Modern economic and financial systems have developed into extremely complex systems. Concepts such as derivatives and global financial and economic systems have complicated the understanding of financial and economic systems for the average man today.
As these systems grew, a parallel awareness grew in Muslim societies. After interest-based banking settled in the Muslim world, Muslims became aware of the extreme conflict these systems cause with their own faith. A new alternative to these ‘traditional’ forms of finance and economics began to emerge, if even theoretically.
Prior to the arrival of Islam, usury was a common method by which individuals would penalize each other for becoming late in returning a loan. Then, the meaning of the word usury was not the same as the current definition used.
According to the Merriam Webster Dictionary, the modern definition for the word usury is “an unconscionable or exorbitant rate or amount of interest; interest in excess of a legal rate charged to a borrower for the use of money.” The dictionary states that this definition effectively came into place in 1545, when England fixed a legal maximum interest for any loan.
Interest (or usury, in the old meaning of the word) was also prohibited by the bible. According to the Kings James Version, Deuteronomy 23:19 states, “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury.”
According to an article by the Guardian titled “When and why did the Christian Church stop viewing usury as a sin?,” the abolishment of the ban on interest in the West began in the 16th century. The article states that the decision that not all interest is sinful “was finally decided in a series of decisions in the institutions of the Catholic Church in the 19th century.
The term riba addresses more than simply monetary interest. According to a book titled قاموس المصطفحات الاقتصادية في الحضارة الإسلامية (or The Dictionary of Economic Terms in the Islamic Civilization), written by the Muslim contemporary thinker Mohamed Imara, riba, linguistically, means excess of anything. According to the book, in Islamic law, it is the excess on the principle of wealth, as a requirement imposed by one of the contracting parties, with no return (for that excess) in terms of labor. It is also defined as excess wealth given in exchange for the same form of wealth, but of lesser quantity.
There are two forms of riba:
The first form is riba al-nasia, or ‘delayed’ riba. This form takes place when dealing with loans. The two contracting parties agree that the borrower will pay back the lender an excess above the principle wealth lent at a later date. This has also been called riba al-diyoon, or the riba of loans.
The second form is riba al-fadl, also known as riba of sales. This occurs when two parties exchange the same form of wealth, but one gives a larger quantity of it than the other, or one is given immediately, and the delivery of the other (of the same characteristic) is postponed.
Riba is strictly forbidden in Islam, and is considered to be among the gravest of sins. Numerous Quranic verses and hadiths stress on the seriousness and magnitude of this sin. One verse considers the insistence of an individual to deal with riba despite knowing the Islamic ruling of it as ‘declaring war on Allah and his Messenger.’
O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal – [thus] you do no wrong, nor are you wronged. (2:278-279) [Translation: Sahih International]
In one hadith, the Prophet Mohamed is quoted as saying that the receiving of one dirham of riba knowingly is worse than fornicating 36 times. In another hadith, he says that there are seventy divisions of riba, the least of which is one who marries his mother.
It is extremely apparent from both the Quran and the hadiths that the sinfulness of riba is extreme. On the night of his ascension to the Heavens (isra and miraj), the Prophet said that he saw people with bellies the size of homes, with serpents staring out from their bellies. He asked Jibreel who these people were. Jibreel replied, “These are the users of riba.”
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