Surah Al-Rûm 30:39

وَمَا آتَيْتُم مِّن رِّبًا لِّيَرْبُوَ فِي أَمْوَالِ النَّاسِ فَلَا يَرْبُو عِندَ اللَّهِ ۖ وَمَا آتَيْتُم مِّن زَكَاةٍ تُرِيدُونَ وَجْهَ اللَّهِ فَأُولَـٰئِكَ هُمُ الْمُضْعِفُونَ

30:39 This verse institutes a contrast between Zakât and Ribaربا. Whereas by means of Zakât the Holy Qur’ân seeks to improve the lot of the poor, the institute of Ribâ (loan coupled with interest) has the opposite effect. The taking of interest and usury does not improve the economic condition of the poor but serves the purpose of making the rich even richer. Interest-bearing loans involve an exploitation of the economically weak by the resourceful. On the other hand, the institution of Zakât improves the lot of the poor while safeguarding their dignity, without significantly affecting the richest of the rich.

Ribâ literally means the increase of a thing over and above its original size or amount: it signifies an addition to what was lent by the creditor. In other words, Ribâ is the money on top of the amount of money lent, so that the borrower has to return more than he had borrowed. Ribâ is mentioned and commented on in four different places in the Holy Qur’ân, (2:275-278; 3:130; 4:161; 30:39), and it is condemned in the strongest possible terms. This verse contains the earliest mention of the term and the concept of Ribâ in the chronology of Qur’ânic Revelation. The chapter is from the Makkan period about six years before the Hijrah.

There can be no question about the prohibition of Ribâ. According to some interpreters, Ribâ does not mean interest but rather usury or the practice of lending anything at a rate of interest that is excessive or unlawfully high, and that the Holy Prophet (pbuh) passed away before having explained it. The fact is there is no mention of “excessive”, high or low, and there is no place left in the word Ribaرِّبًا for quantity, low or high. The fact is that Ribâ refers to interest as well as usury, and it is inacceptable in an ideal Islamic society under any circumstances. It is wrong to say that the Holy Prophet (pbuh) passed away before having explained its meaning and before the details of the question were settled. The severity with which the Holy Qur’ân condemns Ribâ and those who practice it makes it impossible that the Holy Prophet (pbuh) left without pointing out a sufficiently clear indication of its nature and its social, economic and moral implications. Again we have many sayings of the Holy Prophet (pbuh) in the books of Hadîth about Ribâ.

‘Umar(rz), the second successor of the Holy Prophet, did not feel any difficulty in interpreting Ribâ and its implication. His intention was that the Muslim ummah must not practice Ribâ nor acts that resemble Ribâ(Ibn Kathîr; 2:275). The money obtained through any kind of interest-bearing loans, irrespective of the rate of interest and the economic motivation involved, should be condemned.

Not only the taking but even the giving of Ribâ is prohibited. Such a practice cannot be allowed that the idle wealth of the people is made to give returns. The lender accumulates wealth exponentially at the cost of borrower. The result of such a practice is that most of the wealth starts circulating in the hands of a few lenders. The wealth of the nation is thus in a system that promotes inequality in a society by accumulation of wealth among just anew. A system should channel wealth back to the needs of poor into additional circulation. The Islamic system is neither socialist nor communist nor capitalist. It does not put any limit on lawful earning.

The mentioning of Zakâtand Ribâ together, also points to their intricate connection: no Zakâtis to be paid on money that is lent to someone without interest. Thus in a system with obligatory Zakât, there is still a financial incentive to lend money, thereby encouraging investments. The owner of the money has the choice either to pay Zakât at a rate, which essentially had been set at 2.5% annually, or lend out his money and be entitled to the return of the full amount at its due date. By lending his money without interest the lender is saving 2,5% of his wealth, which otherwise has to go as “Charity” for the poor. The economic incentive to do so is identical to a system without Zakât with 2.5% tax rate or no interest on borrowing but with 2.5% inflation.

The existence of inflation in many paper money systems further complicates interest-free lending, since excessive inflation makes money unsuitable for interest-free lending, and one would have to resort to something with intrinsic value less susceptible to fluctuations. In a society in which the obligation to pay Zakâtis ignored, a mere prohibition of interest stifles the flow of money toward economically viable investment opportunities, especially when losses of real worth as a result of inflation of the paper money system further disadvantage the creditor. Modern systems of (so-called) Islamic finance operating in such an environment usually simply hide the interest or call it by a different name. But when looking at the actual flow of money and goods, they are little different from ordinary interest, and they still fulfil the definition of Ribâ, since in the end the creditor receives in return more in real value than he lent out. Other attempts to closely follow the prohibition of Ribâare to distribute the risk of the investment differently between creditor and borrower, so that the creditor may benefit from the profits of the investment, but also bears entrepreneurial risk. Whether such an agreement is in line with the definition of Ribâ depends on the specific contractual details. However, it is only with the institution of Zakâtthat, even up to an annual loss of 2.5%, it would still be beneficial to lend money. This difference could go to a bank or intermediary for managing the loan.

To sum up, there is a fundamental difference between a true Islamic economic system and the modern Western economic and fiscal systems. In the latter, income is heavily taxed and additionally there is usually a sales tax. Thus there is a cost to earning and spending money and an inhibition to the circulation of wealth. In the Western system, there is a price to earning wealth, whereas in a true Islamic system, there is a price to owning wealth.