Sheikh Dr.Sajid Umar in part II outlines the economic pitfalls of Riba and explores where Riba exists around us today.

Wealth Inequality

Riba's contribution to wealth inequality is a critical issue in modern financial systems, as it tends to disproportionately benefit lenders and wealthier individuals, whilst often disadvantaging borrowers, particularly those with lower incomes. This phenomenon can be explained in further detail through the following points:

Accumulation of wealth: Lenders and wealthier individuals who have the means to invest in interest-bearing assets, such as bonds, stocks, and real estate, can accumulate wealth over time by earning interest income. This income can be reinvested, further increasing their wealth in a compounding manner. On the other hand, low-income borrowers often lack access to these investment opportunities, limiting their ability to build wealth.

Debt burden: Borrowers, especially those with limited financial resources, may find themselves trapped in a cycle of debt when they take out interest-bearing loans. As interest accumulates on their debt, they may struggle to pay down the principal amount. In some cases, borrowers might need to take out additional loans to cover their interest payments, exacerbating their debt burden and making it even more challenging to break free from this cycle.

Predatory lending practices: Some lenders may engage in predatory lending practices, offering loans with high interest rates and unfavourable terms, as is the case with a surge in recent BNPL loans which we will look at in depth later, to vulnerable borrowers who may not fully understand the implications of their debt obligations. Such practices can lead to an even greater wealth disparity, as borrowers find themselves trapped in debt and unable to improve their financial situations.

Opportunity cost: Borrowers burdened with high-interest debt may be forced to allocate a significant portion of their income towards interest payments, leaving them with fewer resources to invest in education, healthcare, or other avenues for personal and financial growth. This lack of investment perpetuates the cycle of poverty and further exacerbates existing wealth inequality.

Increased crime rates: Importantly, debt and crime are strongly associated, with officially registered offending increasing during periods of debt enforcement. The unequal distribution of wealth and limited opportunities for social mobility can result in increased crime rates as individuals struggle to meet their basic needs or feel marginalized by society. Debt problems are ubiquitous among people with convictions, with most of the prison population being indebted. This increase in crime can lead to further social disintegration and a decline in overall community safety.

Overburdening debt: High interest rates can make it difficult for borrowers to repay their loans, leading to a cycle of debt. This is particularly true for short-term, high-interest loans such as payday loans, which can lead to long-term financial distress for borrowers.

Inflation: When central banks set low-interest rates to encourage borrowing and spending, it can lead to increased demand for goods and services, which in turn can result in higher prices and inflation. Inflation erodes the purchasing power of money, impacting people with fixed incomes or those who rely on savings.

Discourages Saving: Low-interest rates can discourage saving, as the returns on savings accounts and other interest-bearing assets may not keep pace with inflation. This can lead individuals to seek riskier investments in pursuit of higher returns, exposing them to potential financial losses.

Artificial Asset Bubbles: Low-interest rates can encourage excessive borrowing and lead to the creation of artificial asset bubbles, such as the housing bubble that contributed to the 2008 financial crisis. When interest rates are low, people may be more inclined to invest in assets like real estate, driving up prices and creating unsustainable market conditions.

Misallocation of Resources: Interest rates can influence investment decisions, potentially leading to a misallocation of resources. When interest rates are low, businesses and individuals may borrow more than they need, investing in unproductive projects or assets. This can result in wasted resources and an eventual economic slowdown.

Short-term Focus: High-interest rates can encourage short-term thinking, as businesses and individuals may prioritize immediate gains over long-term investments or projects. This short-term focus can hinder innovation, infrastructure development, and sustainable economic growth.

The Ruling of Riba and its wisdoms

The Qur'an and Prophetic narrations frequently express Islam's strong opposition to interest, emphasising that both taking and giving interest are considered a grave sin. By prohibiting Riba, numerous far-reaching benefits are ensured, including:

1. Equity in exchange.

2. Safeguarding wealth by prohibiting unjust and unequal exchanges.

3. Encouraging charity, compassion, and financial responsibility.

4. Reducing selfishness and self-centeredness, which can lead to social animosity, mistrust, and resentment.

Shariah principles aim to create more equitable and just exchanges between individuals and encourages the distribution of wealth across all segments of society. One of the key components of the system is the practice of Zakah, which embodies the idea that wealth should be circulating and accessible to all members of the community. Here's an elaboration on this concept:

1.  Wealth as a trust from Allah: In Islam, wealth is considered a trust from Allah, and those who possess it have a responsibility to use it in a manner that benefits society. The practice of Zakah serves as a reminder that wealth should not be hoarded or concentrated in the hands of a few but should be shared with those in need.

2.  Discouraging hoarding of wealth: Zakah discourages the hoarding of wealth by requiring eligible Muslims to share a portion of their assets with those in need. This practice ensures that wealth is constantly circulating within the economy, stimulating growth and creating opportunities for all members of society.

