Understanding Riba

by Umar Ibrahim Vadillo

It is generally assumed that from the point of view of material wealth, things have never been better than today. This is assumed, despite just having crossed over the most murderous century in human history, which saw for the first time the use of weapons of mass destruction on civilian populations, the colossal annihilation of the eco-system and fauna, and the largest numbers of starvation victims known in history. All past and present miseries are forgotten before the general assumption that the average person today enjoys a standard of living not equalled in any other time. Yet, it has not been the same for all people of the world. While a material improvement has been achieved for a relatively small portion of mankind, the bottom half still lives below the poverty-line of 2 USD a day, and, collectively, inferior to the income of the 387 largest individual earners. This disequilibrium in wealth goes hand in hand with a corresponding political and military imbalance that has turned one nation in particular into the police-ruler of the world.

During this period of a massive shift of wealth to a small corner of the world, the Muslims have lost an immense part of their past economic and political status. The political unity represented by the Khalifate, that granted Muslims a voice in world affairs, was devastated, and instead a shower of tiny nations emerged under the auspices and new legal frame of the United Nations. Large parts of our population belong to the bottom half of world earners, and our combined GDP does not reach 1/10 of the GDP of the USA. Politically divided, and losers in the economic share-out, Muslims face only the prospect of being underdogs in the present economic system. Under this regime a continuous erosion of our social and cultural life is inevitable, which in turn results in the increased anger and frustration of our youth.

This present system of economic disequilibrium is self-preserved by diverting people’s attention away from economic matters and onto political matters. The economic system which causes the imbalance is taken for granted, and individual political tyrants become the focus of political struggle. Under these circumstances the economic system remains unquestionable and therefore its continuation is guaranteed.

At its core, this system of disequilibrium which we call capitalism is based on usury. Usury is in itself disequilibrium. Mechanised usury through the banking system has turned a criminal contract into a means of economic domination. As long as we remain slaves of Riba, our Muslim nation will remain enslaved.

A society which misunderstands the dynamics of the world will find it difficult to focus in establishing its goals. These are swept away in the emotion of the moment. And so, acts which are intended ‘to do good’ are lost in a lack of direction. Under such circumstances, no amount of effort will prove fruitful.

Understanding Riba is essential to understanding capitalism. The Islamic understanding of Riba opens the path to restore our own Mu’amalat and thus create the tools that can overcome the present system. Riba is not just negative. It opens the path to the positive construction of the Halal. Only when we remain confused between the Halal and the Haram can our enemies find it easy to destroy our efforts. In this document we intend to cast some light on this matter of Riba.

Allah says in the Qur’an:

“Allah has permitted trade and forbidden usury”

Riba represents the opposite of trading, it is the corruption of trading. There cannot be trading with Riba, nor Riba with trading. Yet, Riba has become the core of today’s face of kufr: capitalism. For this reason, Riba is the most important political issue facing our Muslim nation today. Riba affects every aspect of our life and it can be traced back to two main institutions: the Bank and the State. Despite its importance, most Muslims’ understanding of it remains superficial. Most people simply think that Riba is merely interest. The reality of Riba is a much more complex affair. This misunderstanding is not just a miscalculation; it is the product of a mis-education and indoctrination which has resulted from two phenomena: one, the destruction of the political power of the Khalifate, and two, the process of the so-called ‘Islamic reform’ which followed. This misunderstanding opened the gates to the ‘islamisation’ of the most important institution of capitalism: the bank. What the open market-place is to trading, the bank is to Riba.

A ‘reformed Riba’ was to allow the new promoters of the ‘Islamic bank’ to justify their actions. It is for this reason essential to return to a correct understanding of this key term in the fiqh, which can allow us to discern what is haram and what is halal. This is crucial to overcome capitalism and its illusion of power.

This brief introduction will try to outline as plainly as possible the issue of Riba in Islamic Law, and undo the misunderstanding created by the ‘reformers’ and modernist scholars.

Riba literally means ‘excess’ in Arabic. Qadi Abu Bakr ibn al-Arabi, in his ‘Ahkamul Qur’an’ defines it as: ‘Any excess between the value of the goods given and their countervalue (the value of the goods received).’ This excess refers to two matters:

1] an extra benefit arising from unjustified increase in the weight or measure, and

2] an extra benefit arising from unjustified delay.

