In Arabic term Riba is a synonym for the term interest used in conventional banking operations. Riba means charging predetermined additional amount on a loan extended based on length of credit period. Certain quarters are of the view that Riba which is prohibited by revelations is the Usury (interest charged on consumption loans) and banking interest (interest charged on productive loans) is not covered by the term. This point was debated in detail during the Supreme Court (Pakistan) hearing and concluded that there was no difference between usury and interest as for prohibition is concerned. Following are some further citations (definitions) extracted from literature to clarify the meanings of word Riba used in Holy Qura'n.

1. In the words of Imam Abubakr Al-Jassas (D.380 AH) "The riba of Jahiliyya [period of ignorance] is a loan given for stipulated period with a stipulated increase on the principal payable by the loanee [debtor]."

2. Extract from the decision of Supreme Court of Pakistan "It is thus clear that the permissibility of interest can neither be based on the financial position of the debtor, nor on the purpose for which money is borrowed, and therefore the distinction between consumption loans and productive loans in this respect is contrary to the well-established principles" (Usmani, 1999 Para 72). While deciding the issue of banking interest as permitted or prohibited in Islam, Supreme Court (Pakistan) declared that "Any additional amount over the principal in a contract of loan or debt is the riba prohibited by the Holy Qur'an in several verses" (Usmani, 1999 Para 242).
The consensus view of Muslims about the meaning of Riba is presented here under.

3. Islamic Fiqh Academy India explains "Riba (interest) is a very important term in the Islamic terminology showing disapproval and it refers to the instrument by which a loaner charges some amount lump sum or in installments over and above his principal amount from the loanee [debtor] and thus increases his wealth manifold without participating in the business process of profit and loss".

4. Siddiqi, (2004), concluded that unanimous view of Muslims throughout history remained is--- any excess charge in a contract of loan is riba ---- and bank interest has no exception.

5. Islamic Fiqh Academy (IFA) Jeddah of OIC representing the collective wisdom of Sharia experts is of the view that any increase stipulated in a contract of loan irrespective whether consumption loan or productive loan is Riba prohibited by Allah (SWT). Iqbal, & Molyneux, documented "The equivalence of riba to interest has always been unanimously recognized in Muslim history by all schools of thought. In conformity with this consensus the Islamic Fiqh Academy of the Organization of the Islamic Conference (OIC) has recently issued a verdict in its Resolution No. 10(10/2) upholding the historical consensus on the prohibition of interest" (p. 9; IFC/2000) .

Charging of predetermined additional amount (usury, interest) on loans had never got support in ethics/religions. Interest charging is forbidden by at least all known revealed religions including Judaism, Christianity and Islam. Following are six verses cited by Usmani, (1999), from Old Testament of The Bible.

1. "Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon usury." [Deuteronomy 23:19]

2. "Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill? He that walketh uprightly, and worketh righteousness and speaketh the truth in his heart. He that putteth not out of his money to usury, nor taketh reward against the innocent." [Psalms 15:1, 2, 5]

3. "He that by usury and unjust gain increaseth his substance, he shall gather it for him that will pity the poor." [Proverbs 28:8]

4. "Then I consulted with myself, and I rebuked the nobles, and rules and said unto them, Ye exact usury, every one of his brother. And I set a great assembly against them." [Nehemiah 5:7]

5. "He that hath not given forth upon usury, neither hath taken any increase, that hath withdrawn his hand from iniguity, hath executed true judgment between man and man, hath walked in my statues, and hath kept my judgments, to deal truly; he is just. He shall surely live, said the Lord God." [Ezekiel 18:8.9]

6. "In thee have they taken gifts to shed blood; thou hast taken usury and increase, and though hast greedily gained of thy neighbors by extortion, and hast forgotten me, said the Lord God." [Ezekiel 22:12]

According to Usmani, 1999, "The word riba used in the Holy Qur'an carries the same meaning [as word Usury] because the verse of Surah An-Nisaa explicitly mentions that riba was prohibited for the Jews also".

In the Holy Qura'n four sets of verses are about Riba (interest) revealed on different occasions. Translation of the verses is presented here in the order of revelation.

1. The first verse is in Surah Al-Rum 30:39 whereby displeasure of Allah is disclosed for interest based practices. "And whatever riba you give so that it may increase in the wealth of the people, it does not increase with Allah."

2. The second verse is in Surah An-Nisaa 4:161 where interest charging was disclosed as sinful act of Jews. "And because of their charging riba while they were prohibited from it."

3. The third verse is part of Surah Al-i-'Imran 3:130 whereby prohibition of Riba (interest) was declared "O those who believe do not eat up riba doubled and redoubled."

4. The last set of verses revealed is reported in Surah Al-Baqarah 2:275-281 whereby severe punishment is declared for those dealing in interest and also persuaded for charity, deferment of loans from miser persons and even write-off as alms.

"Those who take interest will not stand but as stands whom the demon has driven crazy by his touch. That is because they have said: 'Trading is but like riba'. And Allah has permitted trading and prohibited riba. So, whoever receives an advice from his Lord and stops, he is allowed what has passed, and his matter is up to Allah. And the ones who revert back, those are the people of Fire. There they remain forever" [2:275]

"Allah destroys riba and nourishes charities. And Allah does not like any sinful disbeliever" [2:276]

"Surely those who believe and do good deeds, establish Salah and pay Zakah, have their reward with their Lord, and there is no fear for them, nor shall they grieve"[2:277]

"O those who believe, fear Allah and give up what still remains of the riba if you are believers" [2:278]

"But if you do not, then listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your principal. Neither you wrong, nor be wronged" [2:279]

"And if there be one in misery, then deferment till ease. And that you leave it as alms is far better for you, if you really know" [2:280]

"And be fearful of a day when you shall be returned to Allah, then everybody shall be paid, in full, what he has earned. And they shall not be wronged." [2:281]

Instructions are clear. No ambiguity is left. If a person believes in revelations then s/he should avoid charging interest and seek the pleasure of Allah (SWT). It is the responsibility of all true believers in God (Jews, Christians and Muslims) to give up interest based transactions from their personal lives immediately and input their energies collectively to design promote and implement a financial system free of interest.

Following conclusions are drawn from above citations; First Interest is prohibited by all revealed religions and charging of interest is Haram (unlawful) for at least Jews, Christians and Muslims. Second; as for prohibition of interest is concerned, there is no difference in commercial loans and consumption loans at all and bank interest is haram (unlawful).

While it is clear from the above citations that dealings in interest based transactions are Haram (unlawful) including conventional banking; important role of commercial banks cannot be rejected in the modern economy; so change in the philosophy and design of commercial banking was required to meet the religious obligation. Referring to the above citation it is further concluded that what is prohibited through revelations is the pre determined charge on capital (risk free return) and not the profit on capital (involving risk) invested (2:275). Muslim Jurists are of the view that reward for capital should be linked with the outcome of the underlying project if financing facility is being extended and/or reward should be obtained through trade involving sale and purchase.

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Source: Excerpted from Islamic Banking: Financial Reporting Perspective.

Muhammad Hanif is Assistant Professor of Accounting & Finance at National University of Computer and Emerging Sciences, Islamabad. He is the author of Islamic Banking: Financial Reporting Perspective, it's available at Amazon