RATIONALE OF PROHIBITION OF RIBA

First, Muslim scholars argue that riba is an exploitative act which leads to social injustice

(Iqbal and Mirakhor, 2007, p.62). Take an example of a bank and a borrower. The bank is

guaranteed a positive return from the principal with excess payment and bear no risk, while

the borrower take greater risk and gain inequal benefits. Although one might argue that both

parties are agreed and the borrower is willing to pay the interest, it still does not justified the

act of riba, since it clearly violates the purpose of Shariah to achieve justice and equity.

Justice is the goal of any economic systems which cannot be replaced at any cost (Ayub,

2007, p.9). Furthermore, according to Ayub (2007), the practice of riba also has many

negative consequences in greater scale. The practice is strictly blamed for the failure of

global economic system. The mechanism trigger excessive debt, which creates inequality –

making rich people richer and poor people poorer (Chapra, 1992), and obstacles in achieving

distributive justice. Regardless the rate level, interest system will create “a race of idlers and

cruel bloodsuckers” (2:275). The high rate of inequity, unemployment, and poverty as the

result of the system also hinder the economic growth. Ayub (2007, p.7) also mentioned that

because of inequality, the growth itself might not be an indicator of socio-economic justice. It

is proven from the fact that many developed countries and emerging countries with

remarkable growth still face the major problem of major unemployment and inequal income

distribution. By eliminating riba and replacing it with risk-related investments (Ayub, 2007,

p.8-9), it is hoped that it could help eliminate the “moral hazard” as a result of interest-based

system and other implications from it. As the basic Shariah rules suggests: “there can be no

gain without risk-sharing” (Ayub, 2007, p.9). Therefore, prohibition of riba is a must in order

to establish “well being” of society in this world and hereafter through the realization of

justice.

Second, riba and gharar are prohibited to protect the property and wealth (mal) as suggested

in the objective of Shariah (Chapra, 2008, p.4). Property and wealth in Islam are regarded as

a trust/amanah from God, and human beings as a vicegenrent of God will be held responsible

for them in world and hereafter (Iqbal and Mirakhor, 2007). Thus, the utilization of those

aspects should be done carefully so that the interest of greater society could be fulfilled.

Especially, with the debt liability, it will be strictly asked on the Day of the Judgment (Ayub,

2007, p.4).

Second, Islam disapproves acquisition of other’s property using unlawful means (2:188, 4:29,

4:161 and 9:34). Iqbal and Mirakhor (2007, p.63) argues that the gain from riba is unjustified,

since in Islam the lender could only claim the principal and no more. It is also and also

instantaneous since “the lender gained the right to borrower’s property as soon as the contract

is finalized without considering the results from the use of the money”.

Third, profit and risk sharing will offer greater benefits for the parties involved. By applying

this scheme, when investing, the lender would be the capital part owner and also share the

burden of the risk of the company he/she invests.

Fourth, the conventional economists might argue that “interest is a reward for saving” (Iqbal

and Mirakhor, 2007, p.65)” However, it should be clear that return in terms of interests could

not be claimed unless the money saved was invested in other business. In addition, it is also

argued that “interest arises as the time value of money (Iqbal and Mirakhor, 2007, p.65)”.

Gaining compensation for the value of time in sales contract is permissible, but not the same

in lending, since the thing being compensated is the time. Time by itself does not give the

yield, but can only contribute to the creation of value. In loans, it is an act of charity where

surplus funds are effectively being utilized to promote economic development and social

well-being (Iqbal and Mirakhor, 2007, p.65).

Fifth, the Shariah considers a loan a gratuitous contract and promote to offer charitable loans.

Charity acts might play important role in the development of economy. A charity act is more

valuable according to Allah, compared to accumulating wealth through riba (Verse 30:39;

57:11; 64:17).