What is Interest and why is it Forbidden?
There is nobody who does not know that INTEREST is forbidden in Islam. The reason why interest is forbidden by divine order is obvious: It is forbidden because Allah forbade it. Just as fasting or giving alms is fard because of “divine order”, so too is interest forbidden for the same reason. It is the only reason why we worship. Besides, there are some other reasons following the divine order. It is quite normal because, the One who ordered it knows very well the true nature and disposition of everything and how everything is supposed to be.
For instance, we know that fasting and alms, which we perform because Allah ordered us to do, have got many personal and social benefits. However, we never fast in order to lose weight or never give alms in order to balance social income distribution. As a matter of fact, a person who pays tax as a civic responsibility is not considered to have given alms; and a person who finds out the physical benefits of prayer yet does aerobics instead is not considered to have performed prayers. Similarly, if the starting point of worship is “benefits” instead of “order”, one who cannot see benefits although he has seen the order does not have any reasons to worship.
However, benefits in question can be a source of trust for a person who worships because of Allah’s order. And in this sense, it can be said that benefits are necessary because each order has got, though not necessarily, some specific benefits and reasons. Therefore, we fast because Allah ordered us to do so and fasting has got some benefits. And similarly, interest is forbidden because Allah forbade it. When we think that each order Allah gives us is a “means of disciplining” according to the explanations we have made in length so far, we can turn back to our question:
Why is interest forbidden?
Our answer is ready: It is forbidden because Allah forbade it. If we continue with this answer, our service to Allah will be harmed in case we do not obey the prohibition of interest. That is to say; our service to Allah will decrease in value. When either one of the union of Servant-and-Lord decreases, the other one will increase. When one quits serving Allah, the delusion of being Lord fills its place (He unconsciously feels himself godly). When the delusion of being Lord disappears, the consciousness of serving Allah will fill its place. It is obvious that avoiding giving and taking interest is a requirement of serving Allah. Similarly, it can be said that disobeying this order includes a claim of being a Lord. We can understand it this way in terms of “order”, that is, in terms of the notion of “obedience-disobedience.” For this reason, interest is forbidden in Islam. However, it is possible for us to see why it is also forbidden in terms of “belief” as well as it is in terms of “Islam” when we reveal the wisdom behind this prohibition. In this sense, let us remember of what interest is as a process again:
It is lending an amount of money to private person or incorporation, as capital sum. However, it is not an innocent way of lending money. The one who lends the money determines a list of conditions. A certain amount of money will be added to the amount of the money that is lent after a certain time. The one, who lends money, demands “something” and what he demands is “met”. He is sure of it. In short, the one who lends money, the moneylender, takes it for granted. On the other hand, there is someone who lives by planting wheat on his field or by selling his products in the market; and this person cannot determine any conditions for his income. Neither when he will make profit nor the amount he will earn is guaranteed. For this reason, he often prays. When he starts earning, he gives thanks to the Creator. He always remembers the One who endows him with these blessings and boons. He does his best, as much as the causes let; however, he knows that these causes are not enough to make his products grow and be ready for harvest as he wants or to sell his products as well as he hopes. For this reason, he considers his efforts a cause inadequate yet necessary to earn his living. He is not so confident of himself. There is a significant difference between these two scenes. In the former one, the causes are strong and thick; he determines his income, not the boons and blessings endowed on him (rizq). (Determinism)
Interest makes the one who lends it alienate from service to Allah. As a matter of fact, this results in the thickening of the wall of causes and those who lean on this wall start to feel themselves godly because of the stupor caused by being able to do anything they like. In other words, interest manages to make people heedless, which makes them believe that everything is created by causes. This state prevents one from getting into the state of service to Allah. A person who is somewhere between fear and hope, life and death, and fullness and hunger is a believer as much as he is aware of this state. Interest prevents one from being aware of this state. And we think this is one of the wisdoms behind why interest is forbidden. It is doubtless that the prohibition of interest has got a different importance in Islam. The importance of this issue stems from the fact that interest, which is forbidden in the Quran and hadiths strongly, is one of the key points in the economy of our day (which is non-Islamic). Besides, it would not be exaggeration to say that modern economy is accorded with interest policies and facilities today.
