Understanding 'riba' (usury) and the prohibition

The Qur'an is extremely clear that "Allah condemns usury..." (2:276) as one of the worst sins. In Islam, most people understand the term 'riba' to mean all interest. However, in todays society where the global financial industry is based on interest, how can Muslims obey the divine command to avoid 'riba' and at the same time function in the modern world. This article looks at 'riba' according to the Qur'an and tries to understand whether the inherited understanding is actually correct. 

Root word of 'riba' with examples

Before we can try to understand the term 'riba', we must start with the literal meaning of the word itself. In the Arabic language of the Qur'an, the term originates from the root word 'R B W'. We will study a few examples in different contexts where we will see it consistently refer to an unnatural growth or a disproportionate increase. 

In the first example, when people "...spend their money seeking the grace of Allah, and to save their souls..." (2:265), Allah will double their rewards. The example given in the Qur'an is that "...of a garden that is on a high ground and is subjected to a heavy rain, and because of that it produces double its crop..." (2:265). The Arabic word used to signify the doubling of the crops is 'rabwatin'.

In another example, Allah tells believers to "... do good to your parents..." (17:23) and people should ask Allah to "...have mercy upon them as they have raised me since I was small" (17:24). This is addressing the concept of a small child transforming into a fully grown adult. The Arabic word used to signify this growing up is 'rabbayani'.

In the final example, When Allah addresses those who "...doubt as to the resurrection..." (22:5), He tells them to observe the land around them which they will "...see the land still..." (22:5). But then Allah goes on to describe what happens when He sends "...down the water to it, it vibrates and grows..." (22:5). This is speaking about how the parched land is transformed by Allah through rainfall. The Arabic word used to signify the transformational growth in the land is 'warabat'.

Across these examples, the root 'R B W' consistently conveys disproportionate expansion from the original state; whether in rewards, vegetation or raising a child. 

So when the term 'riba' is used in a financial context, it must also refer to the same type of unnatural or exponential growth.

Attributes of 'riba' - growth

The Qur'an defines 'riba' in a financial context as "...any usury you have taken to grow from the wealth of the people..." (30:39). The Arabic word used to signify growth is 'liyarbua'. But does this mean any financial increase no matter how small is prohibited as 'riba' and "...will not grow with Allah..." (30:39). 

We know the word 'liyarbua' originates from the root word 'R B W' which we have already established means a distorted or unnatural growth. If this is not understood, then it could be mistakenly argued the Qur'an prohibits any financial growth irrespective of whether it is small or large. 

Attributes of 'riba' - compounding

The Qur'an orders the believers to "...not consume usury, compounding over and over..." (3:130). The compounding effect on the financial increase is what traps people as the debt balance owing continues to increase over time; particularly with delayed or missed payments. 'riba' is not the financial increase but rather the increase due to compounding.

The subsequent debt trap due to compounding is what makes 'riba' prohibited.

Attributes of 'riba' - injustice

When the element of justice is missing in a financial transaction, this is a hallmark of 'riba'. The prohibition of 'riba' is not a new thing in Islam as Allah had already prohibited the Jews from taking 'riba'. The Qur'an says they will have have "...a painful retribution" (4:161) for "...taking of usury..." (4:161) and for "...consuming the money of the people unjustly..." (4:161). 

Allah reinforces this ruling for the Muslims when the Qur'an orders the believers to "...not consume your money between you unjustly..." (4:29). Unjustly means through exploitation which usually involves the poor of society. 

The context of taking 'riba' to "... grow from the money of the people..." (30:39) is understood when contrasted with the alternative to taking 'riba' which is "...any contribution that you have placed seeking the face of Allah, then those will be multiplied" (30:39). Those who are "...seeking the face of Allah" (30:39) are those who give "...the relative his due, and the poor, and the wayfarer. That is best for those who seek the face of Allah..." (30:38). 'Riba' is taken from those already in financial hardship and it is these people who also receive charity. Allah is making it clear to the believers that humans can choose between exploiting financial distress to obtain material growth and choose to give charity to gain real growth with Allah.

