THE MEANING OF INTEREST AND INTEREST BASED INSTITUTIONS IN TANZANIA -PART I

O ye who believe! Observe your duty to Allah, and give up what remaineth (due to you) from usury, if ye are (in truth) believers.
And, if you do not, then be warned of war (against you) from Allah and His Messenger. And, if ye repent, then ye have your principal (without interest). Wrong not, and you shall not be wronged. (Qur’an, 2:278-279).
-Prophet Muhammad may Allah’s peace and blessing be with him said "“An age will come, when all people would be involved in Usury and if not, they would at least be affected by its results.”


The doctrine of Interest is an institutional and conventional rather than natural phenomenon in our economic system. The institution of interest exists not because it is natural or inherent phenomenon of the modern time society but because it had existed in several societies for some reasons and for some time (Afzal ur Rahman: 1980). Modern economists regard institution of interest as a necessity for modern society and must be kept alive at all costs despite its socio-economic malaise.

In the recent global financial crisis, it has been clearly noted that it was caused by western banking system indulgence on documented lending based interest in the mortgage financing sector. On the other hand, stability and resilience of Islamic banking system during the crisis has provided a clear insight to the significance of interest free economic system.

THE MEANING OF INTEREST AND RIBA.

Interest has been defined differently by different people. Stephen G. Kellison says “Interest may be defined as the compensation that a borrower of capital pays to a lender of capital for its use. Interest can be viewed as a form of rent that a borrower pays to the lender to compensate for the loss of use of the capital by the lender while it is loaned to the borrower.” Others have defined it as a fee paid for using other people's money. Some argued that interest is a fee paid to the courier of capital. To the borrower, it is the cost of renting money, to the lender the income from renting (lending) it out.

Tanzania Income Tax Act 2004, revised edition 2006, Part I Preliminary section defined interest as “a payment for the use of money and includes a payment made or accrued under a debt obligation that is not a repayment of capital, any gain realized by way of a discount, premium, swap payment or similar payment.”

In the Muslim world, Western minded Muslims are accused for misinterpreting Riba as usury only in which they say it refers to primitive form of money-lending for consumption purposes and differentiate it from interest. To the contrary, Muslim scholars maintains that such difference never exists as the Arabic word Riba includes both usury and interest. Using Maulana Abu Ala Maududi words, “Arabic Riba is but partially covered by the English word Usury which in modern parlance signifies only an exorbitant or extortionate interest. The Arabic Riba on the other hand means addition, however slight over and above the principal sum lent and thus it includes both usury and interest.”

Sharia scholars and Islamic economists have given a broad meaning of the term interest after having studied Riba manifestations and connotations from Islamic revealed sources and opinions of distinguished earlier generations of scholars. They defined interest as a pre determined excess or surplus over and above the loan capital received by the creditor conditionally in relation to a specified period. In other words, Riba contains three elements:

a. Excess or surplus over and above the loan capital or produce.
b. Determination of this surplus in relation to time; and
c. Bargain to be conditionally on the payment of a pre-determined surplus.

These three elements jointly constitute Riba and any deal or bargain or credit transaction, in money or in kind, which contains these elements, is considered a transaction of Riba by the Muslim jurists and economists.

WHY IS INTEREST PROHIBITED IN MONOTHEIST/ ABRAHAMIC FAITHS.

Islam, Christianity and Judaism have prohibited interest based transactions. However, in Judaism, the strict codes of prohibition were relaxed to a lesser extent especially with non-members of the Jewish community. In Christianity, reform began by the end of 13th century in protestant church led by Luther and Zwingli who agreed to the charging of interest and then catholic whereby John Calvin and St. Thomas Aquinas conformed to the secular pattern and provided a theological rationale for charging interest. In Islam, Muslim Scholars have maintained the condemnation of interest in Islam for almost 14 Centuries despite efforts to use deceptive practices to circumvent the Sharia injunctions.

The basic argument against interest is exploitative nature of money lending practices based on interest. For example, in the banking system, we find rich creditor exploiting poor debtors. However, the prohibition of interest in Islam goes beyond exploitation explanation. We have people who may question how can I be exploiting the government by purchasing T-bill Or corporate bonds or buying a unit in the UTT collective schemes or by being a member of pension funds or by depositing in a saving or term deposit account and so on? Of course, in what ever scenario, Allah commands justice to be served in financial deals. How fair to get a return without any element of business risk such as when you buy treasury bills or having a fixed or saving account? Where will the government get funds to pay the principal and interest? Isnt the money comes from taxes that a common mwananchi has to pay expecting better social services? Where will the bank gets money to pay you? Isn’t from charging highly those who borrow or in use of banking services? Isn’t this exploitation? Where do we abide by risk taking principle of “no pains no gains”?

In broadest view, Islam prohibited interest so as to establish economic justice and get rid of injustice. The interpretation of the verse 2.279 ends with…deal not unjustly and ye shall not be dealt with unjustly. In other words, without inflicting or receiving injustice, whereby both an increase and decrease of the amount returned relative to the amount lent is considered injustice.

ARGUMENTS FOR INTEREST.

A lot of efforts in economics have been directed towards justifying interest. This is what can be found in theories of interest such liquidity preference theory, time preference theory, loanable fund theory, abstaining or waiting theory of interest which were propounded by economists such as Robertson,Ohlin, Pigou, Walras, Cassel, Alfred Marshall, Keynes, J.S Mills among others. These theories have been criticized on several grounds. In the words of Shaikh Mahmud Ahmed as quoted by Abdul ghafor,

“… leaving out some notable exceptions, like Bohm Bawerk’s Capital and Interest, significant parts of Keynes’ General Theory and parts of Harrod, Hawtey and Kurihara, questioning the validity of interest, bulk of the effort of economics has been to justify it, yet not a single argument advanced in favour of this institution has a leg to stand on. All theories of interest evolved till the time of Bohm Bawerk, including those resting on productivity, abstinence and demand and supply concepts, were unanswerably repudiated by him. Yet economics continues whipping these dead horses, without evolving any persuasive answers to his criticism.”

To sum up argument in favor of interest which is handwork of money lenders and modern banking system, they propound that since money lent is used to invest in a business venture and make a profit, it is reasonably fair to ask for a share in that profit. For easy of reference, the interest is fixed in advance and for the protection of capital a collateral security is required. On this ground, charging an interest as agreed by both parties is seen as logical.

However, predetermined interest is not at all charged on profit in modern banking operations. Interest is charged on the money used by the borrower by the end of a month as the case in bank overdraft facilities or depending on money lent regardless of use by end of every month (term loans) and debited on the customers account automatically. In both cases, there is no sharing of profit which is normally determined by the end of every three month or half a year or annually.

On that account, banks simply sale money for money. This is the nucleus of injustice and double standard. Money as a means of exchange, measure of value and store of value is treated in the same basket like furniture, maize and rice. Contrary to the distorted perception of money, Islam maintains its position that money isn’t a commodity or product because its doesn’t possess intrinsic value which is possessed by products such as furniture, maize and rice.