykh al-Azhar i.e.. Mufti Abdhuh, Rashid Rida, Mahmud Shaltut, Abd al-VJahab al-Khallaf, Ibrahim Zaky al-Din al-Badwai are reputed for their opinion that present bank interest is not the same as riba in Cur'an. -75- accounts operated by the Muslim depositors could be lawfully apportioned by them. It should not come under the category of riba, but it should be treated as profit gained from ftiudarabah business undertaken by the postal authorxties' 18 Muhammad Rashid Rida, the disciple of Muhammad 'Abduh followed his master in this respect. A modern Muslim writer says that : i^~--hici uida v.,-;i- "an exponent of the Mudarabah theory of bank business (with interesFJ who very often quotes his teacher in support of the posi tion taken by himself in legalizing bank interest from the Shari%h view point. [But according to authorT scholars opposing bank interest as lawful are generally reluctant to give any credential of authenticity to •Abduh's opinion on the problem as found in the writing of Rashid Rida. In their view Rashid Rida might have sometimes attributed his own opinion to his teacher. {But about another Egyptian writer the author mention that^ "Muhammad Shaltut, a former S-haykh of al-Azhar^ refused to recognize bank interest as lawful, but later on he changed his opinion and ranked himself with Rashid Rida and others to accord sanction of legality to the present bank interest. On the other hand, Ibrahipi Zaky, al-Din'l Badawi remained a stounch supporter of bank interest in his early writings, and later he reviewed his oninion and authoured the book entitled. Kazariyyah'l- Riba'l-Muharram fil '1-Shari ' a'1-Islamiyyah.iy IS Ibid., p.184. 19 Ibid., p.185. -76- 11 ature of Congumption and Production Loan : As far OS the modernists viev.'s on the nature of lopn are concerned, there is absolutely no evidence to supoort the contention that riba of al-Jahiliy ah v;as on consump tion and not on production loan, yhere are a good deal of historical record to.prove that position of the Arabs in Mecca was as a trader, and hence it is difficult to believe that loans v/ere for consumption purposes only. The Cur'anic verses about remitting the principal in the event of the borrowers hardship does not refer to consumption loan. It refers essentially to interest based. 20 Traditional Viev; of Interest ; Trnditional view on irterest greatly differs From modern thinking, where Cur'anic riba and contemporary commercial interests are treated alike. In recent years 20 Most of the interest-based transactions mentioned in the classical commentatires in relation to the prohibitior of riba are loan taken by the tribes from each other, each triEes acting like a large partnership company. (For an excellent factual presentation on the subject with numerous solid references from primary sources, see. Mufti, Muhammad Shafi, Mas' al ah-e-Sud (Urdu) (Karachi, Idarah al-Marif) 1374 A.H.y^ pp.18-23, and 'Riba' in Urdu Encyclopaedia of islam, (Lahore : Da'ira al Ma'arif-i-lsl araiyyajn .3". -77- liter ature supporting this traditional thinking are appearing at an increasing scale. Though it cannot be claimed that an interest-free system vjill replace present interest-based system, but the emergence of Islamic benlcing system (interest-free banking) have generated tlie debate .. • 21 on thxs issue. By traditional view here it is referred that line of thinking v/hich is in accordance with Sha'riaKlaw. The basic attitude of the traditionalist is this that riba and interest are one and the same. According to a well-knov/n medieval Muslim theologian Fakhr al-Din al-Razi the Arabs of the Jahiliyah period recover riba monthly without affecting the sum advanced. When the time for settlement came^ the principal amount lent V7as demanded and if the debtor was unable to Pay, the lender increared the amount in his own favour and granted extension of time. This v^as how the Arabs of the Jahilliyyah used to transact their 21 For a general survey of the Islamic position on interest, see Muhammad Nejatullah Siddiqi, Muslim Economic Thinking^ A Survey of contemporary LiteraturFCLeicester; The Islamic Foundation, U.K.,l98lJ p.63-68.j> and Ariff, ed., Monetary and Fiscal Economigs of Islam, (Jeddah s Inter national Centre for Research in Islamic Economies, King Abdul Aziz Tin1 -^>r 1 tyi \ '"'' -78- lending operations. From the observation of thi5 learned jurirt, it can safely be said that riba which was prevalent in pre-islamivc era consisted in extending the time limit and increasing the amount due so much so that the borrower would at the end of the period of the loan returned to the 22 lender double or even more of the principal sum'. A survey of Islamic history shows that the Muslims always considered riba as forbidden. They managed their economy and carried on domestic and international trade without the institution of interest. Profit-sharing and various kinds of participation arrangement served as ade quate bases for saving and investment and considerable capital was mobilized in mining, ship-building, textile and other industries as well as for v/artime trade. 23 There 22 M.A. Mannan., Op. cit., p.159. 23 Muhammad Kejatullah Siddiqi, Issues in Islamic Banking (selected papers) (Leicester :" The Islamic Foundation : U.K.), p.9, -79- did riot exist any distinction betv;een interest rnd ribe but the conflict betv^een the shall'sh and picctice conti nued to exist es an unresolved problerr, of Irlaniic hit-tory. It was realised that the Islamic notion of interest was mainly a medieval idea and it has no connection with what actually takes place in the modern world. As a result of thii-, KiUSlini economists started to find out the alternative of interest. It is profit and loss-sharing that bears the true spirit of islamic concept of justice. 24 Up till now a good number of literature has come out in the support of the theory that profit-loss sharing system is superior to interest-based debt financing on ground of efficiency. 24 A Current Study on the issue is by Waaar Masood Khan, Towards an Interest-Free Islamic Economic System, TE'eicester : The Islamic Foundation, U.K., 1985)"'The author accepts the position of total orohibition of interest and adopts profit-loss-sharing as the alternative for interest- based financing. He has analysed the issue in the context of secular economy. In this way he has departed departed from the usually assumed ideal-Islamic society condition. He has integrated the profit-loss sharing into the mainstream economies. This is an approach which Muslim economists could adopt to islamise economies, instead of the more- common style of stating Islamic Jurisprudence in the termi nology of secular economies. -80- In this direction, the establishment of Irlamic Bpr>:ing System is perhaps the first big step. A proponent o^^ the traditional viev; says j "Muslim masses to whom freedom from the colonial power end disillusionment vith vester- nized secular leaders has nov; given the chance to reasset their identity and intention in the wake of Islamic resurgence. Islamic Banking provides them a legitimate means of directing their saving into profitable avenues of invest ment. One of the major reasons why the bank ing habit never put dovn deep roots in Muslim societies has been interest. Once interest is eliminated from, the banking operations and the social priorities of Islamic banks impresses the masses they are likely to get involved in a big way. This could revolutionise the eco nomies of the Muslim countries,^^ The Muslim economists' defense of profit and loss- sharing is based on the cirtitude that both interest-free consumption loan and profit-sharing venturer were common practices among the early Muslims. Come scbolars hnvp also observed the rigidity of Islamic 1 avj and its prohibition o^ 7 6 usury never really interfered v/ith commerce. 25 Ibid., p.11. 