The Differences between Riba, Usury and Interest - Part 2
Different Kinds of Riba
As we shall see later in this paper there are different types of riba. The following hadiths describe the nature of different kinds of Riba, which are more like unfair and excessive increase - as also like extortion or unethical gain and profiteering or in some cases as voluntary or agreed recompense or appeasement for a favor.
The Prophet (sws) said:"The most prevalent kind of usury is going to lengths in talking unjustly against a Muslim's honor. Sunan Abu Dawud. Narrated Sa'id ibn Zayd:
A) Profiteering by unethical means is a kind of Riba! .
Volume 3, Book 48, Number 841: Sahih Bukhari: Narrated 'Abdullah bin Abu Aufa:
“A man displayed some goods in the market and took a false oath that he had been offered so much for them though he was not offered that amount Then the following Divine Verse was revealed:-- "Verily! Those who purchase a little gain at the cost of Allah's covenant and their oaths . . . Will get painful punishment." (3.77) Ibn Abu Aufa added, "Such person as described above is a treacherous Riba-eater (i.e. eater of usury).”
In this hadith the eating of usury refers to profiteering by unethical trick.
B) Voluntary Gift to appease the debtor is a kind of Riba!
Volume 5, Book 58, Number 159 (Sahih Bukhari): Narrated Abu Burda:
“ When I came to Medina. I met Abdullah bin Salam. He said, "Will you come to me so that I may serve you with Sawiq (i.e. powdered barley) and dates, and let you enter a (blessed) house that in which the Prophet entered?" Then he added, "You are In a country where the practice of Riba (i.e. usury) is prevalent; so if somebody owe you something and he sends you a present of a load of chopped straw or a load of barley or a load of provender then do not take it, as it is Riba."
In this hadith we find the voluntary submission of gifts to please the creditor is being described as riba! But in another hadith we find that voluntary payment of excess on redemption of loan was not treated as usury.
Britannica Concise Encyclopedia: explains usury as under.
In law, the crime of charging an unlawfully high rate of interest. In Old English law, the taking of any compensation whatsoever was termed usury. With the expansion of trade in the 13th century, the demand for credit increased, necessitating a modification in the definition of the term. In 1545 England fixed a legal maximum interest, a practice later followed by other Western nations.
C) The barter of two different qualities of the same product is a kind of riba!
Volume 3, Book 38, Number 506 (Sahih Bukhari): Narrated Abu Said al-Khudri:
Once Bilal brought Barni (i.e. a kind of dates) to the Prophet and the Prophet asked him, "From where have you brought these?" Bilal replied, "I had some inferior type of dates and exchanged two Sas of it for one Sa of Barni dates in order to give it to the Prophet; to eat." Thereupon the Prophet said, "Beware! Beware! This is definitely Riba (usury)! This is definitely Riba (Usury)! Don't do so, but if you want to buy (a superior kind of dates) sell the inferior dates for money and then buy the superior kind of dates with that money."
The barter of two different qualities of the same product is being treated as riba and the right method is advised as selling and buying different qualities of product with money..
D) Prohibition of trade of alcohol and Riba
Sahih Bukhari Volume 6, Book 60, Number 66: Narrated 'Aisha:
“When the last Verses of Surat-al-Baqara were revealed, the Prophet read them in the Mosque and prohibited the trade of alcoholic liquors. "If the debtor is in difficulty, grant him time till it is easy for him to repay.." (2.280)”
This hadith indicates that the alcoholics those days used to buy liquor on credit and were harassed by the lenders. Thus the last verse may have helped the debtors in trouble and the trade of liquor was abolished.
E) Selling an item for more than it’s actual weight is Riba. .
Imam Malik's Muwatta - Book 31, Number 31.16.28:
“Yahya related to me from Malik that Yahya ibn Said said, "The Messenger of Allah, mayAllah bless him and grant him peace, ordered the two Sads to sell a vessel made of either gold or silver from the booty. They either sold each three units of weight for four units of weight of coins or each four units of weight for three units of weight or coins. The Messenger of Allah, may Allah bless him and grant him peace, said to them, 'You have taken usury, so return it.' "
F) Barter of the same type of product with obligation for paying larger quantity is Riba.
