Riba reconstructed

Interest-free Islamic banking is the implementation of the established juridical opinion that any increase on a loan (Arabic: ribā al-nasī’a) or excess in barter-like transactions (ribā al-faḍl) is forbidden in Islam. This opinion is based on methodological preferences of Muslim jurists of the classical period who understood ribā as the opposite of sale (bay‘), categorising it as an ambiguous (mujmal) Qur’ānic term that was explicated using Ḥadīth reports. Modern reformist scholars critique this opinion as reductionist, resulting in Islamic banks’ use of stratagems (ḥiyāl) to avoid loan interest and inhibiting their potential to improve economic conditions in Muslim countries. This thesis has developed a historicised interpretation of ribā to settle this long-running controversy.

Review of Islamic finance literature identified the absence of the sociohistorical reality of ribā, prior to and synchronous with the revelation of the Qur’ān, as the main lacuna. Employing a historical methodology, this thesis charts the economic history of lending from antiquity, dovetailing with the socioeconomic milieu of pre-Islamic Mecca, thus providing an anchor for the exegesis of ribā verses. Occasions-of-revelation reports shed light on the synchronous practice of ribā. Contextual and linguistic analysis of Ḥadīth reports casts doubt on the established view of ribā. This triangulation of evidence overcomes the methodological challenge created by the lack of contemporaneous archival material. The historical sketch of ribā emerging from this evidence enables theory development.

This thesis posits that ribā is a mufassar (unambiguous) Qur’ānic term and is the opposite of charity (ṣadaqah), not sale. The ribā verse in sūrat l-rūm holds definitional value. Ribā is an increase in loans / debts that harms the borrower. This definition precludes mutually beneficial interest-bearing loans. The original remit of ribā is consumption loans to the poor but can be extended to productive loans using textual indicants from the Qur’ān. The rationale of the law is to prevent ẓulm (oppression), the necessary condition for the prohibition. Ribā al-faḍl is an error in legal reasoning. This new theory is tested for application across personal, business, and sovereign loans.

The theory posited here will rejuvenate innovative ethical banking. It will shift policy priorities to eliminating egregious cases of ribā and reducing financial exclusion to facilitate economic development.

This thesis is unique in creating an antecedental historical context to ribā in the Qur’ān. The dynamic interdisciplinary methodology has the potential for application in other fields of Islamic law such as women’s rights.