Eradication Of Riba: Not An Impossibility

Eradication Of Riba: Not An Impossibility

The purpose of this paper is to deeply analyse the judgment of the Shariat Appellate Bench of Supreme Court given on 23rd December 1999 with reference to the eradication of riba in accordance with Article 38(f) of the Constitution of the Islamic Republic of Pakistan 1973. The line of arguments forwarded by the appellants will be reciprocated with the opinion of the honourable Supreme Court. The elimination of riba will be proved ‘not an impossibility’ by digging out an alternative system to the interest based economy.

Analysing the judgment of the Supreme Court:

This judgment of the Shariat Appellate Bench was with reference to the 67 appeals filed by the federal government and financial institutions against the 1991 judgment of the Federal Shariat Court. The Bench consisted of the following judges:

  • Mr. Justice Khalil-ur-Rahman
  • Mr. Justice Munir A Shaikh
  • Mr. Justice Wajeehuddin Ahmad
  • Maulana Justice Muhammad Taqi Usmani.

The five arguments adopted against the prohibition of interest by the appellants will be cited one by one along with the respective reply of the court on each point.

1st Argument

The verses of riba were revealed in the last days of Holy Prophet (SAW) and he did not have an opportunity to interpret them. So, there is no pet definition of riba and the same falls in the area of mutashabihat (the verses having ambiguity or confusion in their meaning).

Reply by the Court

Surah Aal-e-‘Imran


“O those who believe do not eat up riba doubled and redoubled.” [Aal-e-‘Imran 3:130]

This verse of Surah Aal-e-Imran is perceived to be revealed sometime around the 2nd year after Hijra because the context of the preceding and succeeding verses refers to the battle of Uhud which took place in the 2nd year after Hijra. This was the first verse which expressly forbade the practice of riba. The reason why this verse was revealed in the context of the battle of Uhud, according to some scholars, was that the invaders of Makkah had financed their army by taking usurious loans. It was apprehended that it may induce the Muslims to arrange for arms on the same pattern by taking usurious loans. In order to prevent them from this approach, this verse containing a clear prohibition of riba was revealed.

The claim that prohibition of riba had been imposed sometime around the battle of Uhud finds further support from an event reported by Abu Dawood in his As-Sunan from the noble companion, Abu Hurairah(RA). According to that report, Amr ibn Aqyash was a person who had advanced some loans on the basis of interest. He was inclined to embrace Islam but was reluctant to do so on the apprehension that after embracing Islam he would lose the amount of interest and therefore he delayed accepting Islam. In the meantime, the battle of Uhud broke up and he decided not to delay embracing Islam and came to the battlefield, started fighting and achieved the rank of a Shaheed (martyr) in the same battle. This tradition clearly shows that riba was prohibited before the battle of Uhud and it was the basic cause for the reluctance of Amr ibn Aqyash to embrace Islam. Thus, the time of prohibition of Riba is 2 AH (long before the last sermon) at the time around the battle of Uhud.

Some of the appellants have termed the verses of riba as Mutashabihaat. They opined that the Holy Qur’an has directed to follow only those verses which are clear in meaning (Muhkamaat) and not to follow Mutashabihaat. The verses of riba being of the second category, they are not practicable.

This argument is false on the face of it because in the verse of Surah al-Baqarah Allah Almighty declared war against those who do not avoid the practice of Riba. How could we imagine that Allah Almighty, the All-Merciful, can wage war against a practice, the correct nature of which is not known to anyone? It is a matter of common sense that Allah never burdens a people with a command the obedience of which is beyond their ability. If the correct meaning of Riba was not known to anybody, Almighty Allah would not have made it incumbent on the Muslims to avoid it.

2nd Argument

The term riba refers to the loans on which excessive rate of interest is charged and therefore results in exploitation of the poor. The appellants supported their argument by the following verse of Surah Aal-e-Imran:

“O ye who believe! Devour not usury, doubled and multiplied; but fear Allah; that ye may (really) prosper.” [Aal-e-Imran 3:130]

It is argued that this verse has qualified the prohibition by the words “doubled and multiplied” to denote that the practice of riba is forbidden only when the rate is so excessive that it makes the payable amount twice that of the principal. The interest charged in the present banking system, it is argued, is not normally so high as to make the payable amount double the principal, and, therefore, the banking interest is not covered by the prohibition.

Reply by the Court

This argument overlooks the fact that the different verses of the Holy Qur’an relating to the same subject must be studied in correspondence with each other. No verse can be interpreted in isolation from the other relevant material available in other parts of the Holy Qur’an. As explained at the very beginning, the Holy Qur’an has dealt with the subject of Riba in four different chapters. The most detailed treatment of the subject of riba is found in Surah Al-Baqarah. These verses include the following command:

Ayat 2

“O those who believe, fear Allah and give up what still remains of the riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your principal. Neither you wrong, nor be wronged.” [Al-Baqarah 2:278-279]

The words “whatever remains of riba” in this verse indicate that every amount over and above the principal has to be given up.

