Islamic Finance in the Global Economy

By Ibrahim Warde | Go to book overview

3
RIBA, GHARAR, AND THE MORAL ECONOMY
OF ISLAM IN HISTORICAL AND COMPARATIVE
PERSPECTIVE

Most definitions reduce Islamic banking to “interest-free” banking. While the injunctions against riba are indeed the cornerstone of Islamic finance, debates persist as to the exact significance of the word. Since the early days of Islam, the majority of scholars have adopted a restrictive definition: any form of interest constitutes riba. The debate is nonetheless still lively. This chapter starts with the riba debate, its origin, and significance. It later discusses gharar, a lesser known yet in the contemporary world of finance equally significant prohibition; the moral economy of Islam; a broader approach focusing on the spirit, as opposed to the letter of Islam; and the religious versus secular approaches to these issues. The final section places the money and religion debate in comparative and historical perspective.


I Riba

Riba means increase. Given that definition, there is in riba both more and less than meets the eye. Riba is not necessarily about interest as such, and it certainly is not exclusively about interest. It really refers to any unlawful or undeserved gain derived from the quantitative inequality of the counter-values. Interest or usury (that is, reimbursing more than the principal advanced) would then be only one form of riba. Imposition of late fees would be an example of non-interest riba.1

The Koran declares that those who disregard the prohibition of riba are at war with God and his Prophet. That prohibition is explicitly mentioned in four different revelations of the Koran (2:275–81, 3:129–130, 4:16, and 30:39), expressing the following ideas: despite the apparent similarity of profits from trade and profits from riba, only profits from trade are allowed; when lending money, Muslims are asked to take only the principal and forgo even that sum if the borrower is unable to repay; riba deprives wealth from God’s blessings; riba is equated with wrongful appropriation of property belonging to others; and Muslims should stay away from it for the sake of their own welfare.2 But the Koran does not elaborate further. A few of Prophet Mohammed’s companions even expressed frustration at the vagueness of the definition.

The Hadith, however, is more specific, distinguishing two types of riba: riba al-fadl, which is produced by the unlawful excess of one of the counter-values;

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