THE PROHIBITION OF INTEREST IN IRAN SINCE THE REVOLUTION
M A ANSARI-POUR
Neither classical Islamic jurists nor modern writers have elaborated sufficiently on the prohibition of riba.
The first group has largely discussed it in theory, without taking into consideration its applicability to commercial transactions, while on the other hand, contemporary writers, lacking in-depth knowledge of Islamic law, have not understood the notion well enough, even in some cases interpreting it in a way which is clearly in conflict with Islamic precepts.
Before the revolution, the banking system in Iran was an interest-bearing system. The legality of interest had been provided expressly in a number of laws and statutes.
However, since 1979, many steps have been taken towards an interest-free system, particularly the codification of the new Constitution in which riba has been expressly forbidden.
I. Legality of Interest before the Revolution
The legality of riba had been provided for under several laws:
(1) The Iranian Civil Code (CC) had accepted the taking of interest under Article 653. The borrower could enter into a binding agency agreement that would transfer a specified amount of the borrower’s assets to the lender, monthly or yearly, on a gratuitous basis.
(2) In the Registration of Documents and Properties Code of 1310 (1932), known as the Registration Code (RC), Articles 33 and 34 provided that contracts, such as conditional sales and mortgages, are legal devices for taking interest.
(3) In the Civil Procedure Code of 1939 (CPC), Articles 719 to 726, and in the RC, Article 34, provided for a 12% interest rate where there was a delay in payment of the debt. These were known as “late payment damages” or “damages for delay in paying debt”.
(4) The Social Security Act of 1354 (1975) provided for interest charges and damages for late payment of insurance premiums.
(5) In 1969, two major statutes were adopted by Parliament, in which the charge of interest was legalised. The first statute relates to the joint stock companies by which the Code of Commerce was amended. The second statute consists of the Issue of Treasury Bonds and Debentures Act, in which the question of interest has been referred to repeatedly.
(6) Between 1334 (1955) and the revolution, three major statutes were passed with respect to banking; the first in 1334 (1955), the second in 1339 (1960), and the last in 1351 (1972).
Before the revolution, and to a large extent before the adoption of the Interest-Free Banking Operations Act of 1983 (IFBOA), it was the 1351 Act, that is, the State Monetary and Banking Act (SMBA), and its executive regulations which formed the cornerstone of banking law.
II. Illegality of interest since the revolution
The prohibition of riba is considered to be one of the essentials, or pillars (daruriyyat) of Islam and many steps have been taken, since the revolution, to prohibit riba in theory, and to remove it in practice, from commercial transactions.
Steps have been taken in two directions. The law-making bodies have either abrogated the laws allowing riba or adopted new laws and regulations in this regard. A number of provisions, which provided for riba expressly, were abrogated either by the Islamic Consultative Assembly (ICA) or by the Council of Guardians (CG).
Alternatively, new laws and regulations have been adopted which either prohibit riba expressly, or provide for some other measures to prevent the system from being tainted with riba, such as in the new banking laws.
A. Prohibition of Riba
The first and most important step towards the absolute prohibition of riba was taken by the Constitution that states that the economy of the Islamic Republic of Iran is based on a number of criteria.
It lists a number of illegal acts, including riba and makes the government responsible for the confiscation of private property accumulated through those illegal acts and for restoring them to their legitimate owners, or entrusting them to the public treasury.
The Constitution generally talks about the prohibition of riba, not interest. In other words, there is no provision in the Constitution referring to the question of interest or prohibiting it specifically.
Where “interest” is referred to, it states that one of the bases of the economy of the Islamic Republic of Iran is to provide the conditions and the facilities of work for all the nation, inter-alia, through giving interest-free loans. Interest is therefore referred to but there exists nothing in the Constitution to specifically prohibit interest.
The absence of a specific definition of riba was remedied by the Method of Execution of Article 49 of the Constitution Act of 1363 (1984) (MEACA).
B. Definition of Riba
Riba is referred to as ziyadah or fadl and numuw in Arabic. The first two terms can be translated as ‘increase’, ‘excess’, and ‘addition’, while the last as ‘growth’.
There have been various legal definitions, which, to a large extent, are similar. For example, it has been defined as an addition to, or an excess over and above, the capital or principal sum.
It has also been defined as taking an excess over and above what has been given to the other party in the transaction.
A statutory definition of riba has been made by the MEACA, which provides that riba is divided into two categories: riba on loan (riba al-qard), and riba in transaction (riba al-mu’amalat).
The first category consists of: “the interest which the lender receives from the borrower according to the condition stipulated in the contract or on the basis of their implied agreement or custom”.
The second category consists of: “an excess which one of the contracting parties receives from the other party in addition to either of the counter values [for example, in the sale contract in addition to the price (if he is the seller) or in addition to the goods (if he is the buyer)] on condition that the price and its countervalue are measured by capacity, or by weight, and are in view of custom or Islamic law of the same kind”.
