Riba, Modern and Islamic Banking: A Critique

The Concept of Riba (Interest) in Al-Qur’an: Its Application in Modern Banking. Two distinct schools of thought have emerged regarding the interpretation of Qur’anic verses pertaining to Riba (usury/interest). The traditional classical Muslim scholars assert that Riba in any form including interest paid or charged by conventional banks is prohibited according to Qur’anic injunctions and Traditions of the Prophet (SAWS). An eloquent and a most explicit Exposition of the views of this school of thought is found in the Shari’ah Bench Judgment of the Federal Court of Pakistan (December, 1999).

The other school of thought is led by group of modern Muslim scholars who argue that the Qur’anic verses on Riba were revealed to prevent the exploitation of the poor and the needy by the rich members of the tribal society, which was prevalent in pre-Islamic Arabia (Jahiliyyah Period). This cardinal fact (Shan-e-Nuzul—rationale for revelation) cannot be overlooked in any interpretation of the verses of the Qur’an on Riba. Moreover, such transactions during that period were between two individuals where the lender charged exorbitant interest (Usury) if the borrower defaulted on repaying the loan.

These Muslim scholars argue that the socio-economic has radically changed since the revelations of the verses on in the early seventh century. Banking institutions have been established, replacing the individuals, to fulfill the credit needs of the customers. The interest charged by banks is moderate. Banks invest the deposits they receive in industrial, agricultural, commercial and other developmental activities. Thus they offer their customers, including middle and lower income group’s financial stability. Hence they insist on the need for Ijtihad, which is permissible in Islam, because all the activities of conventional banks cannot be summarily condemned as Riba.

The Monograph also highlights the functioning and progress of Islamic banks. They operate in a limited area. Their products are very few. In order to be competitive and to meet the challenge of conventional banks, Islamic banks will have to diversify their products to attract larger number of customers. Some of the leading international conventional banks have already opened Islamic windows to attract Muslim customers, who on religious grounds do not keep their money in conventional banks. This, indeed, is a great challenge to Islamic banks.

It has been proposed in this Monograph that the products of the conventional banks ought to be carefully scrutinized. Islamic banks should adopt and internalize those products, which do not violate the principles of Riba and which contribute to progress and welfare of human beings and are in harmony with the progressive spirit of Islam. It was to prevent the exploitative Riba system prevalent during the Jahiliyyah period that the Qur’anic verses were revealed.

This principle remains valid even to date i.e. to prevent the enrichment of the rich and exploitation of the poor, its applicability needs Ijtihad. It has to be significantly.