Volume 3, Book 34, Number 344 (Sahih Bukhari): Narrated Az-Zuhri from Malik bin Aus: that the latter said, "Who has change?" Talha said, "I (will have change) when our store-keeper comes from the forest."
Narrated 'Umar bin Al-Khattab: Allah's Apostle said, "The bartering of gold for silver is Riba, (usury), except if it is from hand to hand and equal in value/amount, and wheat grain for wheat grain is usury except if it is form hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount, and barley for barley is usury except if it is from hand to hand and equal in amount." (See Riba-Fadl later in this paper).
Taking goods on credit on the promise of paying larger quantity in the barter is also regarded as usury. Similarly lending money on the condition of paying back larger amount is riba. Although the words money or coins are not indicated in such hadiths that appear to have lead most ulema to classify the bank interest however small it is, as usury and prohibited. However, by considering the verses of Holy Quran for avoiding unjust dealings, and since the details and occasion of the transaction are not indicated, it is possible that Hazrat Umar may have misunderstood what the Holy Prophet said as is evident from the following hadiths
F) Definite Verdicts about of all kinds of Riba were not there!
Sahih Bukhari Volume 7, Book 69, Number 493: Narrated Ibn 'Umar:
'Umar delivered a sermon on the pulpit of Allah's Apostle, saying, "Alcoholic drinks were prohibited by Divine Order, and these drinks used to be prepared from five things, i.e., grapes, dates, wheat, barley and honey. Alcoholic drink is that, that disturbs the mind." 'Umar added, "I wish Allah's Apostle had not left us before he had given us definite verdicts concerning three matters, i.e., how much a grandfather may inherit (of his grandson), the inheritance of Al-Kalala (the deceased person among whose heirs there is no father or son), and various types of Riba(1 ) (usury) ."
From History of banking and History of pawnbroking
The historical rendition of usury as a vile enterprise stems not only from a spiritual view that charging exorbitant interest is a flagrant manifestation of unchecked greed, but carries with it social connotations of perceived "unjust" or "discriminatory" money lending practices. This is well explained by the historian Paul Johnson, who believes:
Most early religious systems in the ancient Near East, and the secular codes arising from them, did not forbid usury. These societies regarded inanimate matter as alive, like plants, animals and people, and capable of reproducing itself. Hence if you lent 'food money', or monetary tokens of any kind, it was legitimate to charge interest. Food money in the shape of olives, dates, seeds or animals was lent out as early as c. 5000 BC, if not earlier. ... Among the Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the state. But the Jews took a different view of the matter.
The Torah and later sections of the Hebrew Bible criticize interest-taking, but interpretations of the Biblical prohibition vary. One common understanding is that Israelites are forbidden to charge interest upon loans made to other Israelites, but allowed to charge interest on transactions with non-Israelites. However, the Hebrew Bible itself gives numerous examples where this provision was evaded.
G. Riba in Different Sense
Book 41, Number 4858 of Sunan Abu Dawud. Narrated Sa'id ibn Zayd:
The Prophet (peace_be_upon_him) said: The most prevalent kind of usury is going to lengths in talking unjustly against a Muslim's honour.
Book 23, Number 3454: of Sunan abu Dawud. Narrated AbuHurayrah:
The Prophet (peace_be_upon_him) said: If anyone makes two transactions combined in one bargain, he should have the lesser of the two or it will involve usury.
Terms coined Muslim Jurists
Much of the terms coined in Arabic by Muslim Jurists for different kinds of riba were intended to be based on Quran and Sunnah but literal approach rather than due regard to the logic and the underlying principles. And their verdicts for equating the conventional banking interest with the ancient practice of the wicked moneylenders and pawnbrokers of the past do not appear to be based on logic and reason and indicates their imperfect understanding of the modern monetary and financial systems and the new forms of credit that are helping in growth of commerce and industry as well as in reducing poverty and un-employment. Quran constantly ask us to use reason in such matters and to continue exploring new avenues of knowledge. .