These two aspects have led our scholars to define two types of Riba. Ibn Rushd said:

‘The jurists unanimously agreed about Riba in buyu’ (trade) that it is of two kinds: delayed (nasi’ah) and stipulated excess (tafadul).’

That is to say, there are two types of Riba:

1] Riba al-Fadl (excess of surplus)

2] Riba an-Nasiah (excess of delay)

Riba al-fadl refers to quantities. Riba an-nasiah refers to time delay.

Riba al-fadl is very easy to understand. In a loan, Riba al-fadl is the interest that is overcharged. But in general it represents when one party demands an additional increase to the countervalue. One party gives something worth 100 in exchange for something worth 110. This is also the forbidden case in which two sales transactions are linked by a single contract (known as ‘two transactions in one’), in which one party is obliged to sell something at one price and to resell it after a time to the original seller for a decreased value. As a matter of fact, this is only a subterfuge to disguise the loan with interest under the pretence of a sale. Nobody needs these subterfuges today because you can get the loan directly in the bank. But the Islamic banks have resorted to this old trick to deceive their customers under the misinterpreted name of ‘murabaha’.

Understanding Riba an-nasiah is more subtle. It is an excess in time (delay) artificially added to the transaction. It is an unjustified delay. This refers to the possession (‘ayn) and its non-possession (dayn) of the medium of payment (gold, silver and food stuff –which was used as money). ‘Ayn is tangible merchandise, often referred to as cash. Dayn is a promise of payment or a debt, or anything whose delivery or payment is delayed. To exchange (safr) dayn for ‘ayn of the same genus is Riba an-nasiah. To exchange dayn for dayn is also forbidden. In an exchange it is only allowed to exchange ‘ayn for ‘ayn.

This is supported by many hadith on this issue. Imam Malik related:

‘Yahya related to me from Malik that he had heard that al-Qasim ibn Muhammad said, “Umar ibn al-Khattab said, ‘A dinar for a dinar, and a dirham for a dirham, and a sa' for a sa'. Something to be collected later is not to be sold for something at hand.’”

Yahya related to me from Malik that Abu'z-Zinad heard Sa'id al Musayyab say, “There is usury only in gold or silver or what is weighed and measured of what is eaten and drunk.”’

The hanafi scholar Abu Bakr al-Kasani (d. 587H) wrote:

‘As for Riba al-nasa’ it is the difference (excess) between the termination of delay and the period of delay and the difference (excess) between the possession (‘ayn) and non-possession in things measured and weighed with different genera as well as in things measured and weighed with the uniformity of genera. This is according to ash-Shafi’i (Allah bless him), it is the difference between the termination of the period and the delay in foodstuff and precious metals (with currency-value) specifically.’

Riba an-nasiah refers particularly to the use of dayn in the exchange (sarf) of the same genera. But the prohibition is extended to sales in general when the dayn representing money overpasses its private nature and replaces the ‘ayn as medium of payment.

Imam Malik, may Allah be merciful to him, illustrates this point in his ‘Al-Muwatta’:

‘Yahya related to me from Malik that he had heard that receipts (sukukun) were given to people in the time of Marwan ibn al-Hakam for the produce of the market of al-Jar. People bought and sold the receipts among themselves before they took delivery of the goods. Zayd ibn Thabit, one of the Companions of the Messenger of Allah, may Allah bless him and grant him peace, went to Marwan ibn Hakam and said, “Marwan! Do you make usury halal?” He said, “I seek refuge with Allah! What is that?” He said, “These receipts which people buy and sell before they take delivery of the goods.” Marwan therefore sent guards to follow them and take them from people’s hands and return them to their owners.’

Zayd ibn Thabit specifically calls Riba those receipts (dayn) ‘which people buy and sell before taking delivery of the goods.’ It is allowed to use the gold and silver or food to make the payment, but you cannot USE the promise of payment. In it there is an excess that is not allowed. If you have dayn, you have to take possession of the ‘ayn it represents and then you can transact. You cannot used the dayn as money.

In general the rule is that you should not sell something which is there, for something which is not. This practice is called Rama’ and it is Riba.

