Interest

Allah the Almighty commands:

“Those who consume interest cannot stand except as one stands that is being beaten by Satan into insanity. That is because they say, “Trade is just like interest.” But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past. His affair rests with Allah. But whoever returns to dealing in interest – those are the companions of the Fire; they will abide eternally therein.” (Al-Baqarah/ The Cow 2:275)

Income that is obtained from debt is called interest. Commodities can be exchanged either by trade or as a loan. If there is any difference between two commodities to be exchanged, it is trade. For example; giving money for taking bread is a trade. It can be on the spot or forward. Identical commodities can only be exchanged forward. Giving one measure of wheat, and then after a while, taking one measure of wheat having the same qualities is an example of such exchange. This is called loan. Income can be obtained from buying and selling transactions. If a bread which is bought for $75  is sold for $100 , $25 is obtained as profit. A loan cannot be on the spot. Nobody takes loan to pay it back right away. After giving  loans, taking more than what you have given is not permitted. Furthering your demands would result in interest. This is also valid for other types of debts besides a loan. The Messenger of Allah (pbuh) said:  “Interest arises only from debt.”[1]. Therefore, any transaction which is done to obtain profit from debt is a transaction with interest.

Obtaining profit from debts is different from trade. People who say “Trade is just like interest.” behave like a person who is deviated by Satan. Considering trade the same as interest is a complete diversion.

A person who gives 100 units of gold for 101 units of gold on the condition of paying the next month, gives it to increase his wealth via the assets of the indebted. This is the transaction which is indicated in the following verse:

“And whatever you give for interest to increase within the wealth of people will not increase with Allah.” (Ar-Room/ The Romans 30:39)

For it not to be interest, only the principal, which is 100 units of gold, should be taken back and the remaining 1 unit of gold should not. This is the ruling of the following verse:

“…But if you repent, you may have your principal. Thus you do no wrong, nor are you wronged.” (Al-Baqarah/ The Cow 2:279)

Arabs before Islam were called “Arabs of Ignorance Period”. They used to loan to obtain some monthly profit from their principal. When the payment time came, they wanted the profit; if the indebted could not afford, they set a new interest rate and delayed the payment time.[2] When debt used to arise from a sale on credit, and the payment time came, they used to ask: “Will you pay your debt or will you increase it?”. He would pay if he could; otherwise they, again, would delay the payment time increasing the amount of debt.[3]

Qur’an banned all kinds of interest and introduced the following ruling for ones who cannot pay their debts on time:

“If the debtor is in a difficulty, grant him time until easiness. But donating is better for you, if only you knew.” (Al-Baqarah/ The Cow 2:280)

The events which are considered as the reason for these verses to be revealed, are as follows:

Four sons of Amr b. Umayr, Mas’ud, Abduyaleyl, Habîb and Rebîa, of Sakif Tribe used to lend to the sons of Mughira of Bani Mahsoon who were in Mecca. When Muhammad (pbuh) conquered Ta’if (8^th year of Migration), these brothers became Muslims. Then, they wanted their interest from the sons of Mughira. This event caused the following verses to be revealed:

“O you who have believed, fear Allah and give up what remains due to you of interest, if you should be believers. And if you do not, then be informed of a war against you from Allah and His Messenger. But if you repent, you may have your principal. Thus you do no wrong, nor are you wronged.” (Al-Baqarah/ The Cow 2:278-279)

Thereupon, these four brothers said: “ We repent and obey Allah’s command. We are not able to fight against Allah and His Messenger.”

They gave up on interest and they accepted to get their capital only. They wanted their capital from the sons of Mughira. Sons of Mughira indicated that they were in financial difficulty and said: “Give us time until the crops grow.”. The four brothers did not want to give more time. This became the revelation reason of the following verse:

“If the debtor is in difficulty, grant him time until easiness. But donating is better for you, if only you knew.” (Al-Baqarah/ The Cow 2:280)[4]

1.1. Protection Circle Around The Interest

  The Messenger of Allah considered some selling types of gold, silver, barley, wheat, date and salt as interest, too. According to what Abu Said al-Khudri (r.a.) narrated, he said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt is to be paid the same quantity for the same quantity, equal for equal and payment being made on the spot. Whoever increases or demands more, he yields interest. About this matter, both the giver and the receiver are the same.”[5]

Exchange of a commodity for its own kind generally occurs in loans. Since people can violate the prohibition of interest by giving the image of trade to loan, the Messenger of Allah constituted a protection circle around interest by his sayings about these six commodities. Because all of these goods can be given as loan.

Let us try to see the doors closed to interest and the protection circles set by the hadiths.