A combined study of the verses of Surah Aal-e-Imran and Surah Al-Baqarah leaves no doubt that the words “doubled and multiplied” occurring in Surah Aal-e-Imran are not of restrictive nature, and that “doubled and multiplied” is not a necessary condition for the prohibition of riba. These words have rather been used to refer to the worst kind of practice of Riba rampant at that time.

Secondly, the interpretation of the Holy Qur’an should always be based on the explanation given by the ahadith of the Holy Prophet (peace be upon him). From the following hadith, we find that the prohibition was meant to cover every amount charged in excess of the principal, however small it may be.

It is reported by Hammad Salamah from Sayyidna Abu Hurairah (RA) that the Holy Prophet (SAW), has said: “If the creditor received a goat as a mortgage from the debtor, the creditor may use its milk to the extent he has spent in providing fodder to the goat. However, if the milk is more than the price of the fodder, the excess is riba.”

3rd Argument

There is a difference between consumptive loans and commercial loans. The excessive rate of interest charged on consumptive loans of the poor people is prohibited as it amounts to injustice. The commercial loans are used for generating a profit so the interest charged on them does not amount to riba as it is no injustice to the debtors. The appellants also contended that the modern commercial loans were neither prevalent in the days of the Holy Prophet (SAW), nor has the Holy Qur’an addressed them while prohibiting ‘riba‘.

Reply by the Court

The court paid due consideration to this argument but it could not stand the academic scrutiny for these reasons:

Validity of a Transaction is not based on the Financial Status of a Party

The validity of a commercial transaction never depends on the financial position of the parties. It rather depends on the nature of the transaction itself. If a transaction is valid by its nature, it is valid irrespective of whether the parties are rich or poor. Sale, for example, is a valid transaction whereby a lawful profit is generated. It is allowed regardless of whether the purchaser is rich or poor. Moreover, the prohibited transactions are equally applicable to everyone. For example, gambling is prohibited for both rich and poor persons.

The term ‘poverty’ is a relative term which has different degrees. Once it is accepted that interest cannot be charged from the poor, then who will have the authority to determine the exact degree of poverty required for exempting a person from the charge of interest? If the loans taken for consumption are exempted from the charge of interest, as urged by some appellants, the consumption itself may be of different kinds which range from food items to luxurious objects.

Thus, the distinction between consumptive loans and productive loans in this respect is not valid.

Productive Loans in the Age of Antiquity

It is not correct to say that commercial loans were not prevalent when riba was prohibited. The proof of the presence of commercial loans in the age of antiquity is the law promulgated by the Byzantine Emperor, Justinian (527-565 A.D).  This law determined the rates of interest which could be charged from different types of borrowers. The categorization was as under:

  • 4% was charged as interest from illustrious people
  • 6% was charged from general people
  • 8% was charged from the manufacturers and merchants.

Trade was the basic economic activity of the Arabs. For the purpose of import and export, the commercial caravans of Arabs used to travel to Syria, Iraq, Egypt, Ethiopia etc. The size of these caravans may be imagined from the fact that the caravan led by Abu Sufyan at the time of the battle of Badar consisted of one thousand camels and had returned with hundred per cent profit. Obviously, the caravan of this huge size could not be owned by any one individual. It was a collective enterprise of the whole tribe and was funded by the contributions of all the members of the tribe like a joint stock company.

There are concrete pieces of evidence that they used to borrow money for their commercial and productive needs. Some examples of such evidence are given below:

(i) Abu Lahab, the uncle of the Holy Prophet (SAW), was one of the most inimical persons towards him, but he did not participate personally in the battle of Badr. The reason was that he had advanced a loan of four thousand dirhams on interest to one Asi bin Hisham and when he could not repay it, he hired his debtor against his loan to replace him in the battle. Obviously, this amount of four thousand dirhams was too big to be borrowed by a starving person to satisfy his hunger. It was certainly borrowed for the purpose of trade which could not bring fruit and the debtor stood bankrupt.

(ii) Ibn Jarir has reported that Hind, wife of Abu Sufyan borrowed four thousand dirhams from Sayyidna Umar (RA), for the purpose of trade. She invested this money in purchasing goods and selling them in the market of the tribe of Kalb.

This shows that the concept of commercial loans was not alien to the Holy Prophet (SAW) or his companions when riba was prohibited.

4th Argument

The Holy Quran prohibited only riba-al-jahiliya which means that after the due date the creditor gave further time to the debtor on the condition of charging an increased amount. If the increased amount is stipulated in the loan agreement, it does not constitute riba-al-Quran. It is riba-al-fadl, prohibited by the Sunnah. And it is not haram but makrooh.