26 Bryan S. Turner, Capitalism & Class in the Middle East, Chap.3; (London : Heinem.ann Educational Book, 1984T -81- Controver£y_on Hadith Literature : The main contrdversy on the riba ari^en^ due to it5- definition. The riba mentioned in Cur'an implies to that kind of riba which is consisted ir doubling and redoubling of the original amount. This is the riba related to pre- Islar.iic days i.e. Riba'l-Jahiliyah. Although the Cur'an does not give any specific defination of riba'l-Jahili iy.ah, but its nature and characteristic features are manifested in various riba verses of the Cur'an. The m.odernists also think that Cur' an prohibited only slt'ch kinds of pre-Islamic riba as used to make the principal sum. several fold vdth the passage of time. As V7e have mentioned earlier^ in pre- Islamic Arabia riba became due when a man ov-ned another a debt, at the tim.e of its maturity the creditor would ask the debtor will you repay ? Will you increase ? If the debtor paid up, the amount was received otherwise the debtor increased the amount and the creditor extended a further term.. 27 For an authentic study see, Malik, Muwatt'a, Kitab al-buyu', Bab, al-riba, as cited by Fa^lur-Rohman., Op. cit., p.5. -82- Ry the above ftatement, it IF implied that credit v;as offered free of rib a for the first term, arc that the riba was charged only when the debtor failed to discharge the debt at the end of the first term. Therefore, the riba'l-Jahil ; iyah i?: certainly different from the usual interest bearing dealing which stipulates the increase from the very beginning. In comparison to riba' l-jahiliyah , r.nc the loan with interest, in which the increase is stipulated in the first term is something different. Hence the question arises s was it not e common knowledge among the Ai-abs that what Qur' en prohibits is merely riba' 1-j ahiliy -ah and not the riba as production loan ? This is the main point from which the controversy originates. The Qur'en has not mentioned clearly the nature and definition of riba. The fact that there was room for different interpretation of the Qur'anic injunction against riba is traceable to the time of Caliph Umar, in the first half century of It"! arrdc period v/ho is reported to have said "The last to be revealed v;as the verse of usury and the Prophet expired without explaining it to us. Therefore, give up usury or any thing 28 resembling it" . 28 £ee for detail, M. Liddiq Moarzay, "Islamic Laws on Riba (interest) and their economic implication, p.4. -83- Thus not only Caliph 'Umar vished there \«.'ere a greater explanation regarding all aspects of riba, but also that to be safe he opted for an interpretation according to vjhich one must avoid anything which might resemble riba in dealing with others. The Hadith literature covering the various dimensions of the nature of riba is sometimes in conflict with each other. Particularly the traditions related to the exchange of same item. Take for exsmple, ttiB following hadith: Abu Rafi, a client of the Prophet said ; "the Prophet borrowed a young camel from some person, and when camel from the camel of the Sadaqah came to him, he ordered me to pay back the man his young camel. When I told him that I could find only am "excellent" cam.el in its seventh year, he said, 'give it to him, for the best person is he who discharges his debt with something bet-t er".2 9 it is said that the above tradition created doubt that the con version of riba into the "virtue of the goodness' in the repayment of loan" relates only to the purchase and rale of cattle. Regarding this tradition two opinions have been expressed. The first is that, if at the time of repayment of a loan, the excess paid over and above the principal sum 29 Muslim. Sahih, Kitab al-buyu; B. manfatislaf, etc. -84- of money is not rib a in the case of cattle, vhat is to happen to the universility of the diction so very much insisted upon by our-doctors that every loan from which a profit accures is riba. 'The second question that is asked regarding this tradition is that 'goodness in the repayment of loan' in the case of cattle, becomes, when applied to forms of wealth other than cattle, an evil of enormity that it is characterised as an act of v;ar against God and his Prophet. In this way the variation in the Kadith literature creates doubts and controversy. The Sunan of Abu Da'ud and the Masnad of Ahmad b. Hanbal are ouoted to showing that such an unjust distinction between cattle and other forms of wealth cannot be attributed to the Prc^het. A similar Hedith in the Sunan of Abu Da'ud is ; "Kuharib reported that he heard Jabir b. 'Abd. Allah saying that Prophet ovjed him fjabir] some money and at the time of repayment of the loan the Prophet added some money in excess of the principal borrov?ed" . 30 The modernists on the ground of this tradition say that 'no attempt to define riba in the light of Hadith have so far 3 0 Abu Dawud, Sunan, K. al-buyu'B, husn al-qada'; Ahmed b. Hanbal, Musnod, 111:319, as quoted by Fa^lur- Rahman, Op. cit., p.29. -85- been succesEful. The question is asked whether al] the trediticns relating to riba, having been found unauthentic should be rejected in toto ? It is also asked whether the Cur'anic declaration that if people do not give up riba, they should be prepared for a 'vjar from God and his Prophet' refers to such transaction ? and whethei it is vjith leference to these dealings that such hadith have been narrated in vjhich it is said that the taking of riba is as levoltmg as incestf. Regarding the various types of Hadith on riba, a modernist writer says : "The contradiction found in the Hadiths in respect of riba is difficult to resolve. On the basis of isnad alone, there is rot much scope either for the rejection or acceptance of these traditions because, the Sihah works contain a good number of Hadiths on each aspect of these to'vlcs. Every one 31 Ibid., p.30., Regarding this issue, the author thinks that the evolutionary process through which these hadiths have passed, ana these do not seem to be authen tic. But it would be a grave folly to ignore their moral import since they are sincere and performed attempts at interpreting and elaborating the sunn ah of the Prophet and the Cur'anic injunctions. The Fact is that the spirit underlying these efforts was the Cur•anic spirit in respect of economic life and economic system that it wanted to promote. Therefore, in order to understand riba as meant by the Hadith, it is,first necessary to understand what the Cur•an meant by riba{p.30). -8 6- of these Hadith is either Sahih i.e. supnorted by a strong chain of authori ties or is supported by other Hadiths of the level of Sahih Hadith. The surmise made on the basis of qiyas (analogy) are not so important in our opinion as the historical order of these Hadiths, because the historical order is something which is based on certainty, and is rot a mere matter of probability. If these Hadiths are viewed in this way, it becomes appa rent that there i^ a clear process of development involved therein .... This process of development is at the bottom of the contradiction found in Hadith material. Besides, the above- mentioned contradiction most of these Hadith are full of other complexities, Vv/liich we find it almost impossible to resolve".32 32 Ibid., p.20f The author mentions that if there is hand to hand exchange of articles like god, silver, ^•^7heat, dates or salt in excess or in deficiency, that would become riba, in accordance vjith the most widely current traditions. This is called es riba'l ^adl. The author put question that whether the Cur'ar.ic declaration that if oeonle do not give up riba, they should be prepared for 'a war from God and His Prophet', refers to such transactions and whether it is with reference to those dealings that such hadith have been narrated in which it is said that the taking of riba is as revolting as incest. The author quotes the Muwatta~of Malik and the Sahih of al-Bukhari, who say that excesses permissible in a transaction involving cattle, even on credit, and such excess cannot be characterised as riba. The question, therefore, arises as to why such excess in respect of other forms of wealth should be considered riba. Further more, the Sahih of Muslim^ and other Sahih-\>7orks contain hadiths showing that the credit transactions, not only of cattle but even of slaves and coins of copper is permissible, even when such transaction involves excess. ^^® ai~Bayhaqi, ' al-Sunan al-Kubra', (Iriyderabad), 1352. A.H., V : 288, as "quoted by Fazlur Rahman and Op.cit., p. 20. -87- Th e above statement throv/s some light on the complexities of Hadith that concern with jtiba' 1—gadl. In viev.' of these sharp differences found in the Hadith literature that the modernists do not think the commercial interest also comes in the category of rib a.' Lo far as riba'1-nasi * ah is concerned, there is hardly any difference of opinion among Muslim writers because Cur'an hui:^ clearly mentioned it. The controversy arises from the riba'l-fadl which concerns the exchange of the items about 33 which there are contradictory statements in the Hadith. In modern times, particularly when the commercial interest is considered as Gur'anic riba by the Muslim traditionalists, their most persuasive argument ag-'-inst 33 For detail see Fa7lur Rahman n, "A study of commercial interest in Islam", Islamic Thought (Aligarh) 5 (4 & 5) July-Oct., 1956, p.24-46; In fact, the prohibition of riba'l fadl has been looXed upon as a discouragement of barter and a step directed at monetization of the economy. The primary aim of this injunction is, however, to elimi nate the possibilities of exploitation and injustice similar to that which is the target oi prohibition of interest on money loan. See Sheikh Ahmad Irshad "Islamic Economy and the Elimination of Interest", voice of Islam (Karachi), vol.12; November 1963; pp.78-85. -88- interest is that it is unjust to demand a rev.'ard vithout participating in the rifrk of enterprise. But according to thi.