1.1.1. Exchanging the Six Commodities On the Spot for Their Own Kind

Exchange of gold, silver, wheat, barley, salt and dates with their own kind is conditioned on being paid on the spot. According to this, the on-credit sale of 10 units of gold  for 11 units of gold is a transaction with interest. This is very important because if this was called trade, loans with interest would be given as if it is a kind of trade. Then, lending $100 for $110 to be paid later, would be considered as interest; however, the sale of $110 on credit would be considered as trade.

1.1.2. Equal Exchange of the Six Commodities for Their Own Kind

Hadith put the condition of exchanging these six commodities in equal quantities when the exchange is done for their own kinds on the spot. According to this, giving 10 units of gold on the spot and taking 11 units is a transaction with interest. As mentioned above, the Messenger of Allah said: “Interest arises only from debt.”[6] When this hadith is considered about debts with interest, importance of the prohibition will appear clearly.

The main objective of the person doing transactions with interest is to be paid 11 units of gold in exchange for 10 units. If he does it in a legitimate way, it will not be difficult to convert it to debt. For instance, first, he lends 11 units of gold; then, he guarantees this, and buys 11 units of gold which belongs to the indebted, for another 10 units of gold. At the end of these two transactions, he gives 10 units of gold, but becomes the payee for 11 units. To prevent any inconvenience, this would either be done on a document or a person who the usurer trusts would be the representative for the indebted and would carry out the transactions. Also, the organizations would be established for this. However, the condition of exchanging these commodities in equal quantities, when the exchange is done for their own kind, closed the doors for this situation.

Likewise, in the past, to legally benefit the lender out of the situation, a symbolic sale would be arranged. For example, the person who borrows would put one of his assets before the lender, and he would say: “I sold this to you for 10 units of gold”. The lender would buy and receive it and pay the money. Then, the borrower would say: “Sell this asset to me for 11 units of gold on condition that I pay it the next year.” And the lender would sell it. So, under the image of trade, the borrower would become indebted to pay 11 units of gold for 10 units. There were several methods for this.

A pocket watch from the Security Box of banks, which were founded in the period of the Ottoman Empire, would be sold by the banks and donated to the banks by the borrowers several times a day, to legalize the interest which would be paid by the credit borrowers.[7] If there was not the prohibition mentioned above, this time, instead of the pocket watch method a person would be employed at every bank. This employee’s duty would be completing the procedures on behalf of the borrower and putting the borrower on debt for 11 units of gold, then, giving the borrower 10 units of gold.

1.1.3. Exchanging Similar Kinds of  Commodities Which Can Be Given As a Loan

The Messenger of Allah said:

“…if their kinds are different, as long as the transaction is done on the spot, you can trade them however you wish.”[8]

In the related hadiths, gold and silver; and wheat and barley, which are subsequently same type of commodities, were counted as the different kinds; however, date and salt, which are different types of commodities, were not mentioned. The Messenger of Allah said:

“When the gold is sold for silver, there is no problem for silver to be more than gold, but it can not be on credit. When wheat is sold for barley, there is no problem for barley to be more than wheat, but it cannot be on credit.”[9]

Gold with silver, and wheat with barley can replace each other. The ratio between the prices of these commodities, does not change  in long term. The condition for this transactions to be on the spot closes the doors which may lead to interest.

For instance: if 1 dinar equals to 10 dirhams, 100 dinars[10] equal to 1000 dirhams. Unless the exchange of these two on credit was not prohibited, the usurer would sell 1000 dirhams for 120 dinars which would be paid the next year.Thus, he could give a loan with 20% interest rate under the name of trade. The same thing would apply to barley and wheat.

This hadith blocks the way to forward exchange of one currency for another currency.

For instance, lending USD that is equal to the current value of 1000 Euros and collecting 1200 Euros the next year is forbidden, because USD can substitute for Euro. From the above hadiths, it is not hard to understand that this transaction is also a transaction with interest.

1.1.4. Exchange of Different Currencies Based on Daily Prices

Abdullah b. Umar narrated: “I used to sell camels in Beqi. I used to sell for dinar and take dirham instead, I used to sell for dirham and take dinar instead. I came to the Messenger of Allah. He was at Hafsa’s house. I said: “O Messenger of Allah! Excuse me, I’d like to ask a question; I sell camels in Beqi; I sell for dinar and take dirham instead, I sell for dirham and take dinar instead.”  He said:

“If you take the money for the current price of the day, there is not any objection as long as you do not pay each other inequivalently.”” [11]

According to this, gold and silver should be exchanged for the current corresponding  value of each other. Otherwise, there would still be a possibility to break the interest ban. For example, when 1 dinar equals to the value of 10 dirhams, the usurer first  loans 11 dinars. After getting required guarantees, he would sell his 100 dirhams for borrower’s 11 dinars. At the end of all these transactions, usurer would have loaned money with 10% interest. Legal foundations could have been founded for this purpose. But, the condition to exchange for the current price prevented this. Thus, these hadiths prevented all the options which open the doors for loan with interest under the name of trade.