There is no difference of opinion among Muslim jurists about the prohibition of riba in Shari’ah although some argument has been raised on the meaning of riba that it does not constitute bank interest. This argument is so weak that it is not considered an opinion amongst Muslim jurists.
The consensus of Muslim jurists throughout history has been that riba includes bank interest whether the loan is for a personal nature or commercial type, whether the borrower is a private individual or government and whether the rate of interest is high or low. Therefore, riba cannot be justified by any reason because it is neither like trade where effort is assumed, nor like rent where ownership responsibility is taken, nor like profit which is determined by performance of asset in the market.
This refers to an increment charged on debt or deferred payment of the principal money in consideration of the debt period. This category of riba was initiated during the pre-Islamic (jahiliyyah) period, where it was charged as penalty for late payment. During that period, interest was not charged on loans from the initial stage. Instead, the creditor would double the amount of debt outstanding only when the debtor failed to pay the debt on the due date.
One may wonder, what the essence of interest is. It is a penalty for late payment. However, the conventional system imposes such a penalty (interest) on borrowers even when there has been no late payment or default.
Interest on debts is a category regularly found in conventional banking products which take various types such as; loan with interest or other benefits, lending of usufruct (benefits) of an asset but with conditional benefits in return, penalty charged on late payment or default of the debtor.
In loan transactions, riba occurs when three conditions are met, that is; when there is excess or surplus over and above the loan capital, when this surplus is determined in relation to time, and when this surplus is conditional. When the surplus is paid at the discretion of the borrower, Islam has no blame on it.
Shari’ah allows Islamic banks to maintain different sources of funds including demand deposits, which are risk-free and provide no fixed return to the depositor apart from the bank discretionally gift (hiba). This, however, should not be construed as interest, as gift is given at the discretion of the bank which is not the case with the contractual conventional banking interest.
Dr Lujja Sulaiman,
Tropical Bank Limited