Understanding Riba in the Context of the  Prophet’s Era and Modern Economics

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Understanding Riba in the Context of the Prophet’s Era and Modern Economics

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Islamic Finance: A 50-Year Journey to Ethical Banking

The doctrinal position on Riba (translated as interest) is well-known among Muslims, clearly outlined in the Quran and Hadith. However, it is essential to discuss its application in two distinct contexts:

1. The era of the Prophet and the society of Madinah.
2. Today’s monetized economy.

In the 7th century AD, lending and borrowing were simple, one-to-one transactions. For example, if Ahmed lent 100 Dinars to Bakar, the amount returned after a year held the same value as when it was borrowed. There was no central bank, and currency was based on gold, silver, and bronze. Thus, when Bakar returned the 100 Dinars, he returned the exact value he had borrowed.

Contrast this with today’s economy. If Ahmed lends Rs. 1 lakh to Bakar and gets back the same amount after a year, the money would likely have depreciated in value—perhaps by 5%. For instance, if Ahmed could buy 200 kg of rice with Rs. 1 lakh at the time of lending, he might only afford 180 kg a year later. Bakar, meanwhile, could have profited by investing the money.

Here’s the dilemma: If Ahmed demands Rs. 105,000 to compensate for the depreciation, it would be considered Riba (interest), which is prohibited in Islam. But if Bakar returns the devalued Rs. 1 lakh, isn’t he causing a loss to Ahmed, who helped him in a time of need? The doctrinal stance forbids profiting from money exchange, but what about the loss incurred by the lender?

This wasn’t an issue in the Prophet’s era because money (Dinars, Dirhams, or Auqia) did not lose its value. Returning 100 Dinars after a year didn’t result in a loss for the lender, even if the borrower had earned a profit by investing the money. How do we reconcile this with the current context? Should the lender incur a loss without anyone being held accountable?

Furthermore, in the Prophet’s time, lending was typically from the wealthy (like Seth Parimal Das or his Arab equivalent) to the less affluent (e.g., Safwan bin Abdulla). Today, the roles are reversed. People like Safwan, Rizwan, and Marwan deposit money in banks, and large corporations borrow from these banks. Banks act as intermediaries, not just facilitators of one-to-one transactions.

For every Rs. 100 deposited, a bank might return Rs. 104, while it lends the same Rs. 100 to a large borrower, expecting Rs. 108 to Rs. 112 in return. The difference of Rs. 8 to 12 is considered interest. However, the depositor receiving Rs. 104 for every Rs. 100 can be seen as compensation for the depreciation of their money over time.

Now, consider the practical difficulties of Musharaka (partnership) models. Suppose Ahmed invests Rs. 1 lakh in a Musharaka account with a bank. Ahmed has no control over how the bank invests his money. The bank’s operations are vast, and small investors like Safwan, Rizwan, and Marwan simply trust that the bank will return 4% on their investment. Given market trends, a 4-6% profit margin seems reasonable for the bank to retain, with the remaining profits going to the investors.

However, Islamic businesses in India present a cautionary tale. Many started with halal, interest-free principles but eventually failed, causing significant losses to depositors. Examples include Al-Meezan, Barkat Investment, Ittefaq, and others. Even on an international level, institutions like Dar-ul Mal-ul Islami have collapsed.

This suggests a gap in understanding the differences between the Prophet’s time and today’s monetized economy. There has been little substantial research on Riba, Usury, and Interest, leaving the Ummah (Muslim community) in the dark. It’s crucial to acknowledge that modern banks are not business institutions but service institutions. Depositors are not investors with control over their money but rather entrustees relying on the bank’s management.

These points merit deep reflection and discussion to provide clear, doctrinally sound answers for those seeking guidance in today’s complex financial w

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