^ definition large number of economic transactions can be brought under rib a. ^X'^at abour a doctor v;ho charges a fixed fee without ensuring that his treatment v;ould certainly have a positive effect on the patient ? Again^ why should a lowyer charge a tixed wage rate without being able to guarantee the successful defense of the client ? and why should a labour union contract for a fixed wage rate with out caring for the profitability of the enterprise ? These are the important question when the nature and definition of riba is discussed*'. 34 This is a complex point in Islamic economic literature. For a full discussion see V/agar Masood Khan's admirable. Towards An Interest-Free Islamic Economic System, (Leicester : The Islamic Foun3"at-ion, U.K., 1^85). The author notes that it is not a fixed predeterment reward that makes a payment riba nor is it non—sharing of risk. Riba is an increment on Principal sum, which does not have an equivalent in exchange. The lender gives the money to the borrower and takes it back, but the interest thut the former receives is not compensation tot anything. CHAPl'ER - V MUSLIM CRITICISM OF IMT£RELT /J^;D PROFIT-SHARING During the recent years there has emerged a growing interest in the monetary and fiscal economics of Islani. Based on the contemporary debate in western economies on these issues some Muslim apologists are trying to work out the monetary and fiscal policies of their countries v.'hich they call 'Islamic Economies'. The two most important pillars of 'Islamic Economics' - the institution of Zakah and the prohibition of riba - are fiscal and monetary measures around which most of the contemporary literatures on 'Islamic economics' revolves. It is claimed that if riba is prohibited, banking arid other financial institutions could function efficiently on the basis of profit-sharing. 1 H, A. Khan , in., Muslim V./orld Book Reviev; (London : Islamic Foundation 1981), vol.2, 1-4, p.47. -90- Eut some MuElim apologists have begun to CE>: question v/hether they should carry on their analysi.s v;ithin the framework of the capitalist system or they should depart from the capitalJ.st system and be attached witVi the ethical value system of Islam. In this connection, the folJov/ing remarks of a Muslimi apologist, are interesting that 'one—dimensional thrust of Ivestern cconoinic Liiought, v;hich is based on the vision of eighteenth century England, have kept Muslim economists on the straight and narrov; path. According to him 'Muslim economists are deeply sunk in the quicksand of vestern economic paradigm. From the statements of objectives onwards, they have adopted the western economic paradigm in its totality, "^he major themes of western economics occur again and again in the literature on Islamic economics j 'productivity', •macro-consumption economies', ' full-employment';'econom.ic growth', 'v/elfare programmes', 'cost-benefit analysis' and 'monetarism'. Because the main frame of reference is the v/estern economic paradigm, its tools, mietViodologies, issues and institutions are accepted and questions are always asked in relation to them... These metaphysical notions, and the accompanying borrowing of institutions, ideas and tooli: of the v;estern economic system, are impli.citly lead ing Muslim economists to produce policies that are hardly -91- different from the capitalist and socialist alternatives. In the end they v.'ill lead the muslim countries to the san;e crisis that confronts Indus.trialised societies" . Questions are being asked what is Islamic economics ? Hov; does it differ from the conventional capitalist and socialist models 'i what are its axioms and princj.ples ? \iovi v;ill Islamic economics replace the dominaiit ecc^nomic orders in Muslim societies ? It is generally fell: that the elimination of interest is not the only condition for the Islamisation of the economy, as it is evident from the fact that a socialistic economy, which is contrary to Islam, also functions on the basis of a zero rate of interest in financial transactions. Thus the abolition of interest is not a necessary first step to attain a truely Islamic state. It is argued that ' a transitional Islamic society will have to shoulder this "necessary eviV till a truely Islamic state is finally established, in which case, of course, there would not by any need for the rate of 2 Ziauddin Sardar, "Islamic Economics; From partial to Axiomatic Approach", in Islamic Future (Mansell publishing Limited, 1985, U.L.A. j",~" p. 2of. -9 2- 3 interest to exist any longer" . According to e. modern iiuslini writer "Islamic economics is not capitalism minus interest plus Zakat) or socialism minus stcte control plui 4 Allah". Another Muslim writer explains the rationale behind the prohibition of interest in these words : "If the Islamic system is eraiated simply v;ith the abolition of interest rnd introduc tion of Zakat, this v;ould am.ount to som.e kird of an over simplification. I agree thrt abolition of interest and the introduction of Zakah are the most important pillars on which v^e have to base new structure of society and economy, but they do not go to make un the wViole structure ... Abolition of interest is one of our primary targets. Est ablishrrient of Zakah is a priority of objective in our scheme, But they do not constitute the be-all and end- all of the Islam.ic econom.ies .... our target is a fundamental change in the economy and society : a charge that effects people't attitudes and motives, their consumption and production relationships, society's insti tutions and structures, individual life styles ar;d collective policies at all 1 evels. 5 3 S.IJ.H. Naqvi, Ethics and Economics, Ch.T; p. 109. 4 This remark is made by Ziauddin Eardar, Op. cit., P.199. 5 Khurshid Ahmad made this remark on opening speech in Ariff (ed.) Monetary and Fi^^cal Economics of Islam, (Jeddah j Internal Centre for Research in Islair.ic Economics, King Abdul A^.iz University, 1982) . -93- The rationale of the prohibition of interest if- looked rather with doubt. A numbers of points ere rsised. Regard ing the traditional view that business portr.ers fo-ce the risk of a possible loss whereas the lenders frjce no risk at ell as the reason for prohibiting interest, Horna Katouzion, says there is nothing in the Cur'en and tradition to say that riba is prohibited because it does not involve the lender in the risk taking. He further says that the rate of return on capital bears a relationship to the degree of risk involved in various tynes of investment. The higher the risk, the higher the rate of return. A borrov;er would normally expect a lovjer rate of interest than rate of profit he would have earned on his caoital had he entered a partnership with borro^'/er. In this way, they each take different degree of risk and expect different rate of return. He also thinks that there are various degrees of risk and rates of return associated with different types of business activity. In some partnership, the partner may face higher risk, and even higher profits, than others.But Muslim econo mics does not maintain that business involving higher risks are superior to those facing lower risk, hr it can be seen however, there is no genuinely risk-free decision of any kind, and, in any case, the degree of risk is related to the rate of return. 6 Homa Katouzian, Review on Ciddici's Issues in If] amic Banking (Int er n at i on al .Ton rn p.'] of Mi rid 1 e'East" Studicr, VoTTl7T7~"l^BST, P7595-311. " -94- The emphasis of the Muslim ideal ogee is that the Islamic ecoromic system is a part of the total Irlarriic vay of life. For a balanced ecoromic grov.'th 'curbirg cons- picious consumption, both private and public, and guaran teeing a minimum level of consumption to all, accompanied by fiscal discipline ensuring the channelisation of the additional incomes generated to capital formation', are essential', 'Islamic economics' as it has been already mentioned have still not faced a testing ground. That is v.'hy Islamic economic theories cannot be justified merely on the ground, as they claim, that other prevailing systems have proved a failure. Not only the conceot of interest, but imnortart aspects like the zakah and Islamic financial systems still remain obscure. The discuss Islamic fiscal nolicy within the framev.'ork of Islamic distributive justice. Sakah dominates the whole discussion, as if ,• t3istributive justice is concerned only with transfer payments and as if zakah is the only instrument available. Islamic tViinkers have expressed differences of opinion v;ith respect to Zakahi bose, One view is that Zakah is a form of wealth tax and there- Toru, it is not oexmissible to includ^j income: ir. tin Zakah base. Another view is that Zakah must be paid on a -95- Zakah able asset regardless of v.'hether it ir ovred by private individual or by goverrrriert, it is be'^caase ZaKah ii; earmarked by certain purposes as spelled out ir. tne Cur'an, v;hereas Governinent revenues are not. One v;riter rcjcctJi: tViis point and says that commercial exploitation of mineral resources can be undertaken only by the state and not by individuals. He even goes so far as to sug:jest thiat revf.nues from such statej-ovvmed mires are similar to Zakah, regardless of v/hether these are used to benefit the 7 poor or society as a whole. The question' is generally raised : what will happen if interest is abolished in an Islamic economy ? Muslim writers have produced a good deal of literature on it, but of a very renetitive type . It is claimed that the profit-loss sharing system is superior to interest-based debt-financing on grounds of efficiercv. The prevalence of debt-financirg in the world is explained by the high information cost of profit-sharing system. 