The wisdom behind the prohibition of Interest (Riba)
Assalamu alaykum stecstars🌟. Welcome to another edition of our weekly newsletter, we hope it meets you well😊. Today, we shall be looking at the wisdom behind the prohibition of Interest (Riba).
What is Interest (Riba)
Riba may be defined as: “monetary advantage without counter value, an advantage which is stipulated in favour of one of the parties in exchange for two monetary values”. It may also be defined as: “any unjustified increase of capital for which no compensation is given”.
What does Islam say about Riba?
These are some sets of verses of the Quran revealed on different occasions
“Whatever riba (increased amount) you give, so that it may increase in the wealth of the people, it does not increase with Allah” [Ar-Rum: 39]
“And for their charging ribā (usury or interest) while they were forbidden from it, and for their devouring of the properties of the people by false means. We have prepared, for the disbelievers among them, a painful punishment.” [Al-Nisa: 161]
“O you who believe, do not eat up the amounts acquired through ribā (interest), doubled and multiplied. Fear Allah, so that you may be successful.” [Al-Imran: 130]
Islam's fundamental tenet is that money should not be hoarded or wasted, but rather used productively so that the owner, society, and those who are less fortunate can all benefit. As a result, it is illegal to leave money unaccounted for while charging interest or making a profit from the money's merely being used by a third party, regardless of any potential dangers or gains.
Usurers solely pursue profit or interest that carries no dangers. This goes against the principles of equity and equilibrium that form the basis of Islamic economics.
The aforementioned idea is the foundation for the concept of risk and profit sharing between the capital owner and the borrower.
Thus, in contrast to conventional banking, the capital owner cannot claim both a fixed interest as well as the guarantee of the return of his capital.
Also, Sharia does not consider money as such a commodity, but as a means of payment and as a neutral measure of valuation rather than a commodity by itself
However, the capital owner may be paid based on splitting the gains and risks. To maintain the value of money, trading with money plus interest is prohibited.
The aforementioned ideas also serve as the cornerstone of Islamic banking and economic theory. As we will see later, this highlights the distinction between the Western and Islamic Banking Systems. Profit-taking and risk-sharing go hand in hand in Islamic banking and economics.
Based on the above, Sharia prohibited usury, as well as transactions having unusual uncertainty and unknown perils called “Gharar”, such as gambling, because such transactions run contrary to the principle of balanced relationship or equivalence.
Though, Sharia recognizes the sanctity of the contract, the prohibition of usury and contracts of “Gharar” together with some other principles of Sharia (such as unjustified enrichment) have created restrictions on the freedom of contract, which Islamic banking must observe in any banking transaction.
Why Islam prohibits Interest (Riba)
What is the rationale behind the prohibition of riba? Riba has both negative effects socially and negative effects economically. Here are a few notable negative effects of riba:
Riba-based loans exploit the poor and tend to increase poverty. Payday loans are an example of predatory lending to the poor which often charge as high as a 400% annualized rate. Many poor people end up refinancing these loans over and over in a never-ending cycle of debt and riba. Riba-based lenders only care that the loan is repaid and not where the money to repay comes from or the economic hardship endured by the borrower.
Riba leads to excessive leverage in business which can lead to systemic risks and business failures. In finance, leverage means using debt to buy assets. After the 2008 financial crisis, many businesses failed because they had high levels of debt (leverage) and they could no longer sustain the payments of riba. Economists call this process “de-leveraging”.
Riba conflicts with the spirit of brotherhood and sympathy and is based on greed, selfishness and hard-heartedness. Rather than sharing in the risks of a business or investment, riba sets up a lender/borrower relationship. The lender has a financial incentive to squeeze the borrower as much as possible to get the loan back with interest, regardless of the borrower’s situation.
Conclusion
Islam has strictly prohibited interest and interest-based transactions. The above-mentioned reasons show the rationale of Islam behind the prohibition of this inhuman and illogical practice.
P.S Despite the strong prohibition against Interest (Riba), we still have several believers involved in different forms of interest. This could be a result of their ignorance of Allah's injunctions or self-desires. We pray Allah rectifies everyone. Let’s make effort to inform the uninformed about the consequences of their negligence.
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