Interest Rates
The Dilemma of Saudi Arabian finance
When ideologies and religion, and economics concept conflict, trouble appears on the surface! Who wins in this battle? History has proved that religious ideas win. This winning, however, have serious consequences and opportunity costs on the work of the market economy and efficiency of the economy as a whole. The majority of Saudi people, and even institutions, have the belief that interest rate is prohibited by their religion, Islam, so they avoid any transaction that involves interest rates. Most Islamic scholars throughout the Islamic world have interpreted interest rates as to be usury-plus or riba, which is strongly prohibited by Islamic laws and therefore, the prohibition of any transactions, jobs, and financial instruments that involve interest rates. This causes serious difficulties for the Saudi individuals (i.e., borrowing activities, banking jobs), government institutions (i.e., central bank’s use of the monetary policy tools), banks (i.e. lending activities, stability of jobs), and even the institutional framework (i.e. development of the financial market, giving incentives for development of black markets). Surveying the extent of the problem in the Saudi society and examining both side of the story, that is, the Islamic and economic point of views of interest rates, and clarifying some misinterpretations and confounding would give us insights about the magnitude of this problem, its negative consequences and the potential solutions. explaining the pure Islamic definition of riba based on the main Islamic law sources (Qur’an and Sunnah). and, reviewing some of the opinions of Islamic scholars toward interest rates and interest rates-based banking. will look at the capitalistic reasons behind the existence of interest rates in the economic system, including discussions of some concepts such as the time value of money, inflation, risk and the function of money in the economy. And will be devoted to exploring the dimensions and negative consequences of the problem in the Saudi society. This discussion will help for sub-discussions on the individual level, banking level and the institutional framework. And this may help to raise some confounding in the interpretation of interest rates as to be riba by identifying which is which, in the seek of coming up with a plausible conclusion and insights about the problem. The Pure Islamic Definition of Riba (Usury Plus) Both the Holy Qur’an and Bible are not only concerned with spiritual matters but also with other aspects of life. Unlike the Bible, the Qur’an is more concerned with the economic activities of humans. This emphasis on economic activities in Qur’an was also a concern of Prophet Mohammed himself, who was also a law maker and guidance which all Muslim believers were required to follow. This is to say that the Qur’an is the first and main source for Islamic law (Shariah), and anything that did not come explicit in Qur’an was to be found in the explanations and doings of Prophet Mohammed. Thus, the second source for Islamic law[1] is the Prophet’s sayings and doings (Sunnah), which are supposed to be complementary and explanatory of what came in Qur’an. Borrowing and lending activities and the interest rates involved were one of those economic issues that were explicit neither in Qur’an nor in Sunnah, and thus generated a strong debate throughout the Islamic world regarding its prohibition. There are few versus in the Qur’an that indicate riba but, do not explain it explicitly. For example:Those who swallow riba cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say: Trade is just like riba: whereas Allah permitteth trading and forbiddeth riba… Allah hath blighteth riba and made Sadaqat fruitful. Allah loveth not the impious and guilty. (Surah Al-Baqarah, II: versus 275-276)
It is obvious that no explicit explanation for riba in the above versus is provided. However, it is contrasted with trade. Although the contrasted type of trade is not explicit, it could be all kinds of trade that generate lawful profits and hurt no party involved in the trade transaction. Another contrast is between riba and Sadaqat (charities). This is to say that riba is not like charities which are given for non-profit-seeking purposes but for the sake of brotherhood and God’s (Allah) forgiveness and goodwill. Thus, riba is different from trade in terms of the embodied transactions and from charities in terms of the eventual goals. In other versus of the same Surah (chapter):
O ye who believe, observe your duty to Allah and give up what remaineth (duty to you) from riba, if ye are (in truth) believers. And if ye do not, then be warned of war (against you) from Allah and His messenger. And if ye repent then ye have your principal. Wrong not, and ye shall not be wronged. (II: versus 278-279)
Quite clearly, Islamic teachings of the Qur’an are more concerned with the equality among people and thus no one should make unlawful profit on the expense of others, especially those poor people. Precisely, rich people should not take advantage of poor people and lend them money, when their needs are high and their alternatives are limited by those resources provided by loans from people who have excess resources at abnormal interest rates and enormous costs.
In addition to the above Qur’anic revelations of riba, it was also indicated by Sunnah. One such revelation is:
Jabir ibn ‘Abdullah, giving a report on the Prophet’s Farewell Pilgrimage, said: The Prophet, peace be on him, addressed the people and said “All of riba of Jahiliyyah[1] is annulled. The first riba that I annul is our riba, that accruing to ‘Abbas ibn ‘Abd al-Muttalib [the Prophet’s uncle]; it is being cancelled completely
Another instance where riba was indicated in Sunnah is:
Form Abdullah ibn Hanzalah: The Prophet, peace be on him, said: “A dirham [old Islamic currency] of riba which a man receives knowingly is worse than committing adultery thirty-six times>
As in Qur’an, no explicit explanation of the meaning or riba, its goal and the nature of its transaction, was provided in Sunnah. However, there is one instance in Sunnah where more details about the nature of riba was provided. That is: [Exchange] gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, measure for measure, and hand-to hand [i.e. immediately]. If the articles belong to different genera, the exchange is without restraint provided it takes place in hand-to-hand transaction. This quote tells us that when an exchange for the same commodity (i.e., barter) takes place, the commodities exchanged should be identical in terms of amounts and timing. If commodities were different in type, the amount constrained is relaxed but, the timing constraint still persist. Nevertheless, it is not clear whether these constraints are only applicable for the above mentioned commodities in particular or for all commodities. This issue is not yet settled down and still subject for a big debate among Muslim scholars (Ray, 1995 and Homoud, 1985). From the above discussion, both Qur’an and Sunnah do not define the explicit and exact meaning of riba. Thus, the crucial question that should answered very clearly and unambiguously is whether riba is identical to interest or not. Also, it is important to remember the very first teaching of Islam that “all things are allowed unless there is a clear indication in Qur’an or Sunnah of their prohibition.” Furthermore, the prohibition of riba existed at a specific time-period and the reason underlying its probation is definitely because it would have negative consequences on both the society and individuals. I cannot provide a definite answer to the meaning of riba because neither the Qur’an nor the Sunnah did. A suggested approach for pursuing this goal is to analyze the reasons behind the prohibition of those so-called riba transitions within the historical timeframe given the existing socio-economic factors.
Best regards,
Bin Adlam, A.