7 Mohammad Ariff (ed.) Monetary and Fiscal_ Economics of Islajn., p. 15 " - - - aWaqar Masood Khan, Towards an Interest-free islaynic Economic System. .. . , (iTeTcester : The Islamic Foundation, U.K., 1985), p.i26., It is originally a Ph.D thesis at the University of Boston. -96- IslBm, as it is believed, is neither oppoj-ec^ to competItivt effort nor is averse to the operation of marrcet force.^. But .' -nonopoly, hoarding, speculation and other unlslaniic practices'have been banned. Islam like capitalisn., permits private ov;nership of property including the means of production and grants freedom of ertemrise. It holds trade and tVierefore product'.ion in t, Igh eirtt.t.ni. 9 The Cur'an condemn the hoarding of wealth in following v;ords : "And let not those v/ho hoard un that which Allah hath bestov/ed upon them of His bounty think that it is better for them. May, it is worse for them. That which they hoard will be their collar on the Day of Resurrection. Allah's is the heritage of the heavens and the earth, and Allah is informed of v.'hat ye do (111:1^0) Even Prophet is reoorted to have said : "Fear God and be moderate in your pursuit of wealth, take only that which is allowed end leave that which is forbidden". Ibn. Majah, vol.2, p.725j2144. 10 Zubair Hasan, "Theory of Profit : The Islamic viewpoint". Journal of Research in Islamic Economics, (jeddah \ King Abdul Aziz University, vol. 1-1-sum.mer 19T3, n.l4. -97- Interest and Ir-larrdc Economy : Keepir.g in viev; the functiorr of intererl: .In the capitalistic system, it is argued that interest cannot be cibolished instantly from the "Islamic economy", for if it is done so there are chances that econoir.y v.-il 1 coHapLf^. Because a capital scarce economy in transition to OT: Islamic economy will need a rate of interest vhicri per forms certain desirable functions, ana in the absence of interest it cannot achieve its goals. Thus interest rate would be required to allocate scarce resources opti- • mally among various sectors of the economy. Morover, in a dynamic economy*a positive rate of interest is desired to account for the positive social rate of time nreference, for thf. social cost of cenital consamrtion resulting from its use, and for the declining real value of saving over time. Hence for an economy in transition to the Islamic state, a positive rate of interest cannot be substituted 11 Even in the socialistic system the price of capital is counted. Recent studies shows that planners in the soviet union are anxious not to be denounced as apologists for capitalism; yet they need some form of interest rate (or"discount rate", or "payoff period") for making efficient investment calculations, Lee, Paul A. Lamuelson., Op. cit.,p.669 -99- V..,, !-•>-;,•. li-.isrnir concc;"^t of nrof it-FVint irq. For nr economy in trariEitlon to the I^larriic 5tatc, a '^'':)^ i tive rate of time rireference can move tov/ards 7fro on"!-'-h'.' extensive cut baCK on consumption, v-hich meanr thnt oub] i c Liivir.q v.'ill I el;e tl'ie upper hand and less C'. li.jno' voijld b'., pi Bred on private saving. V.'hile abolishing int.ert.irt ir the tiansLtion period^goveinmert interference v.dll be rece-LEary in creating caving, cut back in c... nrurr.'ption loan, increase in real investmfent ar.d so on. In short, tho; presence of the interest rate is a "necessary evil" in a capital scarce economy during its t:r ?-nsi V j'.-ral r^hr.sc tcj full-fledged Islamic economy. If the rate of interest is at all to be abolished, then it v;ill lead to gross inefficiencies. 17 An im'-iortant function of t;h'= rate of interest ir that it is essential for the effit-ient el location of scarre irvtstinert resources. Interest is a device that serves tvo function.-; in the economy. It orovides an incentive, for neool e to save and accum.ulate i\'ealth. But the interest rate is also a rationirg device; it all ov.'s society to select onlv those investment projects with the highest rates of letuin. Interest rate play a major role in determining tV)e market value of asset. 'V«hen the interest rate drops from a Viigh to low level, there follov/s a rise in the present value of existing machines, land, bons, stocks, yielding a stieain of future return. The rate of interest also perf-.rms the functions of safeguarding the real value of private saving. Besides this interest income provices the reserve funds to finance monetary escalation of m.oney expenditure on depreciation and new investment. 13 L.N.H. Maqvi, 'Interest Rate and Intertemporal Allocative Efficiency in an Islamic Lconom.y, in Ariff (ed.) Op. cit., p.43 -99- Partner;:hip and Profit-£:harirg (Shirkah ard Mudarebeh) : Heplacement of interest by prcf it-i hai irg if- the basic "reform", that has beer advocated by liurlim ecoromists. The reason behird it it that tVie 'irvestor face:, an uncertain worla in which the result of his 14 enterprise cannot be forseen with certainty. What is this 'partnership ana profit-sharing' ? and how much it is different from the concept of interest ? and can this be substituted in place of the functionirg of interest without doing any harm to the economy ? Muslim scholars are at pains to nrove the efficiency of nro^it- sharing system, but not without much comnlexities that are associated with this. There is a general consensus among the Murlims that profit-sharing is legitimate in Islain, end an alLerrativc to interest. \7hat makes profit sharing perm.istible ir Islam, while interest is not, is the fact that it is the profit-sharing ratio and not the rate of return which is 14 Almost every Muslim scholar ha"S" emphasised thij point. For a comprehensive account on this use. Lee H.K . Liddi qi^ Kuslim Economic Thinking., ch., 4 . -100- predetermired. It is because, the owners, of capital have r;0 priority over others ir the form of a fixed rate of return. As for the complexities are concernec^ it is said that the substitution of interest v;ith profit-sharing would lead to monopolies, allocative inefficiency end economic instabilityand socr.it is also felt that inflation might exi^;t in the pi'ofit-sharing system. The re^aj; on is given that some possible factors may contribute the inflation like excess demand, shortage of supply, market regidities and unbalanced resource allocation betv/ern luxuries and necessi- ties, snecially those which can artificially be created. "" Definition : 'Shirkah means particination of two or more nersons in a certain business with defined amounts of capital according to a contract for jointly carrying out a business and for sharing nrofits and loss in-specified proportions. 15 Ariff (ed.) Monetary and Fiscal Economics of Islam., p.260. -101- *• Mudarabah meariE that one party provide?, caoital end the other utilises i^ for but.irer.r under the agreement that proilt from the bu:-iness will be shared accoxding to a specified proportion. Thus^ the most accepted solution for interest is the apolication c^ the principles of shirkah (partnership) and mudarabah (orofit-sharirg) as the medieval Muslim jurists have acceoted th^t as legal. Fow the main concern is that hov; the nrofit-sharirg wor"k?" in an interest-less Islamic economy. The meir economic arguments are given as follows : The Islamic jurists have v/orked out the details about shirkah and mudarabah on the basis of the Qur'an and sunnah. A deeper analysis of the concept of mudarabah reveals that it is essentially an ir:veEtmerit-management agreement. The sahib al-mal (capital contributor or investor) is basically not the lender but the owner of the 16 Muhanimad Nejatullah Siddiqi, Partnership and Profit sharing in Islamic Law, (Leicester "; The Islamic Foundation, 1935T7 P.15. Also, under (Hudarabah, the party that provides the merchandise and the party that engages in business may each comprise many persons, i.e. the capital may be provided by several persons and the business miay be carried out by several other perrons. Alternatively, capital m^y