By Aishat Adegboyeva,
Edited by Sanaa Kadi
Rules and injunctions abound under Islamic Law that guides the Islamic way of life. As rightly believed by most Muslims, Shari’ah – especially the Quran and the Sunnah was revealed to guide the path of morality and conscientiousness, with matters such as ribā being seen as contrary to the injunctions of the Quran. Against this backdrop, more research is being conducted on these injunctions, especially regarding ribā, to determine how it juxtaposes modern conventional banking.
This blog post would address the concept of ribā, modern conventional principles, and whether ribā interoperates with current conventional banking or Islamic banking principles.
Understanding Ribā
Ribā is an Arabic word meaning “to increase” or ‘to exceed’, which is often used in reference to unequal exchanges or charges and fees for borrowing.[1] Matters on ribā still cause a major stir amongst scholars and Muslim jurists, especially as there exist different Islamic schools of law. Generally, ribā is considered haram (sinful) and impermissible with a strong consensus on ribā being forbidden under Sharia law.
Conventional Banking Principles – Trade or Ribā?
Ribā is synonymous with usury, which is the lending of money with an unreasonably high-interest rate.[2] Even though Islam does not prohibit banking, trading, and/or investment,[3] in Islamic banking and finance, investment, or commercial activities that return interest are considered haram (sinful) and therefore not allowed.[4] With the advent of the 20th century ushering in the practice of Islamic banking, there began the proponent of converting conventional interest-based banking and loans with the replacement of profit and loss-sharing investments.[5] The position of States choosing to set their own respective usury laws rather than prohibit them in their entirety is evidence of the prominence usury is having in modern conventional banking. The way Islamic banking has navigated this aspect especially is to provide financial transactions without charging interest rates, and in cases of advancing loans, enter a contract based on either partnership (e.g., Musharakah and Mudaraba) or sale base modes (e.g., Murabaha).[6]
Interest and loans appear to be widely accepted in conventional banking both in theory and practice,[7] which is in contrast with Islamic injunctions according to Muslim scholars.
References
[1] M.H. Khatkhatay and Shariq Nisar, ‘Sharī’ah Compliant Equity Investments: An Assessment of Current Screening Norms’ (2007) 15 Islamic Economic Studies 1.
[2] John Munro, ‘Usury, Calvinism, and Credit in Protestant England: From the Sixteenth Century to the Industrial Revolution’ (2011) <https://ideas.repec.org/p/tor/tecipa/tecipa-439.html> accessed 26 February 2023.
[3] Choudhury Masudul Adam, Rahman Asmak and Hasan Abul, ‘Trade Versus Riba in the Qur’an with a Critique of the Role of Bank Saving’ (2018) 60 International Journal of Law and Management 701.
[4] Khatkhatay and Nisar (n1).
[5] Muhammad Zahid Siddique, ‘Modern Money and Islamic Banking in the Light of Islamic Law of Riba’ (2022) 27 International Journal of Finance and Economics 993.
[6] 6 Ibid.
[7] Ismail Abdul Ghafar, Possumah Bayu Taufiq and Ali Mohd Akil Muhamed, ‘What You Sell Is What You Lend? Revealing Complexity of Riba in Loan Contract’ (2018) 45 European Journal of Law and Economics 591