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INTEREST. The question of whether interest is a legitimate financial instrument has long been a source of controversy throughout the Islamic world. The origins of the controversy lie in Qur’anic verses that prohibit ribs, the ancient Arabian practice whereby borrowers saw their debts double if they defaulted and redouble if they defaulted again. Over the centuries, many Muslims have inferred from these verses that any loan contract specifying a fixed return to the lender is immoral and illegal, regardless of the loan’s purpose, its amount, or the prevailing institutional framework. And on this basis, they have condemned an array of common business practices as un-Islamic.


Anti-interest sentiment, however, has seldom translated into effective political action. At the start of the modern era the anti-interest movement was fragmented, disorganized, and lacking in forceful intellectual leadership. Under the circumstances, Muslim governments, firms, and individuals were openly charging and borrowing interest without encountering any serious opposition. The modern era’s first powerful movement to abolish interest-laden business practices developed in India in the waning years of British rule. The movement’s preeminent spokesman was Sayyid Abu al-A`la Mawdudi (1903-1979), a prolific writer who depicted interest as a tool of Western dominance and a source of Muslim decadence.

Since the mid-i96os, Mawdud-l’s Pakistani and Indian followers have figured prominently among the contributors to a vast, and still growing, anti-interest literature within the field of Islamic economics. This literature offers numerous justifications for banning interest. The most prominent is that interest provides an “unearned gain” to the lender (who earns a return without exerting any effort), while imposing an “unfair obligation” on the borrower (who must repay the loan plus a finance charge even in the event of misfortune). Other justifications for the ban are that interest worsens the distribution of income by transferring wealth from poor to rich; that it promotes selfishness and weakens communal bonds; and that, by fostering idleness, it deprives society of the labor and enterprise of potentially productive people.

Muslims opposed to the anti-interest campaign argue that the purpose of banning ribs was simply to eliminate a specific source of exploitation, inequality, and communal tension. In this interpretation, ribs had to be prohibited because it was pushing large numbers of people into enslavement. The ban was never intended to apply to all forms of interest, as evidenced by the fact that prominent early Muslims distinguished between ribd and various other forms of interest. Another commonly expressed rationale for rejecting a total ban is that in modern economies interest-based financial contracts seldom create grave risks. Competitive pressures generally keep rates within bounds. Moreover, bankruptcy laws and social security programs protect borrowers against unanticipated contingencies.

The case against prohibiting all forms of interest was put forth boldly by Fazlur Rahman, a Pakistani professor of Islamic thought, in 1964. Rahman endured intense criticism for his position, which came to be dubbed “modernist.” Over the years, a few other prominent Islamic thinkers and officials have embraced the modernist position. Most significantly, in 1989 Muhammad Sayyid Tantawi, mufti of Egypt, issued a fatwd (legal opinion) to the effect that “harmless” forms of interest, such as those payed by government bonds and ordinary savings accounts, do not violate the spirit of Islam. There have also appeared, mainly in Western publications, scholarly critiques of the anti-interest drive, including some written by Muslims residing in the West.

Within Islamic circles, however, mainstream intellectual opinion continues to hold that interest is an impediment to social justice. All the research institutes and economics departments that have been established to promote “Islamic economics” treat the abolition of interest as the sine qua non of veritable Islamic economic reform. Moreover, from the Far East to the Atlantic, political parties pursuing an Islamic agenda agree, at least officially, as to the urgent necessity of eradicating interest.

The rise of the modern anti-interest movement was not accompanied, at first, by any practical successes. Interest-based contracting remained common, with few opportunities-outside of informal local networks-for saving, investing, borrowing, or lending in an interestfree manner. The 1930s saw a few attempts to establish interest-free banks in India, but they all failed. The first successful bank operating on an interest-free manner was opened in 1963 in the Egyptian town of Mit Ghamr. Although modeled after West Germany’s local savings institutions, this bank eventually claimed an Islamic identity, on the grounds that it payed no interest on deposits and charged no interest on loans, borrowing and lending strictly on the basis of profit-and-loss sharing. The first bank to assert an Islamic identity from the start opened in Dubai in 1975. The subsequent decade saw the spread of Islamic banking to more than fifty countries, including numerous predominantly non-Muslim countries. Many of these banks, like the schools and institutes that promote Islamic economics, were established largely through Saudi Arabian capital, although Saudi Arabia itself has remained closed to interest-free banking.

The greatest victories of the anti-interest movement have come in Iran and Pakistan, each of which has decreed interest illegal. Four years after the Islamic Revolution, Iran ordered its banks to purge interest from all their operations. For its part, Pakistan moved in 1979 to require its banks to abandon interest within five years, although the order’s practical impact was deliberately muted by placing some common financial practices outside the Federal Shariat Court’s jurisdiction. With the expiration of the exclusions in 1990, the court was quick to rule that Pakistani banks were continuing to engage in various un-Islamic practices. In 1992, it removed various critical exemptions.

Regardless of whether the practices declared illegal are in violation of Islamic teachings, it is true that Pakistan’s Islamic banks have been paying and charging interest as a matter of course, albeit disguised as a “service charge” or “markup.” Even the architects and executives of these banks admit, although generally only in private, that there is nothing inherently Islamic about their country’s new financial system.

Outside of Iran and Pakistan, interest continues to be payed and charged relatively openly. And where Islamic banks exist, their operations rely almost exclusively on camouflaged interest. Alternatives to interest-based financing are emerging under the aegis not of Islamic banks, think-tanks, or regimes, but of secular organizations. Specifically, veritable profit-and-loss sharing is occurring in burgeoning stock markets that have been established outside the purview of Islamic economics.

[See also Banks and Banking; Economics, article on Economic Institutions.]


Abdul Mannan, Muhammad. Islamic Economics: Theory and Practice. Lahore, 1970. Widely available textbook that focuses on the urgency and feasibility of eradicating interest.

Ahmed, Ziauddin, et al., eds. Money and Banking in Islam. Jeddah, 1983. Essays on the mechanics of eliminating interest, including an influential 198o report by Pakistan’s Council of Islamic Ideology. Chapra, Mohammad Umer. Towards a gust Monetary System. Leicester, 1985. The most forceful philosophical argument against interest.

Kuran, Timur. “The Economic System in Contemporary Islamic Thought: Interpretation and Assessment.” International , f ournal of Middle East Studies 18 (May 1986): 135-164. Contains a critique of the anti-interest drive from an economic and sociological perspective.

Kuran, Timur. “The Economic Impact of Islamic Fundamentalism.” In Fundamentalisms and the State: Remaking Polities, Economies, and Militance, edited by Martin E. Marty and R. Scott Appleby, pp.

302-341. Chicago, 1993. Contains an evaluation of practical attempts to eliminate interest.

Pryor, Frederic L. “The Islamic Economic System.” ,journal of Comparative Economics 9 (June 1985): 197-223. Critiques the anti-interest agenda, primarily from the vantage point of macroeconomics. Qureshi, Anwar Igbal. Islam and the Theory of Interest. 2d ed. Lahore, 1967. One of the first comprehensive arguments against interest. Rahman, Fazlur. “Riba and Interest.” Islamic Studies 3 (March 1964): 1-43.

Rodinson, Maxime. Islam and Capitalism (1966). New York, 1973. Best source on the history of the controversy over interest.


Azhar Niaz Article's Source: http://islamicus.org/interest/

  • writerPosted On: May 11, 2014
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