By Jamari Mohtar
Jan 16, 2018
IT WAS some 35 years ago that I learnt in detail about Riba (usury) as an economics undergraduate at the International Islamic University Malaysia.
One particular course, Fiqh For Economist, had me riveted on the juristic discussion on Riba, while the course on the Evolution of Western Economic Thoughts gave me, among other things, a good grounding on the various theories justifying the existence of interest in the economy.
Some of the takeaways from these two courses that are still etched on my mind are:
- Riba and interest are both prohibited in Islam because both pertain to the receipt of, or payment for, something that involves an unjustified countervalue;
- Usury (excessive amount of interest) is riba, but riba does not necessarily mean usury. There is no English equivalent to the Arabic word, “riba”;
- The absence of interest in an Islamic economy doesn’t mean that capital (as in one of the factors of production in an economy) is free. The rate of return becomes the pricing mechanism that allocates the efficient use of capital;
- While interest is an institutional reality, rather than an economic necessity, rate of return is both an economic necessity and an institutional reality;
- As borrowing-lending relationship is an exchange process that does not create surplus value, as opposed to a production process that creates one, the payment or receipt of interest in a borrowing-lending relationship is unjustified.
- Trading is also an exchange process, but unlike the exchange process of borrowing and lending, trading creates surplus value because what is being traded (exchanged) consists of either intermediate goods or finished goods that have undergone a production process. Moreover, there is then the value-added process to market and sell the goods. Thus, seeking profit via trading is permissible.
- In order to make borrowing-lending relationship permissible in Islam, one could either demand just the principal amount at the end of the relationship, or one could convert the relationship into a trade through an equity relationship via partnership (syirkah) or joint venture (mudarabah), or through other instruments of Islamic financing that are also equitable such as murabahah (cost plus mark-up), ijarah (leasing), wakalah (agency), etc.; and
- Riba can be present in both loan and trading transactions.
To refresh my mind on the topic of riba, and keep up with the recent development on the issue, I did some research on riba and found two contradictory classifications of riba.
The first classification in simple schematic diagram is shown below:
The diagram below is the second classification:
The two diagrams above show glaring contradictions in that the neat division of riba into interest in loan (anNasiah) and interest in trade (alFadl) in the first diagram is rendered chaotic by the second diagram when both anNasiah and alFadl come under alBuyu (interest in trade).
So the big question – is anNasiah an interest levied on loan or trade? After all these years of Islamic banking and finance experience, I’m surprised that no one attempts to reconcile this contradiction.
Let’s get to the crux of the matter.
Going by the primary sources of Islam, the classical jurists are unanimous in saying that anNasiah is the riba mentioned in the Quran, while alFadl is mentioned in the Ahadith.
That is why anNasiah is also known as the Riba of the Quran or Riba alJahiliyyah because the Quran refers to anNasiah as the riba practised during the Jahiliyyan period (Age of Ignorance before the advent of Islam). So, Riba alQuran and Riba alJahiliyyah and for that matter, Riba alQardh and Riba adDuyun are all synonyms of Riba anNasiah.
Why then do you sub-divide anNasiah into all these synonyms as a sub-classification when they are all the same thing, as seen in the first diagram or sub-classifying adDuyun into alQardh and alJahiliyyah, as in the second diagram? It is superfluous to have a sub-classification on the basis of synonyms because there is really no different among them to justify a sub-classification.
It makes more sense to sub-classify anNasiah into just Riba alJali (obvious interest) and Riba alMubashir (direct interest) in the first diagram. In alJali, “obvious” is a new element in the synonymity, while in alMubashir, “direct” is the new element.
The above riba is mentioned in the Ahadith of the Prophet (peace be upon him). As such, Riba asSunnah or Riba alBuyu’ are synonyms of alFadl that do not justify a sub-division, simply because they are all the same thing.
Riba alGhayr (indirect interest) and Riba alKhafi (hidden interest) are sub-division in the first diagram that is acceptable because the new elements of synonymity are “indirect” in the former and “hidden” in the latter.
Excess in countervalue
I had a problem grasping the concept of a countervalue during my varsity days but the concept is actually very simple to understand.
When you buy a 2kg sugar from your grocer costing say RM 5, you hand him a 5-ringgit note (the medium of exchange) that you have to part away with, and in return you get a just countervalue, which is the 2kg sugar.
Similarly when someone lends you RM5, he had to part away with his 5-ringgit note but at a time mutually agreed by both, you’ll return him the 5-ringgit which is a just countervalue for the lender. If the countervalue becomes more than RM5 at the agreed time of settlement, this is an unjust countervalue because the excess amount cannot be justified.
The element of interest on excess countervalue is both present in interest in loan and interest in trade. So strictly speaking, sub-classifying riba on the basis of excess in countervalue for trade, which gives the impression that such element is not present for loan is not that accurate as depicted in the first diagram.
Similarly, to say that delayed-payment interest is present in interest in loan as in the first diagram is also not accurate as delayed-payment interest can also be present in interest in trade.
The only sensible thing in the first diagram is its neat division of riba into interest in loan and interest in trade.
The second diagram too has a neat division like the first diagram i.e. Riba adDuyyun (interest in loan) and Riba alBuyu’ (interest in trade) but it becomes problematic when it puts Riba anNasiah as interest in trade while the first diagram puts anNasiah as interest in loan, leading to the contradiction I mentioned earlier.