Attributes of 'riba' - no mutual agreement

Another attribute of 'riba' is the absence of mutual agreement between both parties. The Qur'an forbids people to "...consume your money between you unjustly, unless it is through a trade which is mutually agreed by you..." (4:29). Once both sides can mutually agree on a transaction, then an increase is permissible and is not considered 'riba' as long as it does not constitute an increase which is "...compounding over and over..." (3:130).

For mutual agreement to exist, both parties need to be able to make free decisions without coercion. This is not present in cases where one party is in a state of desperation. It is the financial difficulty element which allows a lender to consume 'riba' by exploiting the borrower's unfavourable financial situation.

Distinction between 'riba' and trade

If 'riba' means financial increase, then a natural question which would arise is how is it different from profit made in business or trade. Those people who try to justify consuming 'riba' would say "...trade is the same as usury..." (2:275). However, the Qur'an counters this by saying "...Allah has made trade permissible, and He has made usury forbidden..." (2:275). Here Allah has clarified that any financial transaction which is not classified as 'riba' is permissible by default. 

The Qur'an does not distinguish between the trade of goods and the trade of money. A profit is allowed on both. What matters is whether all the attributes of 'riba' exist within the transaction. If the transaction excludes any one of the  attributes of the Qur'anic 'riba', then this is deemed trade and is therefore permissible. 

Qur'an gives a narrow definition of 'riba'

Based on the attributes of 'riba', some may argue the presence of any one of these attributes in a transaction constitutes 'riba'. However, this understanding is not accurate and is not in accordance with the Qur'an's own methodology. When the Qur'an decrees something, it often provides qualifiers where required to define the scope of the command, so believers can act upon it correctly.

One example is where the Qur'an forbids blood as one of the four prohibited items for consumption. On it's own, this would mean that all blood would be prohibited including residual blood in the flesh and the bone marrow. This would practically rule out eating meat. But the Qur'an then limits the scope of the prohibition to only "...running blood..." (6:145), meaning flowing or spilled blood. Therefore, any blood that remains within the flesh or bones is thus permissible.

Elsewhere, the Qur'an gives permission to "... kill the polytheists wherever you find them, and take them, and surround them, and stand against them at every point..." (9:5). Without any qualifiers, this would imply Muslims are allowed to kill polytheists indiscriminately. But the Qur'an qualifies the general command to fight by prohibiting fighting "...the polytheists if they did not reduce anything from it nor did they support anyone against you..." (9:4), i.e. those polytheists that continued to uphold the treaties and remained neutral.

This same principle applies to 'riba'. Just as we don't forbid all bloods or kill all polytheists, we should not call all financial increases 'riba'. The prohibition of 'riba' only applies to financial increases which meet all four attributes mentioned in the Qur'an. We should not overreach with meanings as Allah warns "... do not make forbidden the good things that Allah has made permissible to you, and do not aggress; Allah does not like the aggressors" (5:87).

Example: mortgages

A major source of confusion for Muslims is the use of a bank mortgage to fund the purchase of a house.

Unnatural growth - no

In any transaction where the total payable amount is greater than the sum borrowed, there is growth being consumed by the lender. In a mortgage transaction, there is a definite increase for the lender but this is not considered unnatural growth as the interest charged is only a few percentage points above the rate set by the state. Furthermore, the lender will not share in any of the growth of the property price in future.

Compounding - yes (potentially)

It is well known that the repayments in the early part of the mortgage is spent servicing the interest element rather than the capital. Over the lifetime of the mortgage, the capital element of the repayment increases and the interest payments continue to reduce. 

As long as payments are continually being made on time, then there is no additional compounding interest beyond the interest that was agreed at the start. The interest is always charged on a reducing balance. There is no debt trap as the loan will eventually be paid in full over the lifetime of the the mortgage, as long as the payments are not missed or delayed.

