Riba Complexity: Riba Revisited, #3

By Nizar Abdulrahman Alshubaily

Is Riba the same as Interest and Usury?

What are the different names and types of Riba?

Was Riba prohibited only against the poor?

Why did they say {A Sale is like Riba}?

Is Qard an exception to Riba?

Was Riba only at repayment time and not from the beginning?

Was it a contradiction for The Prophet (PEACE BE UPON HIM) to have stated that Riba is only in deferment?

Does Riba take place in everything?

What is the Riba that is Halal?

Can you repay your debts early and repay less?

All of these subjects and more will be discussed in this third volume of the Riba Revisited series, "Riba Complexity".

• Language: English
• Publisher: Nizar Abdulrahman Alshubaily
• Release date: Mar 25, 2021
• ISBN: 9781393973799

Book preview

In

Memory

Of

My

Parents

Also By The Author

Riba Revisited Series:

Riba In Mubadalah

Riba In Jewelry

Riba In Contracts

The Book Of Quotes

The Names Of Riba

A Sale Is Like Riba

The Hadith Of Riba

Myths Of Riba

The Verses Of Riba

Essays In Islamic Finance Series:

Essays In Islamic Finance I

Essays In Islamic Finance II

Essays In Islamic Finance III

Riba Complexity

Volume III

Riba Revisited Series

Copyright © Nizar Abdulrahman Alshubaily, 2021

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopied, recorded, or otherwise, without prior written permission of the copyright holder, except for reference and citation, with proper acknowledgment.

Cover Page: Photo of Manuscript of Sahih Al-Bukhari courtesy of Alukah.net

EBOOK ISBN: 9781393973799

Riba Complexity

Nizar Abdulrahman Alshubaily

A Selection of Myths,

Misunderstandings, and

Complexities of

Riba

Volume III

Riba Revisited Series

2021

Introduction

This is my third book on Riba in the Riba Revisited series. The first two dealt with the subjects of Riba in Mubadalah and Riba in Jewelry.

In the last few years, I have been writing articles about Riba. The articles are in English and for good reason. Many observers and students of Islamic Finance are not Arabic speakers, and thus have not been capable of reading the many books, chapters, and journal articles on Riba.

I felt it was time for them to receive this information in a language they understood. The hope of course is that they learn more about this very important subject.

The other hope is that it would remove many of the myths, misunderstandings, and complexity of the subject, and thus the name of the book.

I also hope that they would have a better understanding of the workings of current Islamic Financial products, and view them with less suspicion.

I hope this book, and other books on Riba that I have written and will write, go a long way in alleviating so many misunderstood issues.

The prohibition of Riba is essentially the main driver in creating products compliant with Shari’ah. Other prohibitions, whilst important, can be found often in existing conventional regulations.

Thus, it is Riba, which is the primary cause of concern in the design of Islamic Financial Products.

Riba can be so complex to comprehend, that even great scholars in the past admitted their perplexity with it, and even made some unproven judgments.

This is a very important topic due to the similarities between Riba and some aspects of certain transactions. Some people view any debt as suspicious, while others view any form of guarantee as an aspect of Riba. For others it may be any increase in the price of the commodity due to time.

This is why some critics of Islamic Finance make statements describing the industry as being involved in Back-Door Riba. This is because many confuse the results of a transaction with the process of generating the return, and end in a suspicious state.

Knowledge of Riba helps navigate through these mixed signals.

In this third volume on Riba, I investigate a number of myths, many of which are still being promulgated in the market. And even though the world’s leading scholars have written volumes on these issues, some still believe them.

I also investigate areas of misunderstandings and disputes between schools and scholars. These issues relate directly to our current Islamic Financial industry and the products it promotes.

I go back in history and I shed light on old disputes, and follow it through to our modern day, and its current applications in the modern Islamic Financial industry.

It is still present with us today, that many call Islamic Banking by such names as No Interest Banking. Of course, this is faulty, as I show in the first chapter. This has created such serious misunderstandings, especially among non-Muslims, that it will take such a long time to remove the taint of impropriety from the industry.

There are still some who still promote the idea that Riba was prohibited because it was unjust to the poor, and therefore it is permissible to participate in it if it is levied against a business. This is also not true.

Other misunderstandings include such mistaken concepts as Riba is only when a repayment is delayed and not from the beginning. Again, this is false.

There are also long disputes between scholars that still exist with us today, and deeply affect the industry, such as repaying less for early repayment.

Other subjects I investigate are mainly for more advanced learning. Misunderstandings do sometimes rear their ugly heads in writings of many authors, unfortunately confusing the issues, such as the seemingly, yet not of course, contradictory statement that Riba exists only in Deferment.

I also elaborate on certain areas such as Sufatjah, Buyu’ Al-Aajaal, and Combination Sales, which are more difficult subjects, yet very important to understand by the student of Riba.

Nizar Abdulrahman Alshubaily

March 2021

Chapter One

Usury, Interest, and Riba

Are they the same?

Yes and No.

Usury versus Interest

The first two are the same; at least they used to be. But Riba is different from the first two, even though many translations use the terms usury and interest when translating Riba.

For certain, there are overlaps, but still, there are differences. The difference between interest and Riba has caused much confusion for non-specialists and those who are used to the terminology of the conventional finance market.

But let us start with Usury versus Interest. Let’s look at a few definitions that we could easily find on the Internet:

"What Is Usury?