belong to one perron anc the carty that utilises it in buriress may be many or several Derrsons may nool their canital vhile one Derson uses if for carrying on business. -102- busir.ess to the extent of his Eheres ir the total f ir ancir.g of the buEiness. The mudarib, (manager or entreprciPeur) inanacjes the irivtstment fund placed at his: disposal by the sahib al-rnal ir accordance v/ith the mudarabah agreement. Mudarabah is a form of equity which is temoorary in nature and is liquidated as soon as the objectives are reali7ed. In accordance with the rationalebehind the orohibition of riba, the manager of Mudarabah fundp is not entitled to a fixed return for hir management services irresnective of v/hat happens to the business. If there is a orofit, he shares the profit in an agreed prooortion as a rev;ard for his managerial and entreprenurial services. If there is a loss, he gets no rev;ard^ and his loss amounts to the opoor- turity cost of his services. However, he shares the loss if he has a share in the equity of the business, but only to the extent of his share because losses according to the fuqha constitute erosion of equity. This fits perfectly into the rationale of the Islamic model of Riba-frec economy and iiuplies that the spirit of business releticnshin prefered by the £.hari ' d"'is "investment management" and not "borroving- lendirg", taking into account the modern connotation of these terms. -103- Equity financing in place of loan-fin arcing vill help eliminate the possibility of a large superstructure of finance being raised on a norrov; equity base. It would help bring about a wide dispersal of owrjerchip of business ana contribute substantially to the realization of the 17 goal of equitable distribution of income and v/ealth. It is said that expected rate of profit in the economy will play the al]ocative role which is supposedly played by the rate of interest in the modern economies. Accordingly , capital as a scarce factor of oroduction, wil] have e price, not in the form of a pre-determired rate of interest, but in the form of a probable rate of return throv/n un by the profit-sharing system. Cavers will have the exoected rate of returns to bank deposits on the incentives to save and deposit their saving in bank investment accounts. The profit-sharing arrangement would result in a I'ust and equitable sharing of social surplus. ' The system based on interest is unjust because it guarantees a definite positive return to the financier whereas the value productivity of investment is uncertain. 18 Thus, it is claimed that profit- 17 K. Umar chapra, "Money and Banking in an IslBTnic Lcononiy", in Ariff,, Op. cit., p.153. 18 M.M. Lidciiqi, i£sues_ir._islairiic_B5nking., p 125 -104- sharirg ryptein is -not only fearible, it is also more efficient than the syrtem based on interest. This profit-sharing, which includes also the ri^.k sharing is considered the only alternative for interest. Muslifn apologists believe that principle of profit-sharing will ensure mobilisation of saving, its channelling to productive enterprise, and its allocation in accordance v;ith social preference will be achieved by the rate of profit. This rate of profit, according to them, will be more efficient mechanism for allocation of re; ources than interest. *'The rate of interest tends to be a "oerverted" price and reflects price determination in favovir of the rich, the more "creditworthy" the borrower, the lov/er the rate of interest and vice versa. The result is that "big" business is able to get m.ore funds at a lov/er nrice because of its "higher" credit rating. Thus those v/ho are most able to bear the burden, because of their bigness claim.ed "higher" nroductivity, bear the least burden. 19"I n tliis system if there is a profit, the entrepreneur shares the profit in an agreed proportion as a reward for his managerial services. 19 li. Umar Chapra, "Money and Banking in An Islamic Economy" in Ariff., Op. cit., p.160. -105- If there is a loss he gets no rev/ard. Hov.'ever, he sharei^ the loss if he has a.share in the equity of the business. It is further argued that a wholly eauity-based system, with the rate of profit not fluctuating as erratically as the rate of interest and the distribution of the total return (profit + Interest) between the ent-i^epreneur and the financier determined more equitably,^ should ori the contrary tend to have the'effect of reducing rather than accentuating > 20 economic instability. As regards the differences between profit and interest it is said that Islam has recognized the profit only in a restricted sense. Because unrestricted and 'abnormal profit' which a capitalist earns is a clear case of exploitation, ^'/hile Islam recognises normal orofit, it prohibits interest. Unlike interest profit is the result of productive efforts. In the case of interest, nroductive effort is not at all made by the lender, but in the case of orofit that element remains throughout the process of production and marketing. Thus profit is the reward of progress. In the case of interest, the element of loss is altogether missing because it is fixed and certain, whereas profit is a payment for the assumption of risk by the 20 M.Umar Chapra, (in) Muslim World Book Revi-rw, (London : Islamic Foundation, 1931) , vol.2, "p.Cl -106- ent ^^oreneures . It is er.t'prnrereur' s ircome vrhich is uncertain and unknown. Bec?u?e of these vast differercer, it is claimed Islam has allowed nrofit and condemned interest. Profit-sharing and "Islamic Banking " s Muslim economists, in recent decades, ha-v^e started to work out different models of Islamic banking, based on profit-sharing instead of interest. Thus profit-sharing is considered as true ideal of Islam. The proposed 'Islamic bank', it is argued, v:"""-! work "as a financial intermediary mobilising savings from the public on the basis of mudarabah, and advancing canital to entrepreneurs on the same basis. Profits occuring to , entrepreneurs on the capital advanced by the banks are shared by the banks according to a mutually agreed percen tage. The bank also provides a number of familiar banking services against a fee or a commission. The bank's own share capital also goes into its business of offering banking services and advancing capital on a profit-sharing basis. Making allowance for administrative costs, the net revenue on all these counts constitutes business profits, to be distributed over the entire capital involved : public - 107- deposits on the basis of mudarabah and the bank'r- share capital. The percentage profits so worked out are then shared with depositors according to a proportion announced in advance. Profits received by the depositors in mudarabah accounts are, therefore, a percentage part of banking profits which rnainly accure to the bank as a percentage part of the profits of enterprises financed by 21 it." -^ Thus, in mudarabah system,instead of interest which is unjust, profit will play the allocative role. The advantage of this system is that the banks as suppliers of investable funds examine the projects presented to them and supply investable funds only when they are fully satisfied that the project will result in the production of a value larger than that invested^ since the bank's ov,m returns 22 depend on it. "In the interest based system sur^nly of investable funds by banks involves creation of nev; money. This applies to the profit-sharing system also. T3ut the 21 M.N. L>iddiqi, "Islamic Approaches to Money, Banking and Monetary Policy - A Review", in Ariff., Op. cit., p.30. 22 M.N. Siddiqi, Issues in Islamic Banking, ch.5., p.127. -108- creatior, of nev/ money in profit-sharing system is effec tively linked with the genuine possibilities of creating additional value. It may not be so in the interest-based system where credit worthiness of the borrower is more important thari the prospective productivity of the project' Mudarabah ; An Analysis : The claim that profit-sharing applied to Islamic banking system, has the unique advantage of not being prone to inflation has been challenged by many economists. It is argued that profit-sharing system offers no solution for inflation. The reasoning is that "in an Islamic economy, where interest is replaced by orofit-sharing, the higher the profit share ratio, the lower the demand for liquidity and the greater the velocity of circulation". As the mudarabah partnership depends on profit-sharing the profit and interest cannot duplicate each other's role, because in a perfectly competitive markets all profits are normal profits and are, therefore, inadequate to perform the functions of a positive rate of interest. Moreover, profit maximisation under the mudarabah will lead to the grov/th of monopolies and monopolistic market would create economi cally inefficient allocation of resources both in a static 23 M.A.Khon, Inflation and the Irlomic Econorry., Op. cit., p.237. -109- and dynamic market situation. The argument runs thus : "Interest rate cannot be abolished just by an administrative fiat, without making alternative arrangements, financial and real, to ensure the effective performance of these functions ... since a 7ero rate of interest is a property of an Islamic economic system and not of capitalism Thus, if interest rate is abolished by an administrative fist while leaving all other capitalistic insti tutions intact, the Islamic 'reform' may end upVpushing the economy away from the Islamic ideal. To put this argument formally, while a zero rate of interest is a necessary condition for an Islamic economic order, it is by no means a sufficient condition in that this step, all by itself, need not usher in an Islamic society, based on al-Adl".'''