There is compounding which activates once payments are missed, as interest is charged on the existing interest. When enough payments are missed, this can become a debt trap in theory, as the subsequent repayments will then not be enough to cover the interest due. However, in practice this does not really happen as the lender will usually repossess the property way before this and sell it to settle the outstanding debt.

The borrower could even gain in this scenario as any appreciation of the property price will go to the borrower and not the lender.

Injustice - no

In a mortgage transaction, it cannot be argued that there is injustice for the borrower. By obtaining a mortgage, a borrower is able to purchase a property they otherwise could not afford. Any subsequent growth in the property price belongs solely to the borrower even though the vast majority of the capital was provided by the lender. This is almost too one-sided in favour of the borrower unless the lender is able to charge a rate of interest to compensate for the loss in property appreciation.

The lender is charging an interest rate is which slightly above the official interest rate set by the state. The state sets this based on what the experts have calculated to be a fair rate for the current society. The lender is not being exploitative when they are charging a rate which is only a few percentage points above the official rate, particularly given the property price will increase at a higher rate over the mortgage term.

The lender is looking for a return on it's capital but at the same time recognising that the borrower will also significantly gain from the transaction.

Mutual agreement - yes

When a person approaches a bank for a mortgage, they are choosing to do so. They are not being coerced into purchasing a property as the option to rent is also available to them.

The lender is also very stringent in who it lends to. The mortgage provider is not looking to lend to those in financial distress so it is not actually looking to exploit the vulnerable. It only considers applications from those who can prove that they can make the repayments. If it feels a potential borrower will struggle to make the repayments, it will refuse to approve the lending. This approach by the mortgage provider is actually the complete opposite to those who are looking to consume 'riba'. 

Trade or 'riba' - trade

In the case of a mortgage loan, only two out of the four attributes of 'riba' exist, and therefore purchasing a home through a mortgage loan is deemed permissible.

Example: payday loan

A particular type loan in the United Kingdom is a short term loan obtained from non-standard lenders. They usually lend at rates of over 1,000% APR. They are colloquially known as 'payday' loans given by so-called loan sharks to help people tick along until their next pay check.

Unnatural growth - yes

There is unnatural growth in this transaction without a shadow of doubt given the growth of the repayable amount can far exceed the original borrowed amount.

Compounding - yes (potentially)

As long as payments are continually being made on time, then there is no additional compounding interest beyond the interest that was agreed in the initial agreement. However, the type of people obtaining this loan are usually people who are financially desperate. If a person is having to resort to a 'payday' loan, this means they will never be in the position to settle the loan on the agreed date and the loan shark is fully aware of this.

The compounding kicks in once payments are missed as interest is charged on the existing interest. Unlike a mortgage, these loans are not backed by any collateral such as an property which can be sold. Therefore, compounding will in theory continue for ever, meaning the loan balance could end up being many many multiples of the original amount borrowed.

Only the lender is gaining from the excessive compounding in such arrangements.

Injustice - yes

These loans target the financially vulnerable. Borrowers usually approach loan sharks as a last resort. As mentioned, these lenders are charging an interest rate which is massively above the official interest rate set by the state, with cheapest loans coming at a minimum of 1,000% APR. The lender is exploiting the financial distress of the borrower knowing they are not able to obtain funds from a conventional bank. 

Mutual agreement - no

When a person approaches a loan shark, it is because they need funds which they cannot obtain from a bank. The lender is looking to exploit the poor and consume 'riba' at their expense. There is no mutual agreement as one party is in a state of desperation.

Trade or 'riba' - 'riba'

In the case of a payday loan, all the attributes of 'riba' exist, and therefore consuming the increase is deemed consuming 'riba' and therefore prohibited.

Consequences of consuming 'riba'

The prohibition against 'riba' is one of the most serious prohibitions in the Qur'an. Consuming it is as a grave offence with severe consequences. The Qur'an issues several warnings to those who consume 'riba'.

Those who continue to consume 'riba' after knowing of the prohibition are akin to entering into "...a war from Allah and His messenger..." (2:279), the most powerful language used in the Qur'an against any prohibition of Allah. The Qur'an's use of this language is to show the severity of the crime.