The significant size of the money and capital markets today is known to everyone. On the other hand, it is really difficult to see a company or an entrepreneur which counts on their own capital in order to start up a new business or which continues their business with their own economic potential. It is known that interest is strictly forbidden in our religion with the strictest rules although it plays a vital important role in modern business and macro economy. Eventually, it causes all Muslims both in Turkey and all over the world a dilemma and makes them passive in business and social life, in which cooperation with financial foundations is almost an obligation today. It results from the fact that the issue of interest is not explained widely and comprehensively in Islamic literature and sources and so religious people who cannot obtain adequate information on the issue prefer to refrain from financial foundations and facilities fearing that they will make mistakes and commit sins. The aim of this article is to contribute modestly to the enlightenment of our people, who are quite critical of interest, on the issue;.
DEFINITION OF INTEREST
According to the economists, interest, which has got an important function on free market economy, determines the distribution between utilization and consumption of sources. Utilization of sources is directed to more productive fields via interest mechanism. When there is a shortage of sources, relatively less productive investments are suggested. According to a wide-spread definition, interest is the price deserved in return for the money rented. In a limited sense, it is the price that a lender charges a borrower for the use of the lender's money. In this sense, it is shaped according to the supply and demand in fund markets. It is also called “interest expense”.
Interest is an impersonal income independent of the possessor of the money. It shows that the limit of interest is generally determined according to the market conditions and that the lender does not play any role in it. As a matter of fact, the personal relationship between customers and financial foundations is disappearing gradually and millions of people do not know at all the owners or the managers of banks to which they entrust their money. That is to say; personal relationship between foundations and people has almost disappeared. In another sense, interest is the price charged in return for postponement or the proponing of utilization of property or service. It enables the link between today and the future.
Interest is the price determined according to the period of time in which the lender is deprived of the money he lent and in accordance with a certain rate, in debts which are only about paying a certain amount of money back. This definition, which evaluates the matter from the point of law, puts forward two elements - time and interest rate - which enable the emergence of interest. In many definitions, we see that interest is the price charged in return for the utilization of money. It is not exactly true; because it is not necessary for the borrower to utilize the money so that the lender will have the right to obtain interest. What is necessary and enough for the emergence of interest is the fact that the lender has been deprived of the money he lent for a while. It is necessary for earning interest from the lent money that the money has been received by the borrower on condition that it will be paid back after a certain time.
And according to a popular and widely accepted definition, interest is a means of income for the lender and an expense for the borrower.
In Islamic terminology, interest is explained with the concept “riba”. Riba means redundancy, abundance and increase. Therefore, extra money or property charged in return for anything lent is included in the scope of prohibition. Riba also means haram (unlawful) earning. According to another definition in Islamic Law, “Interest is the redundancy conditioned in trade.”
KINDS OF INTEREST
There are many kinds of interest in theory and practice and they are classified under some certain categories. We find it appropriate to talk about the issue long enough to help to comprehend the matter of interest better. Normally, interest is paid together with the capital money at the end of the allowed time. It is called ordinary interest; it is easy to calculate and it is not complicated at all. There is no difference between the interest rate declared and agreed upon and the one in practice. What is meant by “interest on paper” is ordinary interest; yet it is not so in practice.
It is the “compound interest” which increases interest and capital wildly and misleads the borrower. And in short, it means charging interest on interest. For instance, interest is collected four times in a year before the debt is paid back in the allowed time, in commercial loans, which are for one year. For this reason, interest rate which is declared to the customer as 60% on paper becomes 75% in practice. Compound interest increases even more in credit card debts in which the capital and interest are divided into monthly installments. No banks or financial foundations tell their customers the compound interest rate. However, interestingly, the very same banks especially inform their customers about it and emphasize compound interest in the income return which they provide their customers with. Compound interest may bear very dangerous results for borrowers. It may sometimes make borrowers deal with a very swollen debt even before they realize; just like a small snowball becomes an avalanche.
Discount Interest: A unique loan situation where an interest rate is determined, and then that percentage is removed from the loan amount, and the borrower is given the remainder of the loan. This kind of interest is usually deceptive for the borrower. For instance, the rate of a discount interest, the allowed time of which is 6 months, which is said to be 40% by a bank, a factoring company or any lender becomes 56% for a year in practice.
Default Interest: The higher interest that a borrower must pay after default. If a borrower defaults on a loan, he/she must pay default interest in order to compensate a lender for the added risk of extending credit to him/her. It is based on the assumption that borrowers are always ill-mannered and do not pay their debts deliberately. It is not searched if a borrower has got any defaults. Lenders do not have to prove their loss in order to have right to charge borrowers with default interest and borrowers cannot get rid of default interest by proving their faultlessness.
