Are There Interest-Based Loans the Quran Permits?

This is part 4 of 5 of our series highlighting key arguments and refutations from Mufti Taqi Usmani and others in the "Historic Judgment on Interest" delivered at the Supreme Court of Pakistan in 1999.

Argument

The fourth argument was that the Quran prohibits riba-al-jahiliyya which according to a number of traditions was a particular transaction of loan where no additional amount over and above the principal was stipulated but if the debtor could not pay back the loan at maturity, the creditor would grant him an extension against charging an additional amount. According to this theory, an increased amount stipulated in the initial loan agreement does not constitute riba al-Quran. It falls in the category of riba-al-fadal, prohibited by the Sunnah. Its impermissibility is of a lesser degree and may be termed disliked but not prohibited. This prohibition may be relaxed in cases of genuine need and doesn’t apply to non-Muslims as it falls within the category of 'Muslim Personal Law,' which does not come under the jurisdiction of the Federal Shariah Court, as established in Article 203(B) of the Constitution of Pakistan.

This argument contends:

• Interest on bank loans is equivalent to riba al fadal which has not been prohibited by the Quran; the Quran only prohibits riba al jahiliyya where the interest amount is imposed after the loan’s maturity.
• Riba al fadal is not prohibited in the Quran but is condemned by the Sunnah and so is a disliked but not an impermissible transaction. Contemporary loan transactions are transactions of riba al fadal where it is acceptable to charge an agreed amount of interest at the time of loan extension.
• An interest-free loan is also based on a riba al fadal transaction.
• The prohibition of riba al fadal does not apply to non-Muslims.

Refutation

This argument is baseless at the outset as it vies to found itself on the false theory that an increase stipulated at the time of contracting a loan is riba al fadal and not riba al Quran/riba al jahiliyya; which is only when a creditor demands an increase after loan maturity. This is not so. Riba al Quran is every transaction that entails an increase on the principal whether or not it is established at contract execution or conclusion.

The claim that interest-free loans too entail riba al fadal, as the Prophetic hadith mentioned the necessity of equal quantity on either side of the transaction and an exchange effected at spot, is inaccurate. The problem with this understanding is that it equates a sale with a loan. The reference in the Prophetic hadith is to a sale and not a transaction of loan.

The hadith states: "Do not sell gold for gold, except in equal quantities...and do not sell the deferred (gold or silver) for the (gold or silver) delivered on the spot."

A sale is different from a loan. In a deferred sale the seller is not allowed to ask the buyer for the price any time before the agreed date while in an interest-free loan the creditor is entitled to ask the buyer to return the loaned amount at any time.

To summarize, riba al fadal applies to sales and not to loans which are covered in the Quran under the subject of riba al Quran/riba al jahiliyya. The Quran clearly states that the creditor is allowed to receive only the principal amount and no more. It is erroneous to consider that a bank loan stipulating interest at the time of the transaction’s execution is covered by the prohibition of riba al fadal and not riba al Quran and therefore disliked but not impermissible.

The contention that the prohibition of riba al fadal falls within “Muslim Personal Law” and does not apply to non-Muslims as it is beyond the Shariah court’s jurisdiction, is inaccurate too. Statute laws such as the one prohibiting riba al fadal even though applicable to Muslims do not fall under the category of “Muslim Personal Law” based on a revision of the mentioned article of the constitution, and apply to all.

In the upcoming part in this series we examine the next Argument:

Though modern interest-based transactions are covered by the prohibition of 'riba', yet commercial interest is the back-bone of the modern economy. Islam, being a practical religion, recognizes the principle of necessity and permits eating pork in extreme situations for survival. The same principle of necessity should be applied to interest-based transactions and the laws permitting interest should not be declared repugnant to Islamic injunctions.

Previous parts of this series can be accessed here:

Part 1 of 5: Is the Definition of Riba Ambiguous?

Part 2 of 5: Does the Word 'Riba' Only Refer to Excessive Interest?

Part 3 of 5: Does the ‘Riba’ in the Quran Also Refer to Modern Commercial Loans?

Source: The Historic Judgment on Interest, Mufti Taqi Usmani, et al., Supreme Court of Pakistan

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