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Did the Prophet borrow at interest?

Dr. Mohammed Fadel
Assistant Professor of Law
University of Toronto

Courtesy: The following comments of Dr. Fadel was posted on IBFnet [message #5773; 11/28/06] in response to a a message [#5772; 11/28/06]  from Mark Robbani. 

Message posted by Mark Robbani

Salaam Br. Fadel,

One of your original comments was that the "Prophet (S) borrowed at interest to finance the early Muslim army". However, as you identify in your most recent post, the hadith you quoted does not mention anything about borrowing - but indicates that it was about purchasing. Thus this whole argument rests on whether the Prophets agent borrowed the camels or bought them.

If it was a borrowing transaction, then if the extra camel was not demanded by the lender, the payment of the extra camel would not be 'interest' (as per the definition & context given in my recent email). Anything voluntarily offered is considered a gift and not interest. However, if this gift is in
the contractual agreement (i.e. promised), then it becomes interest and thus haraam. However, the circumstances described in the hadith indicates that this was NOT a borrowing transaction but a purchasing one (my mistake was seeing the transaction as a borrowing one, hence my comment about 'gift'). If this is the case, then your comment that the "Prophet (S) borrowed at interest to finance the early Muslim army" is not valid and cannot stand. 

Consider the following:

You stated that "...[the hadith]...states clearly that the Prophet's agent supplied the army with camels by purchasing camels now against a future obligation to deliver two camels at the time the sadaqa was collected. There is nothing here that speaks of a gift. It was a contractual obligation..."

Agreed but there is nothing here that says the Prophets agent 'borrowed' the camels, instead it confirms the fact the camels were actually purchased. The reason why I raise this is because 'interest' (as per the definition & context given in my recent email) cannot possibly be involved here, because it is only applicable in lending transactions or where an 'excess' is applied on top of lawful debt (Day'n) obligations (which usually arises out of trade transactions completed on a credit sale basis). What the hadith refers to is payment of profit (the extra camel) for a lawful trade transaction - which we all know is halal.

You refer to mark-up in credit sales: I agree with you that mark-ups (fairly applied in halal credit sales) are halal. In fact, did you know that the belief of some people (myself included) is that pure Murabaha (the archetypal mark-up transaction, which nowadays is used for credit sales) is a form of trade which is directly approved and defended by Allah ta'ala (see the tafsir of the famous and highly respected sahaba Ibn Abbas on verse 275 of Al-Baqarah)? [see attached email].

However, I have to take issue with your following comment "...accordingly, all deferred trades, whether sales or leases, included an implicit interest rate, and that is the view of all regulators as well..."

Here, a halal return (profit) from a halal trade (Bai'y) transaction - is erroneously called 'implicit interest' although this particular use of the word interest is not the same as the haraam interest (as per the definition & context given in my recent email). This may seem a small difference but it is a crucial one, which distinguishes between what is halal and haraam. I appreciate that in order to calculate the profit, haraam 'interest rate' is used as a calculation tool and that to do this is allowed by the majority of the fuqa'ha (because interest itself is not being charged here, but is used
simply as tool to determine cost/profit) - but that is another matter.

You said in a previous post that "...the terms riba and interest are not synonymous, and Muslims should cease confusing one for the other...". I would end by asking you to follow the import of your own advice and not confuse halal profit (known here as 'implicit interest') with haraam interest, as this will seriously confuse an already confused Ummah.

I suggest we stop using the word 'implicit interest' and find a suitable alternative. This is not just playing with words (as Allah ta'ala warns us not to do), as the 'implicit interest' referred to here (the halal profit in a halal trade transaction) is not the same as the haraam interest (the charge on the principal in a lending transaction).

If you concur with all that I say above, I respectfully request you not to say anymore that the "Prophet (S) borrowed at interest to finance the early Muslim army". Otherwise, please feel free to comment. Many thanks.

Wa as-salaam, jazakum-allahu khairan.

