Why interest charges are forbidden in Islamic banking?

November 16, 2016

By Dr Hanudin Amin

Beginning in 1983, the banking sector in Malaysia had witnessed a new development of Islamic banking where interest (riba) was banned for the first time in the nation when the first Islamic bank, Bank Islam Malaysia Berhad (BIMB) was established.

One of the golden features of the Islamic banking business is the prohibition of interest in financial transactions. Literally, interest means over and above a thing, be it in money terms or in physical units of goods. In Islamic banking, however, interest means over and above the principal loaned out for a period.

This article explicates four reasons pertinent to the prohibition of interest in Islamic banking but not limited to the following:

First: Interest disturbs the distribution of wealth in society. The taking of interest leads to the accumulation of wealth in the hands of few people, and at the same time torture the needy and poor people.

This suggests that the rich individual is likely to be richer whilst the poor individual is likely to be poorer. Justice and fairness can be realised from trading but are absent in interest based activities. In contemporary mortgage practices, for instance, interest charges imposed on borrowed money based upon the time value of money. This is called as riba al-nasiah or loan transactions.

In Islam, such practice is against the spirit of mercy among individuals and lacks of value of brotherhood. The taking of interest makes the gap between the rich and poor keeps on widening not only in terms of wealth but also in their relationship.

Second: Interest makes oneself to be unproductive where he or she anticipates his or her money works for him or her rather than he or she works for the money. In this case, the taking of interest permits individuals to earn extra ringgit either in advance or at a later date without working for it.

This means one who lends, for example RM1 to other individual to get extra ringgit without working for it, implying over dependence on the interest mechanism to generate wealth. Consequently, the value of work will reduce in small scale but expanding.

Therefore, individuals will not bother to run their businesses which will affect other businesses as well. Without a corrective measure, interest based activities like standard loans lead to poor productivity to individuals and the benefits brought by industries, commerce and business to society are of course diminishing.

Third: Interest erodes good deeds among individuals in society. It creates an egocentric culture where every loan activity is not aimed at helping the poor and needy, but, aiming at increasing one’s wealth.

The taking of interest in standard banks has been seen as an evidence that weakens one’s feelings of goodwill and affability to the banks. This also extends to society where an individual lends money to others by expecting extra ringgit for every single ringgit he lent out.

Hence, the altruistic behaviours are purely established on the basis of making money rather than helping others who need assistance.

Fourth: The practice of taking interest by standard banks in Malaysia is considered as stealing customers’ wealth in an inappropriate manner. Unlike trade, interest based activities involve no effort (kasb), risk (ghorm) and liability (daman) explaining why they are forbidden in Islam including Islamic banking business.

It is just like a person who takes someone’s money typically without his permission. For instance, ABC Bank lends one ringgit to Imran to get another extra ringgits for nothing, without giving him something in exchange and this is prohibited (haram). It is because the bank takes another ringgit(s) from Imran where no effort, risk and liability occured.

Besides the prohibition of interest, the true Islamic banks are expected to free their operations from the elements of uncertainty (gharar), gambling (maysir) and any undesirable rudiment that against the true spirit of humanity in Islam.

This means that Islamic banks must consider Shariah as the governing law for all of their banking operations where 9Ps of prohibition of interest, policy, principle, philosophy, procedure, product, paper, perception and purpose are brought into play.

*The author is a Senior Lecturer/Dean at Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163).

Photo: pixabay

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