On the day of judgement, such people will be raised as acting like someone "...being influenced by the touch of satan..." (2:275) and Allah has "...prepared for the disbelievers among them a painful retribution" (4:161). This punishment was mentioned for those Jews who continued to consume 'riba' despite the prohibition.

For those who learn of the prohibition of 'riba' and then stop immediately, the Qur'an permits them to retain what was previously profited through 'riba' as they will "...be forgiven for what was before this and his case will be with Allah..." (2:275). 

Some argue that the when the Qur'an says "... if you repent, then you will have back your principal money..." (2:279), it is referring to retaining the original capital and there can be no financial increase whatsoever. However, this verse is actually referring to giving up on transactions which would be deemed 'riba', such as the payday loans, as the Qur'an says "... give up what is left from usury, if you truly are believers" (2:278). The Qur'an also gives these people amnesty when it says "...you will not be wronged..." (2:279). 

We can see exactly how this applies in the case of a loan shark. We already know that the loan shark is consuming 'riba' as seen in the example earlier. If the loan shark then accepts Islam and believes in the Qur'an, then their existing agreements must be cancelled and only the capital element of any outstanding 'riba' loans is claimable. All 'riba' consumed up until this point can be retained as they will "...be forgiven for what was before this..." (2:275).

However, the Qur'an gives a stern warning for those who return to the 'riba' after this because "...they are the people of the Fire, in it they will abide" (2:275).   

Give charity instead of 'riba'

The Qur'an provides clear advice for handling potential bad debts. "If the person is facing difficulty, then you shall wait until he becomes able.." (2:280). This makes it clear that a borrower in difficulty should not be penalised whatsoever. Penalising a borrower is an attribute of 'riba'. However, in such scenarios, Allah says "...if you relinquish it as a charity it is better for you if only you knew" (2:280).

The Qur'an presents charity as the opposite of 'riba'. Where 'riba' seeks to increase wealth by taking from others in their time of need, Allah "... grants growth to the charities..." (2:276).

This act of forgiveness is presented as the best path and an alternative to pursuing the debt, although both options are valid. On the other hand, consuming 'riba' at the expense of the vulnerable is the worst crime as "...Allah does not like any wicked sinner" (2:276).

Allah contrasts this with the growth of those people who instead give charity. Their gains with Allah will be "...like a seed that sprouts forth seven pods, in each pod there is one hundred seeds; and Allah multiplies for whoever He chooses..." (2:261). Notice how the Qur'an is speaking of exponential growth of rewards in the same way as 'riba' grows.

The Qur'an further reinforces this by warning that "...usury you have taken to grow from the money of the people, it will not grow with Allah..." (30:39), but when it comes to charitable contributions "...then those will be multiplied" (30:39). 'Riba' subtracts from society and earns divine condemnation whereas charity multiplies in blessings and earns divine reward.

Conclusion

The Qur'ans real target is exploitation as it attacks predatory lending practices, compounding debt traps, systems that crush the poor and wealth grown on the back of others' sufferings.

By prohibiting all interest as 'riba', scholars are in danger of supressing society instead making it prosper. It unintentionally forces people into a lifetime of rent, lack of education and no capital for setting up businesses. Worst of all, it means Muslims relying on loopholes with 'Islamic finance' products which are actually identical to the products they condemn. It relies on a cash-only system which leaves the Muslims weak through economic exclusion.

Mortgages and other types of borrowing such as business loans, encourages entrepreneurship and contributes to a healthy economy.

Just as the Qur'an qualifies which blood is forbidden and whom to specifically fight, it qualifies what financial increase constitutes 'riba'. By prohibiting all interest as 'riba', scholars have expanded the prohibition beyond the Qur'an, similar to forbidding all blood or commanding indiscriminate fighting. 

Finally, it is important to note that the sin incurred in 'riba' is always on the person who is consuming it and not the borrower as the Qur'an repeatedly condemns the person consuming the 'riba'. The person usually paying the 'riba' is someone who is financially vulnerable and desperate.