Compensatory Interest: Interest which is charged as the compensation for the assumed loss of the lender who is not paid back in due time. The lender does not have to prove his loss; the delay in payment of the debt is enough as the reason.
Penal Interest: It is punitive interest charged by a lender to a borrower if installments are not paid according to the loan terms. It can be for any kind of debts in addition to debts in money lending.
Legal Interest: The amount of interest that is allowed or required to be charged by law; independent of parties’ agreement. Even if the parties do not record an interest condition on contract, the one who does not pay his debt is charged with interest by law.
Conventional Interest: A kind of interest that is not underwritten by a government agency. The interest rate can be determined and recorded on the contract by the mutual agreement of the parties.
INTEREST THROUGHOUT HISTORY
Interest emerged due to lending in ancient times. Excavations carried out in Turkey have shown that Assyrian merchants sold tin and wheat to Anatolians on an interest rate of 100% with borrowed golden and silver coins, in 2000’s B.C. Interest, which is almost as old as the history of humankind, has always been a focus of attraction for philosophers and ecclesiastics. It has always been subject to governmental intervention in all religions and all law systems. It has always been seen disadvantageous both morally and socially because it provides lender with dishonored income and causes borrowers financial hardship as an amount of money which results from lending agreements or other kinds of contracts is added to the debt. Since ancient times, interest has been evaluated as a doctrine, a matter of justice and morality.
Aristotle, the well-known Greek philosopher, states the following in his famous book named “Politics”:
“The most hated sort (of wealth getting) and with the greatest reason, is usury, which makes a gain out of money itself and not from the natural object of it. Money was intended to be used in exchange but not to increase at interest. … Amongst all modes of getting wealth, it is the most unnatural.”
Thomas d’Aquin states:
“It is impossible to sell money and the use of money separately. As it is impossible to separate the use of something from the thing itself and to sell it in this way, it is unfair, it is even theft to charge interest on the use of something because it would be selling the same thing twice (the use of the thing and the thing itself). If interest is a price for time, nobody can demand it; because time is common to everyone and it only belongs to God. Therefore, charging interest is both theft and also a crime committed against God who gives time freely to people.”
Both in Roman law and ancient Greek law, interest was restricted and even banned, with different approaches though.
In original Judaism, interest was prohibited. Later, this prohibition was distorted on behalf of relations amongst Israelites and it was concluded that this prohibition was valid only amongst Israelites and it was permissible to charge non-Jews with interest. Attitude against interest in Christianity went through various stages. Prophet Jesus indirectly rejected the utilization of interest and suggested his apostles to perform good deeds by donating and helping others without expecting any return. Though the Church persisted on the prohibition of interest for a long time, it happened to accept interest gradually because of the oppression by social and financial life and especially due to the emergence of capitalism. Jean Calvin permitted the utilization of interest as he considered it not only a means of consumption but also production.
According to mercantilists, interest is the rent of the capital. Considering interest the same as the lease of land and the rent of real estates, Mercantilists said, “Interest is the rent of the capital”. And according to physiocrats, interest on an amount of lent money cannot be less than the income return which a land bought with that amount of money would provide. Classical economists such as Adam Smith and David Ricardo considered interest as the return the borrower pays to the lender in relation to the profit the borrower will make from the money he borrowed.
In classical economy, which is based on the view of financer-entrepreneur, interest and profit are evaluated and mixed together. The industrialization process the classical economists were going through proved that assumption right.
Karl Marx, who is known to have read the Quran, characterized interest as unnatural and immoral. Keynes, unlike other classical economists, defended that interest is not essential for investments. According to him, interest does not encourage investments; contrarily, interest hinders it.
PROHIBITION OF INTEREST IN ISLAM
Interest was prohibited gradually in the Quran and it was stated in various verses. 279th verse of the chapter al-Baqarah is short yet comprehensive:
“…if ye repent, ye shall have your capital sums; deal not unjustly and ye shall not be dealt with unjustly”
Moreover, the Prophet said in his Farewell Sermon:
“Allah has forbidden you to take usury (riba), therefore all riba obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer inequity.”