The Controversial Definition of Riba
In the orthodox Islamic Fiqh the term riba means an unjustified increment or addition in borrowing or lending money, paid in kind or in money over and above the quantity or amount of loan or credit, as a condition imposed by the lender or voluntarily by the borrower. Riba defined for cash loans is called in Fiqh riba al-duyun (debt interest). Riba is also an unjustified increment gained by the seller or the buyer if they exchanged goods of the same kind in different quantities. This is called "riba al-fadl" or "riba-al-buyu" (trade interest). All such terms have been coined by Ulema.
According to orthodox Ulema the term nasi'ah means to postpone, defer, or wait and refers to the time that is allowed for the borrower to repay the loan in return for the addition or the premium. Hence Riba al-Nasi'ah refers to the interest on the loan. Ulema opine that it is in this sense that the term Riba has been used in the Qur'an in the verse 2.275: “Those who devour usury will not stand except as stand one whom the Evil one by his touch Hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (The offence) are companions of the Fire: They will abide therein (for ever)”.
Orthodox Ulema maintain that the prohibition of Riba al-Nasi'ah essentially implies that the fixing in advance of a positive return on a loan (interest) as a reward for waiting is not permitted by Islam. It makes no difference whether the return is a fixed or variable percent of the principle or an absolute amount to be paid in advance or on maturity, or a gift or service to be received as a condition for the loan. However, investment of money in business project sharing profit and loss is permitted even if the return on principle can be either positive or negative depending on the final outcome of the business, which is not known in advance, it is allowed provided that it is shared in accordance with the principles of justice laid down in Islam.
Ayatullay Khamenai's Verdict ’
Ayatullay Khamena'i is very explicit in his ruling (fatwa) that paying interest (riba), whether to Muslims or non-Muslims, is prohibited. He adds that such a transaction can not be made lawful even with the permission of the al-hakim as-shar'i. Thus, under normal circumstances paying interest is prohibited unless one can substantiate that he/she is compelled (mudtarr). However, the contract for the principal amount remains valid and has to be honored. With respect to receiving interest (riba), Ayat. Khamena'i allows it so long as it is from the non-Muslims.
Source: "Durar-ul-Fawa'id...," p. 108, 111, 113, 115.
The difference between Riba and interest can be summarized as follows:
1. Interest is time related and is a reasonable payment for use of money borrowed. Usury is excessive, wicked or illegal charge of interest. Riba is not only usury but also unethical gain in exchange of goods on credit or in barter, which has been prohibited in Islam.
2. Riba is not necessarily time related; it can be on spot or in any time frame. Interest depends on time like rent. Interest could be per day, per month and usually per annum.
3. Riba is the "increase", not the "decrease" as also excessive discount. Riba will remain riba, however small or big the increase may be. Interest rate can be employed in discounting or arriving at the present value of future liability.
4. Riba is entailed in barter of two different types or qualities of goods even on the spot from hand to hand. Interest does not play any part in barter on the spot..
5. On a loan given for business on profit or loss sharing basis the profit is earned by the sleeping partner without doing work and such transaction is admissible under Sharia, even though the lender gets the benefit of higher return if the profit is high due to ingenuity of the entrepreneur. In interest transaction the lender cannot get more than the agreed rate of interest – usually regulated by the government. Normally the enterprises that obtain loan from banks make much greater profits than the interest that they have to pay to the bank. It is wrong to say that giving credit on interest does not entail risk. The cases of defalcations are not un-common and bankruptcy laws had to be enacted that protect the interests of the lender as well as borrowers who may be shareholders of a bankrupt company.
6.Orthodox Ulema generally say that money is medium of exchange and not by itself product for trading and the money is a store of value and any exchange of the same product must be equal even with delayed return.. But this does not appear to be possible in trading of Foreign currencies and the fiat currency system where the flaw of erosion of purchasing power of money as compared to gold and land is inherent. But they have not been able find any solution for inflation and do not understand the system of SDR introduce by IMF.