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.