3.  Redistribution of wealth: Zakah mandates that Muslims give a fixed percentage of their qualifying wealth to the poor and needy annually. This practice helps redistribute wealth within society, ensuring that the basic needs of the less fortunate are met, and reducing wealth concentration among the affluent. This aim of the Shariah is made clear in Surah Hashr:

لَا يَكُونَ دُولَةًۢ بَيْنَ ٱلْأَغْنِيَآءِ مِنكُمْ…

...so that wealth may not merely circulate among your rich (al-Hashr 7)

There are many stern warnings in Islam from both the Quran and the Hadith regarding the severity of consuming Riba.

ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَـٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَـٰٓئِكَ أَصْحَـٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَـٰلِدُونَ

Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. That is because they say, “Trade is no different than interest.” But Allah has permitted trading and forbidden interest. Whoever refrains—after having received warning from their Lord—may keep their previous gains, and their case is left to Allah. As for those who persist, it is they who will be the residents of the Fire. They will be there forever (Al-Bakarah 275)

يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ ٱتَّقُوا۟ ٱللَّهَ وَذَرُوا۟ مَا بَقِىَ مِنَ ٱلرِّبَوٰٓا۟ إِن كُنتُم مُّؤْمِنِينَ ٢٧٨ فَإِن لَّمْ تَفْعَلُوا۟ فَأْذَنُوا۟ بِحَرْبٍۢ مِّنَ ٱللَّهِ وَرَسُولِهِۦ ۖ وَإِن تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَٰلِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ ٢٧٩

O believers! Fear Allah, and give up outstanding interest if you are ˹true˺ believer. If you do not, then beware of a war with Allah and His Messenger! But if you repent, you may retain your principal—neither inflicting nor suffering harm (Al-Bakarah 278-279)

"Riba is a curse, and if you do not give it up, then beware of Allah and His Messenger." Musnad Ahmad

Allah has declared it impermissible to engage in interest, whether giving or taking. It is based on Allah’s infinite wisdom that He deems an action to be obligatory or prohibited, prescribing matters in man’s best interests, in this life and in the Hereafter, as He is the All-Wise, All-Knowing. We can suggest some socio-economic reasons as to why Riba is haram:

1. The devastating effects of Riba are not limited to individuals but can even crush entire nations under its weight. The crippling foreign debts of numerous countries have led to Riba payments so colossal that they have become a suffocating burden on their economies. The consequences of this financial bondage are dire, as debt has been shown to be a killer. A staggering 6.2 million children are estimated to lose their lives every year worldwide, all due to the brutal conditions of poverty and debt. The toll of Riba is catastrophic, and the urgency to eradicate it has never been more pressing.
2. Riba defies the very essence of brotherhood and compassion, and instead operates on the principles of selfishness, greed, and a lack of empathy towards fellow human beings.
3. Inflation, one of the most pressing issues plaguing economies worldwide, is heavily fuelled by the corrosive effects of Riba.
4. Riba creates an unfair dynamic where the borrower bears all the risk while the lender benefits from a sure gain, without any possibility of loss. The profits, instead of being shared by both parties, are unfairly distributed. This entitled approach leaves many investors not concerned with the success of businesses and providing support, as their returns are guaranteed regardless of the outcome.
5. The ruthless system of Riba perpetuates a vicious cycle of monopoly in society, with the wealthy becoming richer while the poor are left to bear the burden of inflated prices and mounting debts.
6. Mounting debts on society, a common byproduct of Riba, have a detrimental impact on an individual's mental health, leading to anguish and despair.

Where Can I see Riba around me?

Interest-Bearing Personal Loans

A common option when looking to make a large purchase is for an individual to obtain a personal loan via friends and family, directly from a bank by paying via credit card, or relying on another form of credit. This unsecured loan may then be used to purchase any asset—in our case, a vehicle—outright with a separate outstanding debt obligation with the creditors/lenders.

From an Islamic perspective, borrowing money which is to be returned with interest from a commercial bank, or from any interest-bearing lender, irrespective of source, for any purchase, whether secured or otherwise, is impermissible. This is the purest form of a Ribawi contract.

Home Mortgages

Home mortgages are interest-bearing lump sum loans to buy property or land for both commercial and personal uses. The loan to an individual is secured against the value of their home until completion, enabling the bank to get at least part of its money if the borrower defaults.

Over 750,000 UK households are at risk of defaulting on their mortgage payments over the next two years, while another 47,000 are trapped as mortgage prisoners, according to the Financial Conduct Authority.

The FCA head wrote: “We focused on this group because the vast majority of mortgage prisoners have a mortgage from a firm that is no longer lending to new customers, and most of these mortgages were sold before 2008/9.”

The lender or mortgage broker will usually begin a full affordability assessment using the evidence and ‘stress test’ your financial situation. This has become stricter after the 2008 financial crisis, in which a contributing factor was people being given a ‘NINJA loan’, a slang term for foregoing the verification process and giving a substantial loan knowing the person is likely to default as they have ‘No Income, No Job or Assets’.