The message of the verses and the hadith is, in short, as follows:
One cannot take back more than he lent. The lender has got the right to collect the whole capital he has lent. According to the primary and direct meaning here, lending process is not made for making profit out of it. When considered together with other hadiths, we understand that the extra return does not have to be of the same kind with the lent item. That is to say; for instance, if the lent item is of A kind, interest on it is still prohibited even if it is of B kind. The other meaning in the verses and the hadith is that the lender has got the right to collect the whole capital he has lent. Although it seems quite natural, it is not always possible to collect the whole capital as exact. For instance, money on deposit in European banks is reduced because it is saved and protected by the bank; let alone increasing. In Former Soviet Union countries including Turkic republics and today’s Russian Federation, money deposited in a bank is paid back to the owner after reducing it by 10-15%. Although this treatment to the depositor may based on mutual agreement, it is not so indeed. As a matter of fact, it is indisputable that banks – which are both respected and awed – have got an influential power which persuades their customers to accept their conditions.
Another business field of the investment banks, which are the giant foundations of the West civilization, is the management of the wealthy people’s personal funds and the accumulation of the interest. However, in times of economic depression, those banks return less than the money they receive, declaring losses. It is known that investment funds, which are wide-spread in Turkey, sometimes cause harm to investors, who count on them.
However, in Islam, investors, depositors and lenders are protected by the right of them to collect their capital as exact. In this sense, one who does not pay his debt back in due time is regarded to have oppressed. According to the interpreters of the Quran, a lender/depositor/investor cannot be forced to take his money back incomplete in amount. Besides, there are interpretations which state that a lender/depositor/investor can ask for the compensation of his loss in addition to the capital when he is not paid back in due time, on condition that it is recorded in agreement at the beginning.
REASONS WHY INTEREST WAS FORBIDDEN
The secondary vital meaning of the verses and the hadith recorded above is that interest (riba) results in unfairness. It is indisputable that either the lender or the borrower will be treated unfairly when interest is charged on lending. Financial life both in our country and all over the world is full of examples which prove the issue right. As a matter of fact, banks are defined as “foundations which put umbrellas over their customers on sunny days and take it back when it starts to rain” in the West, where they were invented. Our recent history is full of lots of dramatic cases in which both lenders and borrowers infringed the rights of each other and eventually the rights of many innocent people were infringed. Bankers who appeared out of nowhere with a fake certificate bought cheap and a small office in the eighties collected a large amount of money from people promising them interest. Retirement pensions and salaries were deposited to those bankers with the hope of gaining interest return. Some people even sold the houses they had been living in and started to live in rented apartments in order to deposit the money to the bankers to make profit out of it. In the end, it went so far due to the infinite trickery of those bankers and to the naivety (and also greediness) of depositors that interest was charged on money deposited even for one day in order to lengthen this so-called “chain of happiness”. And finally, the bankers disappeared with the whole money they collected. Some of them were caught yet nothing could be taken back from them. Yet some of them were killed and most of them were sentenced to prison. Public was robbed before the eyes of government during these events which were recorded as a "disaster of bankers" in history of economics. We know that many tradesmen and merchants went bankrupt because of their debts owed to usurers in all cities of our country including especially Istanbul. And sometimes we hear of the ones who kill the usurer they owe to as a last option to get rid of the debts.
The murder of Nesim Malki which occurred in the year of 1996 is another significant case which shows that the borrowers are not always innocent. When the economic crisis of 1994 started, banks sent a short written note to their customers saying that they would charge an interest of 700% on credit accounts the very next morning. Lots of factories and businesses had to close down a few days later. The guarantee of unlimited deposits started headfirst by the government turned out to be a shield protecting those earning interest from the ones who did not have money deposited in banks. In the economic depression of November 2000 and February 2001, interest rates on credits were increased to 3000% all of a sudden. Innumerable companies went bankrupt and ended their financial life.
On the other hand, some businessmen transferred the credits they received from the banks to their personal accounts instead of using them in business. Even the bank owners did not see anything wrong with siphoning their own banks. Eventually, 22 banks went bankrupt; their owners were imprisoned and were dishonored in front of everyone. All of the loss of the crisis was put on the public.
In short, the wisdom behind the prohibition of interest is that either lenders or borrowers, or both of them as mentioned above will be wronged and eventually the rest of the public will also be harmed although they are not involved in the case. We come across interest hidden behind different masks in every economic issue due to the abundance and variety of financial instruments and foundations today. In our opinion, when concluding, if any financial process is included in the scope of prohibition of interest today, our criterion must be whether the financial processes in question can cause any unfairness or harm to the borrower or the lender, or the public.