The Wisdom behind Prohibiton of Usury (Riba)

Why Riba (Usury) Is Haram In Islam

“Those who devour usury will not stand except as stand one whom the Evil one by his touch hath driven to madness. That is because they say: “Trade is like usury,” but God hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for God (to judge); but those who repeat (the offence) are companions of the Fire: They will abide therein (for ever).”
- Quran Verse 2:275 (Chapter Al-Baqara)

For some such Quranic verse will come down as very unpleasant & stern judgment and they are infact very severe as Islamic Shariah, a looks upon consumption of Usury (common definition: interest on money) as serious offence.
Quran prohibits its followers from Riba (Usury) and has couple of stern verses to dissuade the people from brining in the concept of Usury in their economic & social life.

At another place Allah says:

“O ye who believe! Fear God, and give up what remains of your demand for usury, if ye are indeed believers.”
- Quran Verse 2:278 (Chapter Al-Baqara)

Verses like such (“…if ye are indeed believers.”) further highlights the gravity of offence by exhorting people to obey if they indeed think themselves as Muslims.
Quran not only put a stop on Usury but it also encourages leniency towards debt-ridden as way to social upliftment.

“If the debtor is in a difficulty, grant him time Till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew.”
- Quran Verse 2:280 (Chapter Al-Baqara)

But why has Islamic Sharia prohibited the Usury from economic and Business transactions?
To understand the wisdom behind such prohibition we need to be first aware of 2 key Islamic principles on wealth-creation.

 1. Islam permits increase in capital through trade and, at the same time, it blocks the way for anyone who tries to increase his capital through lending on interest (riba) – whether it is at a low or a high rate.

Allah Almighty says :

“O you who believe, do not consume your property among yourselves wrongfully, but let there be trade by mutual consent…"
- Quran verse 4:29 (Chapter An-Nisa)

I would also like to point to another prohibited means of earning (though not the subject of this post) – ‘gharar’ (transactions based on speculation/gambling).
Modern financial practices that are Haram under ‘gharar’ include use of derivatives such as futures and the purchase of insurance. However, investment in the stock market, except holding preferred stock with a fixed dividend, is permissible on the principle of shared risks and rewards.

The Hadith of Prophet says:

Do not buy fish in the sea, for it is gharar. (Ibn Hanbal)

Buying fish in the sea, or alternatively, 'what is in the womb’ highlights the speculative nature of the transaction.

2. ‘Gharar’ (speculation/gambling) violates the principle that all parties have both complete knowledge and access to the product before the transaction.

In summary, Quran forbids both risk-less gain, as in the case of Riba (Usury), and transactions based entirely on risk, as in ‘Gharar’ (Speculation/Gambling). Islamic Sharia encourages Muslims to be “risk neutral” and earn profit through neither seeking speculative gain nor hoping to lock down all risk with fixed returns.

With these explanations on Islamic principles of Wealth-creation let me now put forward the wisdom behind prohibition of Usury (interest on money) in Islam.

The strict prohibition of Interest in Islam is a result of its deep concern for the economic, moral, and social welfare of mankind.

Economic: Dependence on interest discourages people from working/trading to earn money and the value of work/trade is reduced. Such people won’t bother to take the trouble of running a business or risking money in trade/industry. For most of the readers this statement may not make sense (or won’t be able to relate) as they themselves are from class of Workers or Traders (and not money-lenders). For such reader, I would recommend them to read this short macro-level explanation of today’s debt-ridden economies (The facts about Usury: Why Islam is Against Lending Money at Interest)

Moral: Acceptance of Usury discourages people from doing good to one another and lend out of good will. A society which encourages interest on lending will require needy people to pay back more than he borrowed, which quite often is a source of huge burden.

Social: If interest is allowed, the rich (who are most likely to be lender) will exploit the poor (borrower). As a result, the rich becomes richer and the poor becomes poorer. This generates envy and hatred among the poor toward the rich, resulting in social disorders, conflicts and at times breeds revolutions & movements.

To understand these economic, moral and social effects we Indians don’t have to look further than Vidarbha and the plight of farmers there which in recent time has received much publicity for unfortunate circumstances. And Vidarbha is a part of much larger problem area.

Between 2001 and 2006, over 14000 farmers have committed suicide in various regions including Vidarbha and Telangana. In almost each of these suicide cases the only recurring reason is debt-trap.

Jaideep Hardikar in his report Loan after Loan notes:

A farming family holding 27 acres in Vidarbha has become a marginal landholder in a span of few years, and a vicious cycle of usurious debt robbed their lands and hopes. There are hundreds of others in the lurch similarly.

These farmers who very often had to borrow from money-lenders at 60-120% interest, to sow seed, and toil every day from sunrise to sunset and if-and-only-if the harvest is good or saved from natural torments will they be able to pay out the interest and some principal. But seldom it happens as willed and for years after years they are still trying to come out of debt. And for many the only way out of these miseries was through death. Suicide is not an easy route as some would think. It is an end for those who see all hopes vanished. It is also thus no surprise that Vidarhba and Telangana are demanding separate States.

Thus, in a society which permits interest, the strong benefit from the suffering of the weak, resulting in conflicts, social-disorders, and revolutions.