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How Rent And Interest Are Distinguished In Islam?
What are the key points of argument Ghamidi Sahib uses to distinguish the two?
1. To call a monthly fixed amount to be rent, should the lender be the fully paid owner with title of the loaned property first?
2. To rent an object, should it be a specifically identified physical object that is purchased from the lender’s money first with lender having the title, before change of possession to receive rent?
3. Would money investment in a business without a specifically identified object to be purchased for the business and without lender having title of a specific object. In such case would receiving monthly fixed income is like receiving interest in Islam?
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How Rent And Interest Are Distinguished In Islam?
updated 2 years, 5 months ago
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Here are my views as a student. (Sir Ghamidi’s definition of Riba doesn’t make sense to me – despite serious efforts to understand it)
1. lender be the fully paid owner with title
The lender should have the power of attorney to rent the property from the owner if he is not an owner.
2. lender having the title
See my comments to Q1 above
3. monthly fixed income is like receiving interest
Fixed or variable is not the criteria. The criteria is Zulm that arises out of the following two situations in a Riba Transaction:
- Transaction having unequal exchange of value – the hanging surplus without the counterpart is Riba. This happens in a case where the free consent of one of the parties is compromised due to force of necessity or any other reason and the other party takes advantage by charging high amount of the goods or service. Loan is a service and any interest would be riba to the extend it is higher than the market rate. Interest on loans at market rate is not Riba for being a cost of service at fair market price.
- Unreasonable penalties on default – In case of default in repayment, charging unreasonably high penalties such as compounding interest that doubles and re-double is riba or Zulm. No penalties should be charged if default is due to circumstances beyond one’s control. Indemnity for damages caused by the delay may be claimed. In case of willfull default, a court can decide some reasonable penalty.
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In light of the above, we can say that investing in a business does not necessarily have to be for a specific asset. it can be for working capital too. Any profit sharing formula be it fixed or variable is fine as long as no partner have to bring in his private money to pay the profits to the other party in case of a loss or lower than expected profits – that would be unfair transfer of others wealth to own pockets – that would be riba.
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Brother Wadood, I always expect deep and good discussion with you. Here are my thought about your statements above.
I agree with 1 and 2.
3. Please see my response to brother Umer below.
I have a difference of opinion regarding your second post above. All the money in a business is in a sense private money. If business goes down, people lose their personal money. So, I think it should be a specific assets bought from lender’s money with lender’s title and insurance policy before any rent can be collected.
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Riba specifically relates to amount charged over and above the amount given as a loan and it has to do with consumable items only.
The property ownership doesn’t matter in your first two instances, since the item is not of consumable nature, it is of a usable nature e.g. car, and the use of this property will yield rent and not riba.
As far as third instance is concerned, according to Ghamidi Sahab, investment should be principal-secured financing, where investor will only claim principal amount in case the business goes under and profits can fixed as an average rate of return by both parties. It is an estimated average, which both can agree will be reviewed on a half-yearly or a yearly basis, lets say and the rate will be adjusted upon review depending upon the actual financial results of the business (and even they both can agree to perform a retrospective adjustment based on actual results).
Please refer to the first question from 0:12 to 10:23 and second question from 10:23 to 20:00
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1. What if the money lending include some services against a fee, e.g., service to process loan application and tracking repayments and there is a fee for that service say 10% of the loaned amount?
2. What if the usable asset is a digital asset like a digital design or an icon, can one buy it and sell it back on higher price and charge rent until payment is settled? If yes how it differs from a translation where someone loans money to some for his living expenses and charge interest?
3. What if someone lends gold (usable) rather than money, can he charge rent (or interest)?
4. What if someone rents an electronic machine that brakes down due to over use and can’t be repaired . Can the lender ask for a replacement in addition to rent? Bear in mind the borrower will have to “re-create” it.
5. A student needs money to travel back to his university from holidays. His friend has some savings but that is invested in stocks at 10 to 15% return in form of dividends on year on year basis. Both agree to use the money to buy plane tickets on the condition that the borrower will indemnify the lender for his loss of opportunity. This is win win for both parties. Is it oK? Bear in mind travel expense is “consumable”
6. Many people invest in a business as “principle-secured” financing at 10% fixed dividend hoping the actual profit is more than that. The business invest money in both consumables and usable assets and makes 18% profit at the year end. Of which it distributes 10% to the investors. No one knows whose money was used where. Who’s eaten Riba here?
