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Sunday, 11 March 2012

Interest (Riba) In Business Transactions

Islam is very emphatic about discouraging interest in business deals. Once an amount becomes due, it cannot be increased and no undue benefit in cash or kind or any type of favour beyond the counter-value can be demanded. All scopes of offer of price, its negotiation and acceptance are available before completion of a business deal. But once the price is determined, business action takes place and consequently an amount becomes payable by one party and receivable by the other, no further increase on account of factors like delay in payment is permitted.
Interest has been prohibited in both the Qur’ān and the Prophetic traditions.

THE QUR’ĀN  ON INTEREST
The Qur’ānic injunctions are in the following verses:
“That which you give in usury in order that it may increase on (other) people’s property has no increase with Allah; but that which you give in charity, seeking Allah’s countenance, has increase manifold.” [30:39]
“Because of the wrongdoings of the Jews We forbade them good things which were (before) made lawful unto them, and because of their much hindering from Allah’s way. And of their taking usury when they were forbidden from it, and of their devouring people’s wealth by false pretences. We have prepared for those of them who disbelieve a painful doom.” [4:160-161]
“O you who believe! Devour not usury, doubling and quadrupling (the sum lent). Observe your duty to Allah, that you may be successful.” [3:130]
“Those who swallow usury cannot rise up save as he arises whom the devil has prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permits trading and forbids usury. He unto whom an admonition from his Lord comes and (he) refrains (in obedience thereto), he will keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him who returns (to usury) – Such are rightful owners of the Fire. They will abide therein.
“Allah has blighted usury and made almsgiving fruitful. Allah loves not the impious and guilty. Lo! Those who believe and do good work and establish worship and pay the poor-due their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe! Observe your duty to Allah and give up what remains (due to you) from usury, if you are (in truth) believers. And if you do not then be warned of war (against you) from Allah and His messenger. And if you repent, then you have your principal (without interest). Wrong not and you shall not be wronged. And if the debtor is in straitened circumstances, then (let there be) postponement to (the time of) ease; and that you remit the debt as almsgiving would be better for you if you did not know.” [2: 275-280]
All the above mentioned verses of the Qur’an can be understood if we keep in mind that these were addressed primarily to a nation of traders and it were meant to contain the wrong practice in vogue of allowing time to the borrower to repay the loan in return for an additional amount; thus increasing the loan amount itself. It was basically a case of business related loan where the borrower failed to pay in time and he was granted further time. The loan amount was inflated in lieu of such postponement of time of payment. We may call the additional amount the time value of the amount of loan.Islamic scholars call it riba al-nasi’ah {interest on postponement/deferment (of loan)}.

INTEREST IN PROPHETIC TRADITIONS
In addition to the Qur’ānic injunctions the Prophet (peace and blessings of Allah be to him) prohibited many other wrong practices. Those traditions may be classified under following groups:
Dishonest business practices;
Accepting any reward or benefit from the borrower; and
Interest in barter system.
1. Dishonest business practices – Various traditions have used the word riba (interest) for wrong business practices. For example, the tradition we noted earlier regarding keeping two prices for one product says that the seller should charge the lower price otherwise it would be riba.
2. Reward or benefit from the borrower –The Prophet (peace and blessings of Allah be to him) said:If a man extends a loan to someone, he should not accept a gift. [Reported in Bukhari]
The Prophet (peace and blessings of Allah be to him) said: When one person grants a loan to another and the borrower offers him a dish (of food) or a ride on his camel, he should not accept unless the two of them have been previously accustomed to the exchange of favours mutually. [Reported in Baihaqi]
Obviously such reward or benefit or gift given by the borrower is not due to the lender and it is an unwanted addition. Islam distastes all such advantage given or accommodation provided.
3. Interest in barter system– In the case of exchange between dissimilar commodities in barter system, Prophetic traditions require that it should be done hand to hand. This writes off the possibility of futures trading in commodities. However, where commodities are same the quantities exchanged should be equal besides being hand to hand. [Dr. Umer Chapra; Prohibition of Interest: Does it make sense; Markazi Maktaba Islami Publishers, New Delhi; 2005 edition; pp. 13-14]
Abu Said al-Khudri reported that the Prophet (peace and blessings of Allah be to him) said: Do not sell gold for gold except when it is like for like, and do not increase one over the other; do not sell silver for silver except when it is like for like, and do not increase one over the other, and do not sell from what is away (from among these) for what is ready. [Reported in Bukhari]
The Prophet (peace and blessings of Allah be to him) said: Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt – like for like, equal for equal and hand to hand. If the commodities differ, then you may sell as you wish, provided the exchange is hand to hand.[Reported in Muslim]
As barter system is not prevalent these days, we do not go deeper in the discussions that the scholars have done on above traditions. Suffice is to say that that at the time of the blessed Prophet both barter system and monetary system were in vogue. He preferred the monetary system and taught that where goods are to be exchanged with each other they should first be sold and then the item required should be purchased from that sale proceed.

(RadianceViewsWeekly/Dr. Waquar Anwar/11 March2012)


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