Imam Malik: ‘Yahya related to me from Malik from ‘Abdullah ibn Dinar from ‘Abdullah ibn ‘Umar that ‘Umar ibn al-Khattab said: “Do not sell gold for gold except like for like. Do not increase part of it over another part. Do not sell silver for silver except for like, and do not increase part of it over another part. Do not sell some of it which is there for some of it which is not. If someone asks you to wait for payment until he has been to his house, do not leave him. I fear rama’ for you. Rama is usury.”’

Rama’ is today the common practice in all our markets. Dayn currency (paper money, receipts) has replaced the use of ‘ayn currency (Gold Dinar, Silver Dirham). This practice is what Umar ibn al-Khattab meant when he said ‘I fear rama’ for you.’

Selling with delay is not restricted to metals, it also includes food. Malik said, ‘The Messenger of Allah, may Allah bless him and grant him peace, forbade selling food before getting delivery of it.’

Therefore, what is prohibited in Riba an-nasiah, is the addition of an artificial delay that does not belong to the nature of the transaction. What does ‘artificial’ and ‘the nature of the transaction’ mean? It means that every transaction has its own natural conditions of timing and price.

A loan involves delay but not quantity excess. One person gives an amount of money, and after a period of time (excess) the person returns the money without increase. The excess in time is justified and is halal, but adding an increase in the quantity to be repaid is unjustified and is haram. This would be Riba al-fadl.

An exchange involves no delay and no quantity excess. One person gives an amount of money and without delay the equivalent is given. Delays are not justified in an exchange. If you want to delay the payment, you have to make a loan, you cannot obtain a loan disguised as a ‘delay exchange’. Delayed exchange is Riba an-nasiah.

A rental involves delay and excess and it is halal. When you rent a house, you take possession of the house for a time (excess) and you return it plus the payment of a rent (excess). These excesses both in time and quantity are justified and they are halal. But you can only rent merchandise that can be hired. You can hire a car, a house or a horse. But you cannot hire money or food-stuffs (fungible goods). To pretend to hire money is to corrupt the nature of the transaction and it becomes Riba.

Thus every transaction has its conditions relating to its nature. You cannot take the conditions of one type of transaction and try to apply them to the other, without corrupting the transaction. To add unjustified conditions or excess to a transaction is Riba.

Since dayn is in itself a delay, the use of dayn is restricted to private transactions and it is prohibited as a general means of payment (money). While dayn per se is halal, it is not halal to use it as money. Dayn is a private contract between two individuals and must remain private. The transfer of dayn from one person to another can be done Islamically, but only by the elimination of the first dayn and the creation of a new one. The dayn cannot circulate independently of what it represents. The owner must take possession of the goods and liquidate the dayn. Dayn cannot be used in an exchange and it cannot be used as a means of payment. It is specifically forbidden to use dayn to pay zakat.

The misunderstanding of Riba by Islamic reformers

Islamic reformers and modernist scholars have made a deliberate effort to equate Riba with Riba al-fadl and ignore Riba an-nasiah. Saying ‘Riba is interest’ is part of this misunderstanding.

Their misunderstanding starts with the early reformers, especially Rashid Reda. Rashid Reda presented a new classification of Riba. Reda made a distinction in the legal treatment of what he called the ‘Riba of the Qur’an’ and the ‘Riba of the Sunnah’. Reda maintained that the primary form of Riba was the one prohibited by the Qur’an, and this prohibition is to be maintained at all times. On the other hand, he said, the texts of the Sunnah prohibit a lighter or secondary type of Riba – according to him – which is generally prohibited but may be permitted in case of necessity (darurah).

He maintained that the Riba prohibited in the Qur’an was the Riba known as ‘Riba al-jahiliyah’ (when a person did not pay his due after the stipulated time, the seller would increase the price) which he wrongly equated with Riba an-nasiah. And he wrongly said that Riba an-nasiah (completely misunderstanding its meaning) was only haram when it involved compound interest, and therefore single interest was excluded from the prohibition. He therefore concluded that simple interest charged or paid by banks was not prohibited by the provisions of the Qur’an at all, nor by the Sunnah.

