Interest-based lending: Drive needed to create awareness of Islamic alternatives

Islamic banks offer Shariah-compliant financing for property purchase, other services.

Humayon Dar November 30, 2015
Islamic banks offer Shariah-compliant financing for property purchase, other services. CREATIVE COMMONS

LONDON: President Mamnoon Hussain faced the wrath of many TV anchors and Shariah scholars from around the country when he, during a speech to the business community in Faisalabad, rather naively requested the religious intelligentsia to reconsider the issue of prohibition of interest.

The president’s suggestion was based on a typical confusion over the prohibition of interest.

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Even some prominent scholars are of the view that while charging interest is not permitted in Islam, paying interest on loans is not impermissible. This is a view that demands an analysis from both an intellectual and economic perspective.

A scholar argues that those who pay interest do not fall under the category of those who “eat others’ property unjustly” and that they must not also be deemed as “cooperating” in dealing in interest (like, for example, those who facilitate it by documenting and providing evidence or becoming a witness on it).

The prohibition of eating others’ property unjustly is established unambiguously in the Holy Quran that also prohibits cooperation in sinful activities.

The Prophetic tradition also prohibits cooperation in matters related to interest-based business. According to the scholar, the payer of interest does not “eat others’ property unjustly.” Hence, he does not commit any sin when he pays interest.

Similarly, he argues that the payer of interest should not be deemed as cooperating in business involving interest.

This is a flawed argument, as interest-based transactions are by their very nature cooperative in nature, ie, the parties to an interest-based contract must agree out of free will to charge and pay interest, for this contract to be legally valid (in the context of conventional law).

Therefore, this is not a coercive arrangement at all, except in the case of default when the borrower may be coerced to pay back the principal sum plus any interest due (with, in most cases, a penalty).

The interest-based contract is an example of a “co-operative game” in the context of economic theory. Therefore, it is logical to conclude that those who agree to pay interest and voluntarily enter into contracts to do so actually cooperate in interest-based business.

Hence, the prohibition of interest must cover both those who demand and those who agree to pay interest.

In an economic context, those who deal in interest actually perform both the roles of borrowers and creditors. For example, banks not only charge interest but pay it to their depositors as well. Hence, differentiating between a recipient of interest and the one who pays it does not serve any meaningful purpose.

On religious/Shariah grounds, any prohibited bilateral arrangement is impermissible for both parties. A prime example is that of bribery, as those who accept and those who give the bribe are considered sinners.

Principle of necessity

The argument that someone in need who resorts to borrowing on interest must not be deemed sinful is valid only under the principle of necessity.

However, the principle of necessity is only an exception and applies only under certain specific circumstances. In normal circumstances, a need cannot alter a prohibition, even if the need is genuinely recognised in Islam.

For example, shelter is a basic need that is recognised in Islam. Someone cannot be allowed to borrow on interest to buy a house, if Shariah-compliant home financing is available in the society.

The acceptance of paying interest will also provide a legitimate route for the Islamic governments to keep on borrowing on an interest basis, from foreign banks, multilateral institutions and the governments. After all, such governments will be merely paying interest and will not commit the sin of “eating others’ property unjustly.”

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Returning to President Mamoon Hussain’s suggestions of reconsidering the issue of interest, it must be noted that Islamic banks all over the world, including Pakistan, offer Shariah-compliant financing for purchase of property and other goods and services.

Hence, there is no need to reconsider the prohibition of interest. What is required is to increase awareness of Islamic alternatives to interest-based lending.

The writer is an economist and PhD from Cambridge University

Published in The Express Tribune, November 30th,  2015.

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