Usury is the act of lending money at an interest rate that is considered unreasonably high or that is higher than the rate permitted by law. Usury first became common in England under King Henry VIII and originally pertained to charging ANY AMOUNT of interest on loaned funds. Over time it evolved to mean charging excess interest, but in some religions and parts of the world charging any interest is considered illegal. And they explain: Charging interest on loans is not a new concept, but in 16th-century England, limitations were put on the amount of interest that one could legally charge on a loan." (1)

Usury, in modern law, the practice of charging an illegal rate of interest for the loan of money. In Old English law, the taking of any compensation whatsoever was termed usury. With the expansion of trade in the 13th century, however, the demand for credit increased, necessitating a modification in the definition of the term. Usury then was applied to exorbitant or unconscionable interest rates. In 1545 England fixed a legal maximum interest, and any amount in excess of the maximum was usury. The practice of setting a legal maximum on interest rates later was followed by most states of the United States and most other Western nations. (2)

The practice of making people pay interest when you lend them money. (3)

The concept of usury has a long historical life, throughout most of which it has been understood to refer to the practice of charging financial interest in excess of the principle amount of a loan, although in some instances and more especially in more recent times, it has been interpreted as interest above the legal or socially acceptable rate. (4)

The canon law to which the English common lawyers conceded jurisdiction was strict in definition. It defined usury as whatsoever is taken for a loan beyond the principal. Any gain stemming from a loan, no matter how small, was considered usurious and unlawful. (5)

The origins and evolution of usury are extremely interesting from the perspective of many disciplines—economics, religion, law, etc. Usury is derived from the Medieval Latin term usuria, which means interest or excessive interest, and originally meant charging a fee for the use of money. (6)

II. One cannot condone the sin of usury by arguing that the gain is not great or excessive, but rather moderate or small; (7)

And one can go on and on. The easing of the prohibition of interest in Europe meant that the words Usury and Interest, as can be see above, developed different meanings. So while interest was a charge on money that used to be illegitimate and banned, it was now acceptable. Only if interest were excessive, then it became usury and illegal. How excessive, was dependent on jurisdiction.

Interest versus Riba

Now that we have seen that usury and interest were the same, it is time to define interest better so that we ascertain whether it is the same as Riba.

Money that is charged by a bank or other financial organization for borrowing money. (8)

But it also has other names, such as the cost of funds, or borrowing cost, or even the cost of debt. Sometimes these can be differentiated depending on whether one is discussing just the interest rate charged, or in fact total cost of for example a company issuing debt.

"Cost of Funds

The amount of money paid in interest on a loan. The cost of funds is an expense for both personal and business loans. It also refers to the interest rate in addition to the absolute amount in interest." (9)

And,

"Borrowing Cost

The total charge for taking on a debt obligation that can involve interest payments and other financing fees." (10)

Basically, if I can pay later for an object, and there is a cost to that later, then it is Interest.

And this here is the problem: defining interest in this manner does not take into account How it was established in the first place, which is what makes it different than Riba.

If instead of borrowing from a bank to buy a car, you went to the car dealer and he gave you the financing in the form of an installment sale, then any addition to the cash value of the car that the dealer places on these installments would also be called interest.

But that is in the terminology of the conventional markets. In Fiqh, this second type of interest is not the forbidden Riba. This is because Shari’ah allows the sale of physical assets with a margin for time. The auto dealer, by placing a margin on top of the cash price of the car for selling it to you in installments would not be committing a forbidden act in Shari’ah; this is a sale and is perfectly permissible.

You can see that definition here:

"What Is In-House Financing?

In-house financing is financing in which a firm extends customers a loan, allowing them to purchase its goods or services. In-house financing eliminates the firm's reliance on the financial sector for providing the customer with funds to complete a transaction." (11)

Here, some firms extend a loan themselves to the customers, however, many organizations extend credit to their customers by simply selling the goods to the customer on deferred or instalments basis.

Effectively, if it is interest on money that you are paying, it is forbidden. However, if it is interest in the form of a fixed price on an asset you bought, it is legitimate.

Due to the fact that certain verses in The Qur’an dealing with Riba were translated as Interest or Usury, This of course led to confusion that Riba and Interest are the same.

{Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, Trade is [just] like interest. But Allah has permitted trade and has forbidden interest.} (12)

Here are a few more showing different versions:

Pickthall: {Those who swallow usury...}

Yusuf Ali: {Those who devour usury...}

Muhammad Sarwar: {Those who take unlawful interest...}

Mohsin Khan: {Those who eat Riba (usury)...}

Arberry: {Those who devour usury...} (13)

It is interesting to note that the Muhammad Sarwar translation translated Riba as Unlawful Interest, which is probably the better description, since as we have see, simply calling it interest confuses the observer as it would also include any margins placed on the sale of assets for deferred payment.

There is another confusion that could be seen sometimes, which is that Riba is only usury, meaning excessive interest, which of course is not true, but that is another subject.

And thus for many observers of Islamic Finance, seeing that there is a margin for financing assets such as cars, machinery, and houses; which of course is the same as interest in conventional terminology, led to the belief that it is interest but it is not being called that to fool people.

Not true.

It is simply not the forbidden type of interest, which is on money and which is called Riba and absolutely prohibited.

The interest, as we have seen, placed on financing assets, is part of the sale price of the asset and is termed Ribh, or profit, and is perfectly legitimate.

But for the observer, matters are judged by the economic/ financial outcome or result, and thus for the borrower, both rates are the same from that point.

The result looked a lot like interest, and some argue that murabahah is simply a thinly veiled version of it; (14)

The bank makes a profit on the rent, which would be higher than equivalent rents in the area, but on an annualized percentage basis, would look very much like a conventional mortgage interest rate. To the casual observer, a spade is a spade. (15)

"In economic terms, while the banks don't charge or pay what they call interest, the effects are that they do indeed charge and pay interest. Those of us

Reviews for Riba Complexity

[habeebullah07 · Rating: 5 out of 5 stars]

A fantastic book on Riba written in simple english for any layman to understand. This and the other series of Riba are really a goldmine for we english speakers.