He also maintained that the remaining prohibition from the Sunnah referred to the specific event of the exchange. Thus for example if two persons were exchanging gold with one another, the amount of gold must be equal in weight on both sides and the two quantities must change hands on the spot, at once. He argued that unlike the Riba al-jahiliyah, this type was not known to the Arabs, since it was difficult to conceive of why two persons would exchange equal quantities of the same commodity at once. Riba al-fadl was seen as part of the abandoned practice of barter when people would exchange gold for gold (and similar), yet it is not practiced any more.

The famous hadith of ‘hand to hand’ and ‘equal for equal’ referring to Riba, has not been understood by the modernist scholars. They could not understand the relevance of the argument and the form in which is described. Gold for gold, equal for equal and hand to hand, is a description of the balance of the transactions. One aspect refers to the equivalence in the quantities which refers by default to Riba al-fadl; the other refers to the immediateness of the transaction which refers by default to Riba an-nasiah. It forbids the possibility of exchanging ‘gold which is not present’ (dayn) for ‘gold which is present’ (‘ayn). It is very relevant because this is how Muslims were cheated away from their gold, by exchanging it for false promises of gold (the original form of paper money). It follows that, in order to make paper money halal, the modernist scholars had to ignore the relevance of this hadith and this formulation.

The hadith refers in the positive to the specific event of exchanging Dinars and Dirhams of different denomination; in the negative to the impossibility to use promises of payment in the exchange. Both cases are relevant and important to us.

In conclusion, Reda’s views were that:

A] Riba an-nasiah was only Riba al-jahiliyyah. And only compound interest was forbidden by it.

B] Riba al-fadl was relative to the exchange. It was secondary in nature and it could be accepted in case of necessity (darurah).

The followers of Reda basically adopted the same classification but differed with him on the issue of the compound interest. They agreed that single interest was also haram, but they agreed that darurah can be applied. And they saw Riba al-fadl as being secondary, related to what they saw as barter.

The truth is that both Riba an-nasiah and Riba al-fadl are prohibited by the Qur’an. In fact the Riba of the Qur’an and the Riba of the Sunna are exactly the same. The Sunna simply acts as a living commentary of the Qur’an.

The Riba known as Riba al-jahiliyyah contains both Riba an-nasiah and Riba al-fadl. In this transaction, the payment is delayed (nasiah) in exchange for an increase (fadl).

But Riba an-nasiah involves more than just the Riba al-jahiliyyah.

The implications of the modernist position

By ignoring the true nature of Riba an-nasiah, modernist scholars have avoided confronting the issue of paper money. Let us look at this issue which the modernists have missed. Paper money can be considered as ‘ayn or as dayn.

A] If we accept the fact that paper money is dayn, it means that it is an obligation to pay a certain amount of ‘ayn. Then paper money cannot be used in exchange and it is forbidden in two practices:

1) Dayn cannot be exchange for dayn. Paper money for paper money is a debt for a debt, which is prohibited. Malik said:

‘[the disapproved transaction] Delay for delay is to sell a debt against another man for a debt against another man.’

2) Dayn based on gold and silver cannot be exchanged against gold or silver, because that is against the fundamental command related by Imam Malik:

‘Yahya related to me from Malik from Nafi’ from Abu Sa’id al-Khudri that the Messenger of Allah, may Allah bless him and grant him peace, said, “Do not sell gold for gold except like for like and do not increase one part over another. Do not sell silver for silver, except like for like and do not increase one part over another part. Do not sell some of it which is not there for some of it which is.””

B] If we accept that paper money is ‘ayn, its value is the weight of the paper, not what is written on it. If the value of the paper is increased by compulsion, the value is corrupted and the transaction is void according to Islamic Law. Paper money is used by the State as an (illegal) tax and it cannot be presented as an Islamic means of payment.

Understanding Riba an-nasiah is fundamental to being able to understand our position regarding paper money. The reason why the modernist ulema took their twisted position on Riba was clearly to validate the unthinkable: banking. This justification later turned into Islamic banking. The principle of darurah combined with the elimination of Riba an-nasiah has allowed them to justify the use of paper money and in turn to justify fractional reserve banking which is the basis of the modern banking system.

A proper understanding of Riba an-nasiah reveals paper money to be a form of Riba in itself, because it is intended to be used in a way that is not permitted.