Mohammed (Mark) Robbani
The Institute Of Islamic Finance
www.insif.org 

Reply of Dr. Fadel

Salam alaikum,

Thank you for your reply. Now we can get somewhere, inshallah. As your attachment indicated, Ibn Abbas made clear that verse 2:275 was directed toward riba al-jahiliyya, not riba al-fadl or riba al-nasi'a. Thus, the increase that was being condemned in that verse is specific to post hoc
increases where the debtor is bankrupt. Thus, the next verse instructs creditors to defer collection until the debtor has means to repay or, better yet, forgive the debt (wa an tasaddaqu khayrun lakum). This is policy is expressed in all modern bankruptcy codes, alhamdulillah. Accordingly, the
Quranic prohibition of riba jahiliyya is clear and easy to understand: it is not a sale, even though it appears to be consensual, because the creditor is not giving the debtor any new value in consideration for the increased debt the debtor agrees to pay the creditor. Note that the source of the debt in the verse is irrelevant: it could be a loan, a sale or even compensation due as a result of a tort. The point is that there is a debt, the debtor cannot pay because he is bankrupt and the creditor seeks to increase the indebtedness in exchange for a deferral. That is categorically unlawful in Islam and contemporary bankruptcy law which suspends the running of interest upon the bankruptcy of a debtor.

The problem comes when we try to understand riba al-nasi'a, which limits certain contracts of sale at their origination, not at the time when payment is due. You argue that there is a difference between a credit sale and a loan. I believe, as do most lawyers, that there is no principled
distinction between a credit sale and a loan, the only difference being that a loan the intermediation of a credit provider. The impossibility of maintaining a principled distinction between credit sales and loans is even evidenced in the lexicon of Islamic law: the term salaf is used, simultaneously, for a loan, and a forward sale, the latter being a type of credit transaction. (In a salaf (also called salam) transaction, the purchaser pays cash in advance for a good, and the seller is then obliged to deliver that good at a specific time in the future. It is obviously a financing device.) Accordingly, the hadith that is bandied about "naha al-rasul 'an salafin jarra naf'an" is difficult to reconcile with other hadiths in which the Prophet (S) explicitly permitted forward sales, one of terms for which is a "salaf."

Perhaps the best way to understand the notion implicit in the hadith prohibiting "benefits" from "loans" is that he prohibited loans whose benefits were undefined. In other words, this is an
instance of the prohibition against gharar, not against interest. People claim that trading similar commodities is not a sale but a loan, and on that basis, one can meaningfully distinguish sales from loans. That is not the case, however, as it is always possible to structure a three-way trade to
replicate the economics of what we call today a loan. It is preposterous to believe that God allows something if it involves a third transaction, but not if done directly. The current approach to Islamic finance simply increases transaction costs by imposing a requirement to interpose a fictitious sale between the financial intermediary and the borrower. 

We would be better off if we eliminated superfluous transaction costs, and simply allowed financial intermediaries to provide credit directly to borrowers without the fiction of some sale of a good. Now, that leaves the problem of how to understand the hadiths on riba al-fadl and riba al-nasi'a, since both of these rules, in contrast to riba al-jahiliyya, consist of ex ante restrictions on contractual freedom. Unless someone can give me a convincing economic explanation of why trading gold for gold on a deferred basis is substantively different trading gold for wheat on a deferred basis, my view is that riba al-fadl and riba al-nasi'a express the equivalent of what we would call today "prudential regulation," and therefore are not religious prohibitions. (There is no doubt that a trade of gold now for gold in the future is a sale. The Prophet (S) calls it a sale in the hadith in which he prohibits us from doing so. This is in contrast to 2:275 where God categorically denies that the transaction known as riba al-jahiliyya is a sale at all; it is simply unjust enrichment that has a superficial
resemblance to a sale because of the facially consensual nature of the transaction. It cannot be a sale, however, because there is no exchange of value, as mentioned above.) The only religious prohibition then is riba al-jahiliyya. 

And God knows best.

Mohammad Fadel
Assistant Professor of Law
University of Toronto Faculty of Law
78 Queen's Park
Toronto, Ontario M5S 2C5
Canada

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