* The above proposition that elimination of interest will not be a sufficient condition for an ideal Islamic economy, deserves to be considered carefully. He may right or wrong, but it is fact that there is not any established Islamic economic model available in the Islamic world for empirical studies. Even those "economists" v;ho are full of praise for the mudarabah system, cannot'justify their claim miftrely on acholaf.tic ground. As a matter of. fact it has yet to prove its potentiality. As one critic has noted 24 S.l^.H, Naqvi, "Interest Rate and Intertemporal Allocative Efficiency in An Islamic Economy"'^ Tr\ ArifP., Op. cit., p.76~ '" "'" -110- th at existing literature on profit sharing system hardly can help to describe and analyse the situation, problems and prospects of Islamic bank. He examines that Islamic banks have to adopt their business strategy to market conditions which are formed by the dominating conventional banks and that Islamic banks cannot neglect the market rate of interest but must base their calculation on it; and without certain innovative strategies of the Islamic bank's management it is more probable that, in the long run, an Islamic bank would be less instead of more success ful than an average interest bank. Furthermore, the search for innovative strategies for the profitable employ ments of funds might fP^m the Islamic banks, on the long run, into international operation banks, especially active in the financing of technology transfer and technology 25 development for the Muslim countries. It is also argued that profit-sharing will encourage entreprise leading to an increase in the volume of invest ment and,the level of unemployment. Because the 25 Volker Fienhaus, "Profitability of Islamic PLS Banks competing with Interest Banks j Problems and Prospects", Journal of Research in Islamic Economics (Jeddah), vol. 1, Ko.l, 1983,p.38. -111- ent-1-Gprerieur's willingness to take risk v.'ill increase 'as the obligation to repay the borrowed capital as well a.-- to pay a pre-deterniined rate of interest to the bark ir replaced by an obligation to share the profit and/or return the capital (or whatever remain out of it in the eventuality of loss)., depending on the availability of funds, '^ro"'ects with expected yield not high enough to cover the risk premium, and the rate of interest and the entreoreneurial reward equal to possible alternative earnings, but sufficient to cover entrepreneur possible alternative earnings in view of the expected rate of profit and. the ratio of these profits to be retained by the ent^^ epreneurs, will now fully qualify for ent'iE preneural effoit.'*^ It is also argued that 'Islamic economy', composed of interest- free banking and Zakah will eliminate the danger of dep ression, and that Zakah can be used as fircal instrument to penalise hoarding, and in this way price stability can be maintained in an 'Islamic econopiy'. On the contrary there are others v/ho hold the views that 'isJarnic economy' is prone to fluctuations. The reason given ir thnt interest ?6 M.^•'. Siddiqi, Issues in Islamic Banking., Op. clt., p.128. "" -112- rate is replaced by profit-sharing and profits are vola tile by nature. The absence of the interest rate* instru ment will rot cripple the monetary policy in an Islamic economy, since interest rates as an instrument of monetary policy is not all that powerful even in a capitalist set-up. It is stressed that monetary policy in an Islamic economy can be achieved by regulating the sunnly of money. L-ome controversy seems to exist with regard to the "profit- sharing ratio'^ One writer attaches considerable importance to it as an instrument of monetary policy. This ratio, on the basis of u'hich profit is to be shared between the bank ar.d entrepreneurs, lends itself to be adjusted upv-ard or dov/nward by the central bank for the purpose of bringing ond about an equilibrium between supply of'''demand for in vest- able funds. One writer insists that a profit-sharing ratio should be determined by market forces and that the central ban]', should refrain from meddling v/ith it. Another objects to it on the premise that the manipulation of this ratio ! by the central bank v.'ould amount to changing contractual j ; rel ationshipsi in the economy. It is argued that rrofit- sharing is a contractual agreement between two parties and that this agreement can be changed only by a mutual consent -113- and r.ot by a third party such as central bank. Arbitrary changes in the profit-sharing ratio will upret the one- ration of the economy. It is very much doubted that profit car Derform the function of interest rate in a dynamic economy, becaure a free enterprise system cannot coerate on the basij-' of unlimited liability to risK. The element of risk must be kept -within a reasonable limit. 'ivith the abolition of interest/ private sector savings and capital formations are bound to decline and in this way profit-sharing system will be highly unstable. 27 riohammed Ariff" (ed.) Monetary and Fi.^r;il Econom.ics of Islam, p.14 cc^^cLucIO^'; L.ome modern rnuslim v.-riters have tried to Drove that 'riba' of Gur'en is equivalent to usury end dooi: not ar.''"'ly to interest on productive loan. They think that the Gar'an niokec distinction between busiriess and rjba o: inlertii-t. But this view is quite recent which arose the ninetienth century.Trcditionelists/ riba covers- all kinds of interests irrespective of nature and function of loan. The majority of Muslim scholars and jurists do not find any distinction betvjeen riba of the Cur'an and commercial interest. They were claim that commercial loans/in vogue during the early period of Islam. The fiqh literature has divided the concept of riba into tvvo broad categories i.e. jziba' 1-nasiah and )ai.ba' 1-fadl, but the one ooint of similarity is found in the literature. Almost all the Jurists have defined the term, riba aL'. ar increase in the principal amount. The oractice of nayirg and receiving jnterrrt has been a controvertJ--l rrntl.or evtn in the early Islamic society. After tl'ie prohibit-i'on -115- of rj.ba, ?. number of evasive methods became commor amonq the Muslims. The shafi'is, the leitter Hanafis and Imamis have recognised such methods of evasions, while the Kalikis, the Hanbalis and Saydis reject them. The main alternative to interest, on the conim.ercial level ' ii; profit-sViaring or the ftiudarabah. It is considered as an Islamic alternative tc lending and borro\ving against a fixed rate of interest. The "Islamic economists" vievw'that there is e considerable moral and. social superiority in profit sharing as compared to ordinary lending and borrowing. From the economic point that of view, they argue,/it serves as an adequate basis for saving and investment. It affects the supply of money, linking it directly with transaction needs of a community, as ^'/ell as the allocati.on of financial rerourcer ir direct resDonse to production possibilities. Hov-e^'er, the claims of rome muslim economists that profit-sharing system vdlT result in a just and equitable sharing of social surolus still lacks the empirical basis. It is a]ro said that the allo'-varce for profit m^aximisation under Mudarabah v/i ] 1 lead to a grov.'th of monopolies, and as a re.-sult'monopolj-f: ti c market would create inefficient allocation of resourcer. -116- Hoviever^ this vievT has beer challenged by rr.ary contermDorai Muslim -writers. It. cannot be denied that tVie sonrch for an alternative mechanism is by no means over. BIBLIOGRAPHY BOOKS IN ENGLISH 1, Ahmad, Khurshid Towards a_Morietary ard FJFcal SyEtem"of_ Isl_arn7(^Is 1 amabad Institute "of iPolicy Studies, 1981). 2. (ed.), Studies in I s 1 ami c Ec on o- mics (Jeddah j International Centre for Research in Islamic Economics, King Abdul A?iz University, 1980) . Ariff, Houhammad (ed.), Monetary and Fiscal Econo- of Islam, (jeddah : International Centre £or Research in Islamic Economics, King Abdul Azi? University,198?) Council of Islamic Report of the Council of Islamic Ideology Ideology on th e E1 x m i h at Tor" o '£' Interest~'f fbm" the Econoniy TTiTarnabad s Government of Pakistan,1980). 