A lot has often been discussed about the concept of interest and banking in Islam. Is banking, interest, usury and other similar financial activity fully forbidden in Islam? What about interest-free banking activities that are not based on money-hoarding? This article dispels the myths.
Interest, Finance and Banking: The Islamic Perspective
Surah 104, Surah al-Humazah says:
Woe unto every backbiter, slanderer, who has gathered money and counted it, and sorted it out, and made it ready (to be loaned) thinking that his money has made him immortal!
The above Ayah’s part “who has gathered money and counted it, and sorted it out, and made it ready (to be loaned) thinking that his money has made him immortal” talks a lot about modern day practices of finance. The Surah talks about Abu Lahab’s gathering of money for his enterprise. He had started this enterprise with his own money and with money which he had gathered from wealthy Meccans like himself who sought to invest their money in his enterprise. From the Surah, we can conclude that this enterprise of wealthy Meccans of the past was none other than the equivalent of a present-day bank.
Quranic Views on Fraudulent Banking Activities
Surah al-Humazah is composed of nine Ayahs. The last six Ayahs, i.e. two-thirds of the Surah, are dedicated to the description of the chastisement reserved for Abu Lahab on account of his fraudulent banking activities. This is the same chastisement reserved to those who are guilty of Kufr (disbelief). In other words, the Quran equates greedily hoarding of wealth and usury with disbelief.
In accordance with the style of the Quran, we expect that our interpretation of Surah al-Humazah will be justified and its significance enhanced by later Ayahs. This is indeed the case as will become evident from our discussion of Ayahs 4:160-161 from Surah an-Nisa and Ayahs 9:34-35 from Surah at-Taubah.
Surah an-Nisa Ayah 160-161:
And for the injustice committed by the Jews, We have forbidden them certain good things that were permitted to them, and for their barring from Allah’s Way many, and for their taking interest, that they were prohibited, and devouring the wealth of the people by means of falsehood; and We have prepared for the unbelievers among them a painful chastisement.
These two Ayahs say that the culinary laws which the Jews adhered to were a punishment for them from Allah because of four misdeeds committed by them. These were: injustice, barring from the way of righteousness, giving loans at interest, and devouring the wealth of the people.
But then these two Ayahs add: “and We have prepared for the unbelievers among them a painful chastisement.” So who were the unbelievers among them for whom a painful chastisement was reserved? To answer this question, we will have to study the other set of two Ayahs which we mentioned above; namely, Ayahs 34-35 from Surah at-Taubah:
O believers, many of the Rabbis and monks indeed devour the wealth of the people by means of falsehood and bar from Allah’s Way. Those who hoard up gold and silver and do not expend them in the Way of Allah — give them the good tidings of a painful chastisement, the day they shall be heated in the fire of Hell and therewith their foreheads and their sides and their backs shall be branded: ‘This is the thing you have hoarded up for yourselves; therefore taste you now what you were hoarding.’
The Practice of Money-Hoarding
We need to say a word about the hoarding of gold and silver. The Arabs often used the Byzantine currency. This consisted of the Denarius which was minted in gold, and the Drachma which was minted in silver. So whoever was hoarding money was, ipso facto, hoarding gold and silver.
The two Ayahs quoted above tell us that it was the rabbis among the Jews who charged interest and devoured the wealth of the people. Through their office, they were able to gather money and lend it out on interest, just like Abu Lahab did. They then set up pseudo-banks with this money to further indulge in money-hoarding.
As a result, we can state unequivocally that the above Ayahs reaffirm the message of Surah al-Humazah; namely, that greedy hoarding of wealth and lending out of loans on interest is a form of Kufr. Islam has no room for greed or malicious monetary practices.
The Concept of Usury and Interest
Surah ar-Rum mentions the technical term, Riba, in the Quran. This occurs in the second of these two related Ayahs; namely, Ayahs 38-39:
And give the kinsman his right, and the needy, and the traveller; that is better for those who desire Allah’s Countenance; those — they are the prosperous. And what you give for Riba, that it may increase upon the people’s wealth, increases not with Allah; but what you give in alms, desiring Allah’s Countenance, those — they receive recompense manifold.
We left “Riba” untranslated in order to enhance what the Quran means by it. It means the increase in the value of the loan by the time it is repaid. The Ayah makes it absolutely clear that Riba is that increase irrespective of its value. Consequently, Riba can only be translated by the financial term “interest”.
But that is not all. Surah al-Imran, Ayah 130 further adds:
O believers, devour not interest, doubled and redoubled, and fear you Allah, that you may prosper.
The above Ayah irrevocably bans usurious interest.
As quoted above in Surah an-Nisa 160-161, we have seen that usurious as well as normal interest was forbidden to Hz Musa (AS). This makes one wonder: if interest was forbidden to Musa, why not also to Muhammad?
The answer to the above query can be found in Surah al-Baqarah Ayahs 274-281:
Those who spend their wealth night and day, secretly and in public, their wage awaits them with their Lord, and no fear shall be on them, neither shall they sorrow.
Those who devour interest shall not rise again except as he rises, whom Satan of the touch prostrates; that is because they say, ‘Trade is like interest.’ Allah has permitted trade and forbidden interest. Whosoever receives an admonition from his Lord and gives over, he shall have his past gains, and his affair is committed to Allah; but whosoever reverts — those are the inhabitants of the Fire, therein dwelling for ever.
Allah blots out interest, but He augments freewill offerings. Allah loves not any guilty ingrate.
Those who believe and do deeds of righteousness, and perform the prayer, and pay the alms — their wage awaits them with their Lord, and no fear shall be on them, neither shall they sorrow.
O believers, fear you Allah; and give up the interest that is outstanding, if you are believers.
But if you do not, then take notice that Allah shall war with you, and His Messenger; yet if you repent, you shall have your principal, unwronging and unwronged.
And if anyone should be in difficulties, let him have respite till things are easier; and that you remit the debt as almsgiving would be better for you if you did but know.
And fear a day wherein you shall be returned to Allah, and every soul shall be paid in full what it has earned; and they shall not be wronged.
This is the most definitive statement of the Quran on the practice of lending at interest. It constitutes a most stringent prohibition on interest and a most severe denunciation of those who practice it. The statement makes it incumbent upon the state to enforce this prohibition.
Lastly, we turn to the statement: “they say, ‘Trade is like interest.’ Allah has permitted trade, and forbidden interest.” The Quran is saying in this statement that there are two sectors to the economy. There is the productive sector which generates the products, the goods, and the services and which gives rise to salaries, profits, and jobs, and generates income to the whole economy. Then there is the so-called “financial trading” sector which sucks the income generated by the productive sector in the form of interest, mortgages, arbitrary rents and transaction fees. The Quran says unequivocally that such fraudulent trading activities are not permitted.
Editor’s Note: What about Modern Banking?
So now the big question is: what about modern-day banking?
Most banks of today lend money on interest. They also allow people to save their money with them for a fixed term (a cloaked form of hoarding) and earn interest on the “saved” money. These two activities, obviously, are not permitted in Islam.
Similarly, actions such as offering interest on money invested in the guise of insurance or savings schemes are just fancy words for hoarding of money. People with surplus money tend to hoard them with banks in the hopes of earning high rates of usury.
Furthermore, banks loan money to needy people in hopes of charging high rates of usury. Such acts are most unworthy of praise in the Sight of Allah.
An acceptable banking model would be one that avoids interest in all forms and makes life easier for the masses. Such banks, of course, can hardly be private ventures and are totally unlike the modern-day Western banks that are based on profit.