I also notice in my research that the division of riba into anNasi’ah and alFadl is the approach favoured generally by the professional Islamic bankers and Muslim economists, while the sub-division of Riba alBuyu’ (interest in trade) into anNasi’ah and alFadl is generally favoured by the fuqaha (jurists).
And both are sitting together in Syariah supervisory board of Islamic financial institutions. I just hope that they can reconcile this glaring contradiction.
Foreign Exchange Market
As a matter of general principle, since trading in a forex market is a worldly affair that has nothing to do with rites of worship (ibadah khusus), it is permissible to trade there unless there is a nash (primary evidence) from the Quran and Sunnah expressly stipulating that trading in a forex market is forbidden.
There is no such nash in forbidding the trading simply because the forex market and all the sophisticated techniques of trading in it are a modern invention.
“Thou knowest best thine own worldly affair”, says a Hadith of Prophet Muhammad (pbuh). (Soheh Muslim)
Let’s now dissect the various transactions in a forex market.
First, you have margin trading, which is basically your financial broker advancing you some monies for you to trade in the forex market.
This is a loan transaction where it is not permissible in Islam if the repayment involves interest (Riba anNasi’ah). But this does not negate the permissibility of trading in a forex market because margin trading is not an integral component of the forex market. You can do away with margin trading. If you don’t have enough money to trade in the forex market, then don’t trade there.
Next, the trading of currencies itself in a forex market.
In my term paper while taking a course on International Finance in my final year at the IIUM, I proposed that trading in the forex market involves Riba alFadl. I have lost the term paper but from what I can recall here was my argument.
Riba al-Fadl, which is interest in trading, occurs when you exchange goods of the same genre, as seen in the Hadith below:
From Abu Said al-Khudri: The Prophet (pbuh), said: “Do not sell gold for gold except when it is like for like, and do not increase one over the other; do not sell silver for silver except when it is like for like, and do not increase one over the other; and do not sell what is away [from among these] for what is ready.” (Soheh Muslim)
In that term paper, I argued that it doesn’t make sense for one to engage in barter trading involving the exchange of say, 8kg of gold for 8kg of gold. Might as well, you don’t trade. So why is the Prophet (pbuh) advocating such a trade?
Then comes the following Hadith:
From Abu Sa’id: “Bilal brought to the Prophet, peace be on him, some barni [good quality] dates whereupon the Prophet asked him where these were from. Bilal replied, “I had some inferior dates which I exchanged for these – two sas (quantities) for a sa.” The Prophet said, “Oh no, this is exactly riba. Do not do so, but when you wish to buy, sell the inferior dates against something [cash] and then buy the better dates with the price you receive.” (Soheh Muslim)
In the above Hadith, which is a case of trading goods of the same genre (dates versus dates) but with different quality, it is still riba alfadl if the amount traded is not equal, but the Prophet (pbuh) taught us how to avoid riba alfadl by advocating the use of a medium of exchange (monies).
What this implies for the forex market is, since the trading of currencies falls under trading of goods (or entities) of the same genre i.e. currency versus currency, Riba alFadl is obviously present.
If one wants to argue that the trading in the forex market is that of trading same genre entities with different quality in the sense that the Ringgit is obviously of a different quality from the US Dollars, then it is still Riba alFadl if the trading is done on the basis of a different price, as in 1RM is equal to USD0.253 as my currency conversion app shows.
As it does not make sense to trade on the basis of 1RM is equal to USD1 unless economic and political developments in Malaysia comes to a stage where there is parity between the Ringgit and the US Dollar, it simply means trading in a forex market involves Riba alFadl.
Unless; one sells the ringgit for some medium of exchange (?), and with that medium of exchange (?), one then buys the USD. This is taking the cue from the Hadith about trading of dates of different quality.
I pose a question mark in bracket because in the case of trading goods of the same genre with different quality, the medium of exchange is money (currency).
But in the case of trading a pair of currencies with different quality, the pertinent question to be asked is what is the medium of exchange for currencies? To make it more enigmatic, the question can be rephrased as: what is the medium of exchange for mediums of exchange?
I remember vividly ending my term paper with the following challenge: Until and unless Muslim economists and the fuqahas can create or devise a medium of exchange for currencies, then I’m afraid trading in the forex market will always involve Riba alFadl.
Before I end, I would like to make two additional remarks:
The first is using a medium of exchange is just one condition to avoid Riba alFadl in a transaction involving same genre entities with different quality. The Hadith below specifies another condition – it must be hand to hand i.e. a spot transaction as opposed to a delayed payment or credit transaction:
Ubaida b. al-Simit (Allah be pleased with him) reported Allah’s Messenger (pbuh) as saying: “Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to hand.” (Soheh Bukhari).
The second remark, which I also included in my term paper, is the genuine disadvantage for traders and businessmen involved in international trade who are faced with a risk exposure to movement of currencies on a daily basis such that they need to engage in the forex market for hedging and arbitraging purposes, otherwise their business will be ruined.
In such a case, there is a maslaha (public interest) principle for allowing them to hedge or arbitrage in the forex market under the Islamic principle of darurah (dire need).
The same goes for the government, which needs to hedge/arbitrage against risk exposure of currency movements that will disadvantage the country. As pointed out by Second Minister of Finance Johari Abdul Ghani, this is not the same as gambling in the forex market.