This type of loan falls under the same category as above, an interest-bearing loan, and therefore would be one of the purest forms of a Ribawī contract.

Car Finance

Finance debt for new and used cars has risen to £40 billion per year, prompting concerns that consumers may default on agreements amid soaring living costs. Analysis by The Car Expert shows that UK car finance debt has increased by £29bn since 2009.

Almost all (circa 92%) new cars are purchased using finance agreements, along with a growing number of used cars, meaning hundreds of thousands of owners could be at risk of defaulting on their debts.

The Car Expert found that the average amount financed per new car has more than doubled, increasing from just under £12,000 at the start of 2009 to more than £25,000 by the end of June 2022.

A large percentage of the car finance agreements in place fall under a tripartite hire purchase agreement. A tripartite hire purchase agreement occurs when the buyer borrows money from a third party, usually a financier, to purchase the car from the seller. The third-party financier will secure their loan against the car, and the debtor (buyer) pays an amount greater than that originally lent by the financier.

Unless the Hire Purchase is a bipartite agreement, being involved in the financing method mentioned above would be impermissible. Fortunately, there are many permissible alternatives, such as bipartite agreements, leases, and PCP (Personal Contract Purchase).

Overdrafts

Banks rely on fees charged on overdrafts as a major source of revenue and are not completely committed to transparent, upfront pricing. These often exploitative and hidden fees can have a significant impact on a family’s bank account, and as a result, they have been the subject of much scrutiny and within the purview of regulating bodies. Having a look at the total value of overdrafts in the UK we can see an unhealthy amount of overdraft used by the public with spikes in May and June 2022. In line with the first billable months for many energy price hikes around the UK.

Banks charge interest on overdrafts continuously, falling under the interest charged in exchange for an increase in time to repay what is owed. This is Riba in our debt-based transactions (Riba al-duyun).

Credit Cards

There were 355.1 million credit card transactions in November, 0.3% more than in November 2021. The total spend of £19.6 billion was 5.3% higher than November 2021.

Outstanding balances on credit card accounts have grown by 9.4 percent over the past twelve months to November and 50.9 percent of outstanding balances incurred interest compared to 52.9 percent twelve months ago.

These statistics are showing an increase in credit card use as time goes on and the cost of living has increased. A reliance on this form of credit is creating a debt cycle for many already struggling families who are using credit cards to pay for simple necessities such as food and bills. As they increase in debt repayments whilst attempting to pay for basic goods, the cost of the credit card repayments would increase and make it more difficult to be able to make repayments without defaulting.

Credit institutions may offer interest-free periods; however, they ultimately end up charging for deferred payments, falling under interest charged in exchange for an increase in time to repay what is owed. This is Riba in our debt-based transactions (Riba al-duyun).

BNPL (Buy Now Pay Later)

Buy now, pay later (BNPL) schemes are plaguing society, encouraging spending on otherwise unaffordable items or holidays. Gen Z users (those aged 18-24) are using BNPL so that they can afford to keep up with fashion trends. Another common use is to manage pressure from other debts on individuals. FCA have had to step in, attempting to regulate and provide guidance to lenders to review their harmful approaches.

BNPL schemes contain clauses allowing interest to be charged when a minimum payment is not met, or the loan is not fully paid within the interest-free period. This would constitute interest charged in exchange for an increase in time to repay what is owed, the exact definition of Riba in our debt-based transactions (Riba al-duyun).

Closing Words

In conclusion, the concept of Riba, rooted in Islamic teachings, highlights the importance of fostering equitable financial practices and discouraging unjust gains. While many modern financial systems have moved away from these principles and now widely accept interest-based transactions, Riba's fundamental concerns remain relevant today.

As we witness the adverse effects of interest-driven economies, such as wealth inequality, unsustainable debt burdens, and financial crises, it becomes increasingly clear that there is a need for alternative approaches to finance. By revisiting the principles behind the prohibition of Riba, we can gain valuable insights into creating more just, ethical, and sustainable financial systems that promote fairness, risk-sharing, and prioritise our relationship with our Lord.

Consuming Riba could be an obstacle standing between us and having our duas answered by Allah Almighty. The Messenger of Allah ﷺ mentioned the case of a man who spreads out his hands to the sky, making dua, and said about him, “While his food is haram, his drink is haram, his clothing is haram, and he has been nourished with haram, so how can [his supplication] be answered?" By addressing the challenges of Riba in the contemporary context, we can work towards a more equitable and resilient global economy for future generations.

Sheikh Dr. Sajid Ahmed Umar holds a 3-year University Diploma in Arabic language and Islamic Studies, a Bachelors degree in Comparative Islamic Law and Jurisprudence Methodology. He also holds a Masters degree in Judiciary, and is a qualified Judge. Sheikh Dr. Sajid has also completed a PhD in Comparative Islamic Law with his postgraduate research focusing on the area of Liquidity Management and Financial Risk Management through an Islamic lens.