Reply by the Court

This contention did not appeal to the court, for the reason that a careful study of the relevant material in the original resources of Tafseer clearly shows that the claim of an increased amount on the principal had different forms in the days of jahiliya.

Firstly, while advancing a loan the creditor used to claim an increased amount on the principal and would advance loan on this clearly stipulated condition as is mentioned by Imam Al-Jassas in his Ahkamul Qur’an.

Secondly, the creditor used to charge a monthly return from the debtor while the principal amount would remain intact up to the day of maturity as mentioned by Imam Ar-Raazi.

It is thus established that the increased amount was at times charged on monthly basis, while the principal was to be paid at a stipulated date, and sometimes it was charged along with the principal. All these forms used to be called riba because the lexical meaning of the term is ‘increase’.

5th Argument

The entire world deals in interest based banking. We can’t deal with the world without dealing with interest. It would be a suicidal act to abolish interest. Therefore, the same should be allowed on the basis of the principle of necessity.

Reply by the Court

No doubt, Islam is a realistic religion and it never binds an individual or a state with a command, the implementation of which is beyond its control. The doctrine of necessity in Islam is not an obscure concept. There are certain criteria expounded by the Muslim jurists in the light of the Holy Qur’an and Sunnah to determine the magnitude of necessity and the extent to which a Qur’anic command can be relaxed. Therefore, before deciding an issue on the basis of necessity, one must make sure that the necessity is real and that the necessity cannot be met with by any other means than committing an impermissible act. When we analyse the case of interest in the light of the above principles, we are of the view that there is no truth in the apprehension that the elimination of interest will lead to the collapse of the economy. Thus, interest can’t be allowed on the basis of necessity as an ‘alternative system’ in the form of Islamic banking is available.

However, there is a misconception that the concept of Islamic banking is a utopian and impracticable concept. But the fact is that Islamic banking is no longer a fanciful or utopian dream. Muslim jurists and economists have been working on various aspects of Islamic banking and it is from the 1970s that the concept of Islamic banks has been translated into real institutions working on the Islamic lines. The number of Islamic banks and financial institutions has now reached more than 500 across 65 countries of the world. Islamic finance is in a much healthier condition in today’s world. Between 2007 and 2014, the sector tripled in size and the total assets are now around $1.9 trillion. The basic and foremost characteristic of Islamic financing is that, instead of a fixed rate of interest, it is based on profit and loss sharing.

John Tomlinson is an Oxford based Canadian economist. In his book Honest Money he has strongly recommended the ‘conversion of debt into equity’.

An equity-based system has more potential to bring about distributive justice and stability. In equity-based banking, the depositors are expected to gain much more than they are receiving today in the form of interest which often becomes negative in real terms by the inflation caused mainly by the expansion of the debt-based money.

Thus, with reference to foreign loans incurred by Pakistan, it is suggested that they could be converted into equity.

Main modes of Islamic Finance

  1. In Islamic finance, Mudarabah is a distinct type of partnership, wherein one partner provides the capital to another partner for investing in a commercial initiative, with the objective of sharing profit from the commercial entity.
  2. Musharakah is a joint enterprise or partnership structure with profit/loss sharing implications that is used in Islamic finance instead of interest-bearing loans.
  • Murabahah is the arrangement where the financier bank, instead of advancing a loan in the form of money, purchases the commodity required by the customers from the market and then sells it to the customer on deferred payment basis retaining a margin of mark-up (profit) added to its cost. Murabahah is a sale, not a loan.

The “mark-up system as in vogue in Pakistan” is not a Murabahah transaction. It is merely a change of name. In Murabaha, the bank must assume the risk of the commodity so long as it remains in its ownership and possession. The price of the commodity in a Murabahah transaction is more than the price of the same commodity in the spot market.

When the seller can sell his commodity at a higher price in a cash transaction, he can also charge a higher price in a credit sale, subject only to the condition that he neither deceives the purchaser nor compels him to purchase, and the buyer agrees to pay the price with his free will. Any excess amount charged against late payment is riba only where the subject matter is money on both sides. But if a commodity is sold in exchange of money, the seller, when fixing the price, may take into consideration different factors, including the time of payment.

Apart from Musharakah and Mudarabah, there are other modes of financing like Ijara, Salam and Istisna that can be used in different types of financing.

To sum up, the doctrine of necessity cannot be applied to protect the present interest based system for an indefinite period. However, this doctrine can be availed of for allowing a reasonable time to the government necessarily required for the switch-over to an interest-free Islamic financial system.


The views expressed in this article are those of the author and do not necessarily represent the views of or any other organization with which he might be associated.

Muhammad Noman Yasin

Author: Muhammad Noman Yasin

The author is a practicing lawyer based in Lahore. He has previously worked as an associate at ABS & Co. Formerly, he has also worked as an intern at the Supreme Court of Pakistan.

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