5. Galbraith, J.K. The Affluent Society,(Boston s Houghton Miffling Coinpony, 1958) -118- 5. Goiteir, L.d. A Medlterr aneor wOcic--t.y, vol. 1, Economic' Four.datior. - tlie JevrisVi CoininaritieE of the Arab V;orlri as portrayed in the Docurn(-:nts of the Cairo Geniza. (BerKley : Calif., University of California Press, 1957). 7. Huq, M. Azizul (ed.) Readings in Islamic Bankj ng (Dhaka : Eanglades'h Itlemic Banker's Asscciation,1982). 8. Hussain, Mushtaq Interest on Money and Islam, A suggested Analysis, Report of First Regional Conference of the M.S. A. of U.L. Canada, (Calif orni fi: Standard University U.S., 1966) (June 10-12, 1966 : 9-14) 9. Iqbal" Munvar, and A Survey of Issues and a Fahim Khan Programme for Research in Monetarv and FJscal Economics of I sl_arp, TKing Abdul A2.1? University, l'9Bl) 10. Islamic Economics Thoughts on Islamic Economics, Research Bureau (Dha1 11. Islamic Council The Muslim \i;orld and the Future of Europe Economic Order, (London : lb Governor Crescent 1979). -119- 12. Khan, Waqar Masud Towards an Interest-free l5lamic THe Econorr.ic System, tLercester Islamic Foundation, U.K., 1985) 13. Mandel Ernest Late Capitalism, (Norfolk ; The Thetf or3 "Press Limited,, 1983) . 14. Mannan, M.A, Islamic Economics ; Theory and Practices (Lahore : Shaikh Muharamed Ashref, 1970) 15. Muslim., A.G. The Early Development of the Islamic Concept of Riba, • (current British Research in Middle Eastern and Islamic Studies, University of Durham, Centre of Middle Eastern and Islamic Studies, 1971) . 16. The Theory of Interest in Islamic Law and the Effects of the Inter pretation of this: V'v the HanafT School uDto the end of the Mughal EmDire, (Unpublished. Ph.D. Thesis, University of Gl asgov;, 1974) 17. IJaqvi, L..K.H. Ethics and Economics ; An islamic Synthesis (Leicester : The Islamic Foundation, U.K., 1931) -1?0- 18. Fat el, M.. Adam Muciarabah, (Karachi i Pakistan Law House, 19S1) , 19. Cureshi/ Anwar Igbal Islam and the Theory of Interest, '(Lahore s Lh. M. Ashraf, 1974) . ' 20. Rodinson, Maxime I slain and Capital ism, tr. by Brian Pearce, (Luffolk : Allen Lane, 1974) . 21. bainuelson,, P.A. Economics (Singapore : Mc Grew Hill Book Company 1985). 22. Lardar, Ziauddin Islamic Futures ; The Shape of ideas to come» (London:Marijell, 1985T7 23. Shah, Syed Yaqub Islamic Jurj .snrudence> (Lahore Fe r o 7 e s ons, 191TT7 24. Siddiqi^^l.,t:eiatullah Partnership and Profit-Sharing in Islamic Lav/, (LeTcester : The Islamic Foundation.,U,K.,1985) 2^"J . Muslim Economic Thinking i A Survey of Contemporary Literature. (Leicester : The Islamic Foundation, U.K., 1981) -1?1- 5. Issues ir Islamic garkir:j, TlTeicester j The IsTaniic ''•'•''-uv tior.,U.K., 1^83) 27. Udovitch, Abrahaiti L. Fart.nershj.p and Profit ir '(Medieval Islom^ TPrTnceton, l-^ Prir.ceton University Press, 19 -122- B - JOUI Abbasi, Masud Ahmad "Interest - An Economic Study on the Three Economic Cyst err". Islamic Revieiv, (London), Korch-April 1969 1957 vol. no. 3-4, pp. 28-3 2. Abdullah Khalid "The impact of Islamic Economacs" Araiba.(London), Tov, 19S4, n.5S. Abu Sa'ud, Muhammad "Islamic Viev; of Riba", Islamic Review. (London), vol.45. No.2, Feb. 1957, pp.9-16. Ahmad, Mahmud "Semantics of Theory of Interest" Islamic Studies,(Rawalpindi), V0.6, no,2, 'June, 1967., pp. 171-196. *hmad. Sheikh Mahmud. "Interest and Unemployment". Islamic Studies. (Islamabad) Vol.8, No.l, March 1969, i pp.9-46. "Judaism and Interest", Islamic Studies,(I siamabad), Vol.20, No.l, Summer, 1981, pp. 47-81. -123- 7. Ahmad, oyed "Reflections on the concept and the Lav; of Rib a" . in Outlines of Islamic Economics, (Indiana), A.M.-.i-'.# "1977, pp. 26-34. Ahmad Ziauddin "The Theory of Riba", Islamic Ltudles, (Is] cm.;bad), vol.17, Fo.4, 1978, op. 171-85. Al-Jarhi,Mataid Mi "A Monetary and Financial Structure for an Interest-free Economy : Institutions, KecHamTsiri anaPol i£Y." ' in Z, AHmia Tl'^STTTTir, P".6^101. 10. The Relative Efficiency of Interest-tree Monetary Economics The Flat~Money c"ase, In~ K. Ahmad (19S0), pp.85-1]8. 11, Chapra, M. Umar Money and Banking in an Is1amic Economy, in ArTf?"Tl9827X17, pp. 27-68. 12. Chapra., M.Umar "The Nature of Riba in Islam" Hamdard Isi amicus, vol.VIII, Number ~l/Lpfing"1984, pp.3-24 13» Chowdhury, M. Alam "The Doctrine of Riba". The Journal of Development StudTe's'," "rPeshswaf)", VoT.'l"l, 1979, DO. 47-58. -124- 14. ,omoyvi, Joseph "Lcoromic Theory in tht: Claeijical Arabic Literature", studies in Islarn (Delhi), vol.2, iVo.'i, ' Jar.uary 196--) : pp. l-o. 15. Far rukh., Om ar "Banking and InsuranC' ir Relation to the li-lsmic Concent of Riba" in M.A. Khan (ed.), International Isiamic Conference, Tl s 1 ani) ab ad 7, 19 7 0,"" "po .'123-9, 16. Farid, C.M. "Is Interest Obsolete ? " Voic_e of_Isl_arTi (Karachi), voT. 8,"KorrO, July 1964 : PD. 495-502. 17. Fazlur Rahman "Riba and Interest", Is^landc btudies ^Karachi), vol.3, Fo'.l, March,- 1964: 1-43. 18. Fazlur Rahman "A Study of Commercial Interest Gunn suri in Islam'*, Islamic Thought (Aligarh), vol.5, ~No.'4' i 5, July-October,1953: pp. 24-46. 19. Huq, M. Azizul Islamic Banking and. Some Possibld Impact, in Islamic Economic Research Bureau,1982, op.158-74. 20. Prohibition of Interest and some Common Micgivirgs - CIassification from Islamic Shari'nh oointsof vievj, in Hua (1982) ; pn.iv-i3-^6. -125- 21. Haque, Ziaul "RibQ, Interest and Profit", Paki_stan Economisj:, (Karaciii) vol. 2'OV'Kor21-2"'2, May 24, 31, 1981,- pp. 14-35, pp. 13-30. 22. HaEan, Zubair "Theory of Profit s The Islamic Viev/point", Journal of Research if- Islamic Ecqnomics fjeddah), Vol.'l, f983",' PP.'^1-16. 23. lioma Katouzior Book Reviev; of Siddiqi's Issue im Islamic Banking (U.S.A.), int. J. Middle East Stud. Fo.l7 Tl^SST," pn. 295-3117 24. HUE sain, Zahid "Prohibition of Interest in an Islamic State", Pakistan Economist, (Karachi), vol. 19," ^To.4 6, November 17,1979, pp.17-21,26. 25. Irshad, Sheikh Ahmad "Islamic Economy and the Elimi nation of Interest", Voice of_ Islam (Karachi), vol.l2,No72, Movember, 19 63, pp. 78-85. 26. Kamali, A.H. Decembej. ^-o, ± vol.18, no.49. December 9,1978, pp. 32-3; vol.18, no.50 December 16, 1978, pp.19-20, vol.19, No.l, January 13, 1979, op. 27-9. 27. Kahf, Monzer "Islamic Economic System Reviev?", Al_2l_tihad, (U.S.A.) January 1978, po. 41-52' -126- 23. Kabf, Monzer Fiscal' and Moretary j^pljcies_^ir ArT Is 1 anilc Ecoriorriy"', i r~ Arif f (1932), DP. 125-44. 29, Karsten, Ir.go "Islam ard Financial Ir. Ler- mediation", IMF Lta£r Papers, Marcfi 1982, t.p. fOB-42/ 30. Khan, Mir Sa'adat Ali "The Mohammedan Lav/s Agaii-Et Usuary and how they are Eved'.ed", Comparative Legislatior, vol.11, 1920, pp. 23 3-244. 31. Khan, M, Ajmal "Islam and Usury", Gtudies in I_£_l.a''"' (New Delni), vol-.^l^'^n'o.: April, 1964, nv>. 96-92. 32. Khan,Muhammad Akram "Reviev; : A Good discussion Paper on Interest-free Economy' Impact International (London), November, 1986, pp. 14-27 . 33 "A Survey of Contemporary Islamic Thought on the Institution of Interest", islamic Education, (Lahore), vol.6, no. 4, July7 August, 1973 . 34 "Inflation and the Is 1 amic Economy t AClosed Economy Model, in Ariff"Tl932 5T" pp. 237-&8. -171- Ki£ter, K.J. "The Market of the ProDj-c-t" , Journal of the Economic and Social History of the Orient Vol.e, Mo.3, January 19 65, pp. 272-276. 3o Lallv;ala^ J.I. "Inflation in Muslim countries Implications for an Islemic Economy", in Ariff (1982), pp. 269-86. 37. Mann an, 14. A. "Consumption Loan in Islam", Islamic Reyiev; (London), Vol.58, No.3, March 1970, pp. 19-22. 38. Alio c a tiv e_E£fi^ ci ency, DecisTon and Welfare in Criteria ir an Interest-free~Islamrc Econ omy A Comparative Policy ApoF'^ach, in hrlTl^l^Wiy, PP. 43-74. 39. Haudoodi, Syed Abul Ala "The Prohibition of Commercial interest in Islam.", islamic Thought (Aligarh), vol.vil,"" No.3, July-Sept.19 60. 40. Mohsin, M. A Profile of Rib a-Free B ankirj_g, in hrxIT, ri982T7 pp. 187-210. -128- 41. Naqvi, S.M.H. Interest Rate and Intertempora] Allocative Efficiency xr an TiTaniic Economy, in Arifr'7i9S2), pp. 75-106. 42. ^•oorzoy, M.Liddieg "Islemic Laws on Riba (interest) and their Economic Implications" l^nternational Journal of Middle East studies (Can;bridge University) FeH7 l584, Vol.14, pp.3-17 43. Qureshi, A.I. "Views of Islam on Interest", I slamic Review, (London), Vol.45, NO.7, Jurly, 1957, pp. 5-10. 44. Rushdi, A..A. Interest Rate Redundant Instrument of Monetar:a£Yy . PoTrcy, m Islamic Economics Research Bureau (1980), pp.153-80. 45, On I siamic Monetary Policy, rn Islamic Economics Research Bureau (1982), pp.130-46. 46. Saeed, K. Amjad "Business Finance in Islam", I^nvestment and Marketing, (Karachi) VoT.lS, NO.7, November, 1979, pp. 11-15. 