This article was first published by our content partner Islamicfinanceguru
There are lots to discuss in this blog related to riba, from the haram and halal of student loans and forex trading, to the free milk we used to get in primary school. But first, I want to talk about nuclear bombs.
Seventy years had passed this week on the devastation that struck upon Nagasaki, Japan, when the US military dropped a nuclear bomb on the city. At least 70,000 people died in the horrific week following the attack and survivors described how their skins hung off their arms and backs like rags. It was an awful moment in human history.
But why am I going on about WWII when the title is about riba? Trust me; there is a link.
God tells us to give up trading in riba if one truly believe in him, but if we don’t then, we are determined to“take notice of war from Allah and His Messenger.” (2:278-279). In the entire Qur’an nothing else gets the same treatment. Nothing else warrants a war being declared upon you by God himself – except riba.
Why is that? Like war destroys societies, rips apart lives, causes mass injustice, destruction of human life and happiness, and puts in charge those who are bankrolling the whole thing, Islam teaches that so does riba. Riba results in an economic structure geared towards inflation, shifting activity from real productivity (actually making things, providing services, innovating) to an illusion of productivity (money begets money directly). It results in starker and starker rich-poor divides, creates boom-and-bust economies, and enslaves nations to their creditors. The UK only recently paid off the last payment from its loans funding WWI, which was a hundred years ago. Their creditors are currently forcing the Greeks into corners and policies they never wanted to be in. And this is the state of sovereign nations with large armies, what then of the small businessman? Once he’s forced into borrowing using a credit card with 40% interest, he’s always fighting a losing battle.
So riba is pretty severe isn’t it?
But here’s the thing, most people don’t even know what riba is, never mind avoid it. The chances are that you have indulged in riba yourself. Let me prove it to you.
When you join a bank, they give you lots of incentives to open a savings account or current account with them don’t they? “Come to us, and we’ll give you £100 for joining. Come to us, and we’ll give you 1000 nectar points. Come to us, and we’ll give you Amazon Prime for free.”
But did you know that accepting that incentive is haram?
It all comes down to the basic idea behind riba: there needs to be an equal and fair exchange in every transaction. In this case, if you’re loaning your money to the bank, then anything the bank gives you above and beyond your deposited, e.g. your annual interest payment, or, in this case, nectar points, is riba. If you deposit £1000 in your current account, you can only get £1000 back, not £1000 + Amazon Prime Membership!
Of course other incentives given by other companies, such as a phone company or a supermarket to buy with them, for example 50% extra free, 1 years free line rental, or £20 cashback etc, all of these incentives are fine, as there is no loan of money involved here, merely a sale transaction taking place. So here it is not money being exchanged for cash, but money being exchanged for a bag of carrots + 50% extra free carrots. In a sales transaction like that Islamic law gives you a wide leeway to negotiate and offer whatever you like, it is when money is exchanged for cash that we run into issues.
What we all think is riba.
Ask any standard Muslim (let’s call him Kamal) what riba is, and he’ll give you a confident nod. “Of course I know what riba is bruv. Let me give you an example. It’s when you get a £5000 up front from someone and then pay them £5200 back after two months.”
Right, that is riba. But there’s more to riba than just that.
What riba is
In fact there are two kinds of riba, and both are prohibited. Firstly there is riba al-nasiah, This is the interest of delay as explained by Kamal above. This is the standard understanding of interest that we have today: a person borrows £x on day one and has to pay back £x+interest on day ten when he returns the payment to the lender.
The second is riba al-fadl, which is the interest of unequal exchange. For example, it is prohibited to exchange £20 for £10 with someone, or one bag of rice for two bags of rice. There’s lots of debate in academia on how exactly this kind of riba works, but a childhood memory captures the essence of it. At primary school when they used to give everyone free milk, that sharp wheeler-dealer kid would take one sip of his milk and figure out it had gone off. He’d come over to you and say “let’s swap mate. They’re just the same thing aren’t they?” And so you would, much to your regret. The prohibition on riba al-fadl is designed to stop this.
So riba al-nasiah prevents unequal exchange in loans, and riba al-fadl prevents unequal exchange in sales. Simple.
How we fall foul of riba in our ordinary lives
Below, in no particular order are three of the many ways we all engage in riba without even realizing it!
Some Muslim companies end up having debts owed to them. Francis from down the street still owes you £1000 for the furniture he bought off you a year ago, and you’re struggling to get him to pay. So you decide you will sell the debt on to Clive, who pays you £800 for your £1000 debt. You take it as you think £800 is better than nothing, and Clive takes it as he thinks he can strong-arm Francis into paying the full £1000 and making £200 profit. But this transaction is haram. As it is selling money at less than equal amounts. The Shariah sees the debt of sale at less than par value as money of sale for less money. An alternative way of trying to get your loan back is by hiring someone for £200 to get the £1000 back. This would be Islamically fine. (There might be a business idea here for the entrepreneurially-savvy Muslim!)
These days all sorts of online trading are available. Most of this is unambiguously haram (e.g. CFD) as it is some form of spread betting and so you are not buying and selling an asset but are betting with a betting company on what you think will happen to a particular share.
Forex trading is slightly different in that you buy and sell money. From the outside, it looks pretty legit, money exchange, what could be wrong with that? Some companies even offer “Shariah-compliant” accounts where they won’t pay you or charge you interest on the money in your account. But in Forex trading too, something is haram.
You see you are buying using leverage (google the term). This means that the broker is extending to you an interest-free loan so that you can buy £100,000 worth of currency, even though you only have £1000. This is important as coins move a tiny bit every day, so unless you’re buying in significant amounts, you’re just going to make a few pence a day!
But the problem here is that the company is getting back more than the £99,000 it lends you as you pay it back £99,000 + brokerage fee. So this is getting back something extra every time, and consequently, this is not allowed. There is a structural riba built into the transaction.
This is a big one right now for students in countries such as the UK where university fees are ridiculous, and the Government extends an interest-based loan to you so that you can pay to go to uni.
There are many arguments out there right now that try and make it halal for Muslim students to take these loans and go to university. Unfortunately, none of these arguments stack up. No it is not a necessity, yes there are alternatives, and yes it is riba.
Please note that the content of this article may not be applicable to all jurisdictions Wahed is live in.
Article content was first published on Islamicfinanceguru