Islamic finance guru Ibrahim Khan explains what riba is and why it’s so dangerous.
There’s 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 have passed this week since the devastation that was visited 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 believes in him, but if we don’t then we are told 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 a 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 literally enslaves nations to their creditors.
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The UK only recently paid off the last payment from its loans funding WWI, which was a hundred years ago. The Greeks are currently being forced by their creditors 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. In fact chances are that you have indulged in riba yourself. Let me prove it to you.
Up to our eyes in riba
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, we’ll give you £100 for joining. Come to us, we’ll give you 1000 nectar points. Come to us, 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 money, 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 being exchanged for money 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.”
True, that is riba. But there’s more to riba than just that.
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 the 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 realising it!
Selling debt: 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 selling debt at less than par value as selling money 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!)
Forex trading: These days all sorts of online trading and even a forex trading course is available for the average Joe. Most of this is unambiguously haram (e.g. CFD) as it is some form of spread betting and so you are not in fact actually buying and selling an asset but are betting with a betting company on what you think will happen to a particular share. Some will even start their own Forex trading brokerage with companies such as Leverate.
Forex trading is easier than ever as you can now just get a forex robot to automate your trading but it is slightly different from other trading in that you actually buy and sell money. From the outside it looks pretty legit, money exchange, what could be wrong with that? Many people use services similar to IQ Option to trade and seem to learn a lot and some even make money. 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 currencies only move a tiny bit every day, so unless you’re buying in big amounts, you’re only 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.
Student loans: 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 definitely is riba.
I am aware that by saying a number of things I have said are riba-based, I am poking a hornet’s nest with a stick, and many people will have questions or disagree. Please let me know (with solid reasons) why you might disagree, or any questions that you may have.
I do also plan to do a much more detailed and rigorous article on the issue of student loans in the coming weeks so hear about that first by subscribing to our newsletter (box at the top right of the page).
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You can follow Ibrahim Khan on Twitter @ibrahimkhan and you can read his blog on the link below.