7. Someone needs money for his wedding and he asks his friend who’s living abroad to lend him some money. Let’s see he sends him $10K out his account in USA. The money received by the borrower is in local currency after some deductions of bank charges etc. After one year, when he returns the money, is he supposed to return the amount he finally received in his bank or what the lender send him in US dollars? If US $, can the lender ask the borrower to pay for bank charges, forex exchange loss etc? If yes, wouldn’t it cause hardship to the borrower to “re-create” money? If no, would it cause hardship to the lender to “re-create” his loss?
I can go on and on. I am not expecting any verdicts or judgement in response to the above questions. That’s because all above scenarios are hypothetical. 2ndly i am very clear in my mind which one of them is riba and which one is not. The sole purpose of sharing those scenarios to figure out the principle based on which farhai school or sir Ghamid specifically reach a conclusion and to see whether the underlying principle remains the same or it keeps changing depending on the scenario and most importantly how it is linked back to Zulm or injustice that makes Riba haram.
@faisalharoon – please chip in where necessary. thanks
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Brother Wadood:
1. If it is actual cost for services; perhaps it is right.
2. I think it is ok. It is a rental of digital assets. The lender is the owner.
3. I don’t see a problem. Someone is using your asset and paying rent.
4. Machine break down is not an issue. Normally when an asset is loaned, it is required to buy an insurance policy on the asset.
5. I think it is Riba.
6. I think it is Riba
7. This is not Riba as there is no monthly payment or demand above the principal amount except for actual transfer and exchange expenses.
I think it is not that confusing.
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None of the scenarios I have given begets Riba. But many of them destroys the consumable-usable principle and that’s why i disagree with it.
The reason Sir Ghamidi has reached the wrong principle is two fold
1. Definition of riba is confined to “Sood”. Sood is only a subset of Riba. It can be an example of Riba but not the definition. There are tons of Ahadeeth where Riba is used to describe unfair hand to hand transactions without involving any loan. The correct definition of Riba is the hanging surplus without a count part. In other words, trade is define as “value for value” exchange. If the two sides of transactions are not equal it leads to transfer of wealth from one party to another. This what Quran says eating others wealth unfairly to explain why riba is haram.
2. Wrong understanding of the difference between sood and rent or sood and trade. Rent is a fee for usage. If rent is higher than the market the surplus is riba. If price charged in trade is higher than the market the surplus is riba. If interest charged on loans is higher than the market the surplus is riba. If loans are given at zero % in a society even 1% charge is riba. The example quran has given in Quran is about the doubling and redoubling interest amount that accrues on the principal if not settled on the due date. That is total zulm as default happens for reasons beyond one’s control and charging penalties is not justified.
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Thank you Wadood for great questions and answers and thank you brother Umer for your answer.
1. So the Riba is for amount above the loaned amount and for consumable items, such as money spend for Food, Wedding, Education, Health care, utilities, necessities and other personal expenses. This perfectly makes sense.
2. But, beyond the above items, everything else (even fixed and tangible assets) are consumables in a sense that when a business goes down, all is lost.
3. It still doesn’t feel right to invest money in a business and ask for a fixed payment (even if the payment is adjusted every few months based on projected and prior performance). The business still owes the lender the full principal amount even if the business performs poorly. I think the issue is the original principal payment, not the monthly payment. If the business worth goes down, then repayment of the principal should go down.
4. The only way it could be very clear and Halal, if a person himself or the business buys a specific fixed and tangible asset with the lender’s name on the title and insurance policy with lender’s name and then make specific monthly lease payment to the lender. In case business goes down, the lender should be able to collect his specific asset back. A good example of this is home mortgage or equipment rental business. I would say that would be the only clear and without doubt method. I think even, business inventory can’t be used for such purpose. It must be fixed and tangible assets, such as land, building, machinery, office equipment, etc.
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Regarding point 3, if two parties agree that principal needs to be written off in case of a business loss, the they can do that. The domain of religion ended as soon as the ethical problem in the transaction has been eliminated i.e. the riba factor. Fixed payments are based on actual performance (or estimated performance results based on lowest estimation), and when there is loss, no such payments would ensue. Thus, the riba element has been eliminated which was additional amount over and above the Principal asked of a borrower irrespective of the conditions in a loan arrangement.
As far as the principal amount is concerned, justice dictates that the one who invested or lent the money, and is not part of the business strategy and is not overseeing the day-to-day business operations (i.e. is a sleeping partner), should have a right on his principal amount in case of a loss.
Regarding point 4, It is a matter of application and legal implications, and transaction should be as transparent as possible. I agree with your take here.
Regarding point 3, following video adds fruther insight on Principal-Secured Financing as proposed by Ghamidi Sahab:
Please refer to the video below from 1:12:18 to 1:21:26
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