47. ii-hah, Lyed Ya'qub "Islam and Productive Credit", islamic Reviev/, (London), vol.47, Ko.3, March 1959, pp.34-7. -129- 43. Sharraf, B.A. "The Fundomeritals and the ros^sibilities", Arabia (London), October, 1984, p.44. "Theories and facts about interest • ^. rate", Ar abi a (London), May 1984, P.54 50, "Abolition of Interest in a modern Banking Systeiri", Ar abi a (London), August, 1984, pp.46-47. 51. Ciddiqi, M.A.M. "Riba-Usuary and interest : Qur'an's verdict i? clear". Islamic Ord_er, (Karachi) vol.2, No72, 1980, pp. 40-70. 52. Eiddiqi, M.Nejatullah Islamic Aooroach to Money, Banking and Monetary Poricy - A Revrev; in AriFF"Tl9s5Tr~pp7T?^4?T Economics of Profit-Sharing, in Z. Ahmad; (1^57, pp.163-201. 54. Timur., Kuran "The Economic System, in Contemporary Islamic Thought : Intemretation and Assessment" (U.S.A.), Int. J. Middle East Stud., vol.18,1986,pp.135-164 -130- 55. Udovitch, Abraham.L. "Cominerciel Techniques in Early Medieval Islamic Trade", in Richards, D.C. (ed.). IF lain and Trade of Asia, (Cxf ord), 1^70 pp. 57=6?. 56. uzair, K. "Central Banking Operation in an Interest Free BankTng System''", m Ariff Tl9§2y, pp. 211-36. 57. "Some Conceptual and Practical Aspects of Interest-free Banking", in K. Ahmad, 1980, pp. 37-57. 5 8. Wi1s on Rodn ey IslaJTiic Banking and Finance, Middle East and Forth Africa, 32nd edition,TLondon : Europa Publication Limited, 1985) ,u.l56 ,9. Zarqa, M. Anas "l^slemic Economics ' An Approach to Human V7elfare", Tn K. A?imad (1980), pn, 3-18. 60. Ulgener, Sabri F. "Monetary Conditions of Economiic Grovrth and the Islamic Concept of Interest", Islamic Review, (London), vol.55. No.2, February 1967, pp. 11-14. -131- bl. Zainan, ^.H. "Islam vis-a-vis irteiest rate' Isloirdc Culture, (Hyderabad), Vol. XL., No .1, January 19 66, PP. 1-12. Zarqa, I"). Anas "Capital Allocation, Efficiency and Growth in an Interest-free Islamic Economy"^ Journal of Econorrdcs and Administration TJeddah), November 1982, pp. 43-55. •132- C - BOOKS IK ARABIC Abd'1-Bir, Muhammad Zaki al-riba wa ak'1-'1-mal'1-batil (Riba and taking of irvalid PropertyT, Col'Kuwait : Dar' 1-Qal am, 1982) Abu Zuhra, Muhammad Buhuth fi'1-riba ^discussion on Riba) (Kuv/ait : Dar al-Buhuth al- •Ilmiyah, 1970) . Al-Amin, Hasran, al-fawaid'1-Masrafiah •Abdullah wal '1-riba (The Bank Interest and Riba) (al-Qahirah : Al-ittihad'1-Dawli lil Banuk'l-Islemiyah,1932) 'Abdou, Muhammad 'Issa al-Fa'8dah'a; a ra»s al-mal surah min suv;aral-riba (Interest, on Capital is a Farm of Riba) (Beirut ! Dar al Fath, 1970) Limadha harrama Allah al-riba (whv Al^lah has prohibited riba) (Kuv/ait : Haktabah al- •Manar) , r . d _133- 6. 'Atadou, MuhaJTimad'Issa Wad • al riba fi bin a al-Iqt-.i- sadi (Position of Rlba in blie EconomTc StructurelT TKuv.'ait ; Dar al Buhi th al-'Ilrrdyah, 1973) . al-Riba wa deuruhu fi istighle I, maw arid al Shu'ub ^^iba and its role in the exploitation of the incorne of nation). (Kuwait L Dar al nuhuth al- •Ilmiyah, 1969). 8. Abu Ehahabah, Muhammad Kazarat al-Islam ila'1-riba (Islam '£ view point of Riba) ( al-Cah'ir'ah' ':' "Ma jrna* al-Buhuth al-Islamiyah, 1970) . 9. Daroz, Muhammad al-Riba fi nazar al-aarun al- •Abdullah Islami (Riba according to Islamic LavQ iKuwart : Maktabat al-Manar),n, 10 al-Kisri, 'Abd al-Sami muqawv;amat' 1-Iqtisad ' 1-1 si ami- (values of Is 1 amic Economics) (al-Qahirah : ^Maktabah" Wahbah, 1975). 11 Kazariyat al-lslam al-iqti saciiy uh (Econotaic Theory of Isl Bin) (al-Q^iirah : Maktabah al- Anjalu al-Hisriyah, 1972). -134- 12. Qutb, Sayyid Ta-fJsir ay at al-riba (Exegesis of the Verses of the Qur'an)'"related to "Riba) (Kuwait : Dar ar-BuHuth aT-^ 'Ilmiyah, ) n.d. 13. al-riba fil'l-Islem wa fi nazariyat al-iqtisadiyah al-hadithah (Riba in Islam ard in recent (KuvTSTt L al-Dar al-Kuv;aitiyeh li'1-tiba'ah wa'1-Nashr, ) n.d. 14. Rid a, Muhammad Rashid al-Riba wa'1-mu'amalat fil-Islam (Riba and Trans actions in I: ;1 am) (al-Cahirah": ~Maktabet ~al-~ Gahirah, I960) . 15. 'Uthman, Muhammad Fathi al-tarikh-al-Islami wa madhh ab-al-Maddi f i-al-1afs eer (Hirtory of I si am and HaterialiStic" religi.gio; n in the 22.01016^^ ££y r~ (al-Dar al-Kuwait, 1969). 16 al-Fikr al-Islami wa'l- tatawv^ar (Is 1 amic Thought, arid Ch ange) 2nd ed~ TKuwait : al-Dar al Kuv/aitiyah, 1969) . -135- 17. 7.aki al-Din, Ibrahim !'"'azariyat al-riba al- tnuharraiTi f i ' 1-shari ' at'1- I si ami yah. (The Theory of the or oh ibibed Interest in ohari'^_ah) (al-Qahifah: "Al-Majlisul' 1 A'ala Le re'ayate'iFanoon wa'l Adab wa'l'uloorri * 1-if tarne'iyeh, 1964). -136- D - JOUI^IALC IK ARABIC 'Abd al-Basit, Badr al- " al-Riba da' al-bashariye.h i-iUtawalli al-wabil" (Riba, the Disastrous affliction of Mankind) al-Azhar, vol.22, no.9, Ramadan, 1370, pp. 797-800. Aba-al-£aud, Mahmud "Sa'ar-al fai da v/a al-riba" (Interest and Riba) Al-Muslimun December, 1952 TQairoT7~no.2fc p.55. Abu Zuhra, Muhammad "al-Riba (tafsir al Our'an)" (Riba, exegesis of the Qur'an) Liwa al-Islam (Cairo), vol.3, no.3m July 1954,DO.137-145. al-Ghav/ah, Hamid "al-Riba bain al-tibb v;a'l- Islam" (Riba according to the Science of medicine and lEla'n). Liwa' al-Islam (Cairo) , vol. 13 , no.4, June 1959, pp. 246-248. Hamia, Muhammad "Haula mushKilat al-riba" (on the problem of Interest) al->iuslimoon (Dimashq) , vol.6, no.4, September 1958, pp. 75-81 -137- Hosrain, Mi:i}-imud Hasnain "t:hubhat huwal Cuv;r min-al-Riba" (Boubts on the form of Ribs) " Al -1 qt 1 s ad- al-1 s_l_anii (Dub a.i) vol.51/ October, r^BS, p.63. 7. Kharufah, 'Ala al-Din "al-Riba wa'l fa' idab" (Riba and interest). Majma' u 1 -_^I 1 mi__al-I_roqi Vol.10, 'no. f,'1963, po.353-354 Cutb, Layyid "al-Riba" (Interest) Liv/a'al Islam (Cairo), vol.S, no. 10, February 1955, pn.64S-657. -138- E - BOOKS Ih URDU hr,v;arul I ah, Muhammad MaE'alat al-Riba (The Problem of Ir^terest) (Hyderabad TDnTT, n.d7" Fazlur Rahman Tijarti Lud tarixhi aur fiqhi (Gunnauri) Nuqta-e-nazar se (Commercial Interest from the stand'poirit ~of_Hi story "arid T s 1 am i c Law J". (Aligarh Muslim University, 1967) Ja'far Shah, Kuhamm.ad, Commercial Interest Ki fighhi Phulwari haythiyat (Comriiercial Interest in Islamic Lav;7 TLahore Idara-e-ThagoFat-e- Islamiyah, 1959) . Mawdudi, Sayyid Abul Lud (Interact) Alia (Lahore : Islamic Publications, 1961) . LhafiV, Mufti Muhammad "Has' ela-e-sud" . (The Problem of Interest) (Karachi: Idarat al-Ma'arif, 1390 A.HJ -139- b. Riba' in Urdu Encyclopaedia of Islam (Lahore : Da'ira Ma'arif-i- Islamiyya), n.d. 7. Lhah, Lyed Yaqub Chand ina'ashi masa'il aur Islam (Some Economic Problems and Islam). (Lahore : Idara-e Thaqaf at-e- Islamiyya, 1967). 8. Suhail, Iqbal Ahmad Haqiqat al-riba (Nature of Riba) (Badayun s Fi^ami Press, 1935) -140- F - JOJRNAL IN URDU 1. Abbasi, Manzur Ahsan "Gud aur Card" (Irterest and Loan), Islarnl To'lj^rn, (Lahore) vol.1, no.l.. Jaruary/FebruarY, 1972, '-0.31-41 "Cardv/a Riba" (Loan end Ribr?), ThaqaEat, (Lahore), vol. "^j no. 3 August7l'^60, no. 43-6?. 3. Ahmad, Sheikh Mahmud "5ud ka mas'elah" (The Problem of Interest) Thaqafat (Lahore), vol?, no./ Feb. 56, pp.33-43. 4. "Islam ka Nazariyyah-e-Lud _ — _^^^ Bankari" (Islainic Theory of irLerect and Banking) Thaqaf at : (Lahore), vol.3, no. 1 October i960, pn. 22-3 1. Ghulam, 'Ali, Malik "JawQz-e £ud Ke haa men ch riwayat se ghalat istidlal" (VJrong Argument in Favoar of nermiEFibility of Trtrr.-rt derived from a I i rnlit i ^^T.) . Tarjuman al Our' an (Lahore) volfeo, no.5., Auqast 1963, no. 306-309. -141- •Imadi, Tain am a "Riba aur bai" (Riba ard Trade) Fi>;re-o-Ha7ar (Karachi) . vol.2, no.7, January 1965, po. 429-434. 7. Isma'il, Ch. Muhammad "Ku? 'ala-e-Sud" (The Problem of Interest) Thaqafat (Lahore), vol.9, No5.' 1,4, 6, no. 3 7-47; pp. 35-50; T50.53-61, no.40-50 8. Kasif, Hafni Beck "Bank aur Sud" (Banks and Interest), Thaqafat '(Lahore), vol.9, no.2, March 1961, pp.57-64 9 . K adwi, ' Abd al -S al am "Tahrim-e-Sud" (Prohibition of Interest) Ma' arif (Azamgarh), vol.14, no.l, July 1924; pp.9-31; vol.14, no.2, August 1924, pp. 93-123; vol.14, no.3; Leptember 1924; pp.170-184 10. Kadv;i, Muhammad Na'im "Mahajani aur tijarati sud" (Money Lender Interest and Commercial Interest) 7indagi (Ramour), vol.40, no.?, Anril 1968. -142- 11. "TSar.k kci sad" (Bank Interest) Zindagi (Rampur), vol.40, no. 3, March 19 68, pp.22-37, 12. "T ahrim-e-Sud'iliTi wa'aql ki raushni men" (Prohibition of Interest in the light of Science and Reaj or) ^indagi (Raippur) , vol.38, no.2," Januarv-February 1967,' pp. 25-35. 13. Qadri, Cayyid Mu'inuddin "Sarmaya kari ki ma'ashi haqiqat aur I si ami nuqt-aenazer se us ke mu'awade ki wajhe-^jawaz" (The Economic Nature of Invest ment and the Basis of Permission of its Reward from IsLiraic view point), Burhan. (Delhi), vol .5S, no.4, L>eptember 1965, pp. 159-176, October 196'J, pp.221-229. 14. Lhami, Amir Hamza "Commercial Interest aur Islam" (Coiimercial Interest and Islam) Tarjuman al-Qur'an/ (Lahore) vol.57, no-1, October, 1961, pp. 32-46. 15. Siddiqi, Muhammad, "Sud ka mas' al ah" Mazharuddin (The Problem of Interest), Thaqafat (Lahore), vol.4, no.5, May 1957, pr^. 54-62.