The status of riba is therefore quite clear in the loan contract. However, the definition of riba with regard to riba in transaction, needs elaboration.
The definition which has been put forward by some authors is not comprehensive. Defining it as “a monetary advantage without a countervalue which has been stipulated in favour of one of the two contracting parties in an exchange of two monetary values”, or as “the fixed return for the use of money” is applicable only to the loan contract. It does not include riba in transactions.
Therefore, in the field of transactions, the definition put forward by MEACA is the accepted definition among almost all Shiite jurists. Consequently, riba can be established in two cases under the Iranian law. In this paper, it is riba on loan and related questions that will be discussed.
C. Riba on loan
To understand this kind of riba, we need to look primarily at the notion of a loan in Islamic law and the nature of the obligation of the borrower. Even though some have discussed the legal nature of a loan, it is impossible to fully appreciate the prohibition of riba on loans without understanding this specific legal angle.
Under Article 648 of the CC, a loan consists of: “a contract whereby one of the two parties transfers or passes the ownership of a definite amount of his property to the other party, so that the other party returns to him what is equivalent thereto in respect of quantity, kind, and description; if the return of the equivalent is impossible, he (the borrower) gives the price (of the borrowed property) on the day of payment.”
Almost the same notion is found in the definitions of loans in Shiite legal texts. Imam Khomeini defines it as a contract by which the lender transfers something to the borrower in return for the latter’s liability to give back the same thing, or its equivalent, or its price. Another jurist defines it as a contract by which the lender transfers the ownership of something in return for its real equivalent or consideration.
Therefore, the argument that under Islamic law there are two kinds of loan, i.e., loan for use (Ariya) by which the usufruct of a property is transferred to the borrower, while the ownership remains intact for the lender; and the loan of fungible commodities, which are transferred to the borrower, who is under an obligation to return the equivalent or the like of that he has received, is not recognised in Shiite jurisprudence.
Loan (qard) and Ariya are two different contracts. The first is a possessory and irrevocable contract, while the second one is a gratuitous contract regarding usufruct and is revocable. In addition, the object, in the latter, will be held in trust for the owner.
As is clear, the loan contract is a possessory or dispositive (tamliki) contract. In other words, what the lender gives to the borrower would be the property of the borrower, not the lender, since he passes the ownership of the said property to the borrower. However, ownership will pass when the borrower physically receives the loan.
It is for this reason that if the borrowed property is destroyed or becomes defective, after having been delivered to the borrower, the loss will be incurred by the borrower as a result, the argument that in Shiite jurisprudence, qard (loan) does not confer title of ownership on the borrower and the lender retains his ownership and can claim back the object of loan at any time, even if they agreed on a given respite, is a matter for dispute.
Secondly, the notion of a loan in Islamic law is different from that of Western countries. A loan in Islamic law is, in fact, a contract by which no monetary reward can be sought. Under English law, a loan of money is defined as a contract whereby one person lends or agrees to lend a sum of money to another, in consideration of an express or implied promise to repay that sum with or without interest. It is even argued that a promise to lend without interest is unsupported by consideration and therefore void. Under Article 1905 of the French Civil Code, the stipulation of interest in favour of the lender has also been permitted.
In other words, the contract of loan is not regarded as a commercial contract under Islamic law while it is a commercial one under English and French law. For example, the State Immunity Act of 1978 considers a “loan” to be a commercial transaction.
D. Obligation of borrower
There is a lengthy discussion in the treatises of Shiite jurisprudence with regard to the exact obligation of the borrower towards the creditor. In summary, the obligation of the borrower is to return to the lender the equivalent of the borrowed property or its price, no more and no less.
A general rule exists in Shiite jurisprudence which is applicable to all liabilities (damanat), such as the liability of the contracting parties in a loan. Under this rule, if the borrowed property is fungible (mithli), such as wheat, barley, gold, or silver, the borrower must return the equivalent of the borrowed property which is similar to that in all qualities, regardless of the increase or decrease of value in comparison to the time of borrowing. This is the case in all things made in factories to certain standards, such as dishes.
If the borrowed property is non-fungible (qimi), such as a sheep, then the price must be paid. This is the prevailing and the majority view among Shiite jurists. But whether the borrower must pay the price of the thing when it was borrowed, or the price at the time when it is returned, seems to be controversial. Some jurists have accepted the view that the borrower must pay the price at the time of borrowing, but the CC has accepted that the price at the date of payment must be paid.
Another issue relates to the criterion for determining which commodity is fungible and which one is non-fungible and how commodities can be classified under these two headings. The prevalent view among Shiite jurists is that mithli consists of a thing whose parts ajza are equal in price, or equal in price and profit, and their qualities are close to each other, and that qimi consists of a thing which is not mithli.
According to the above definition “equality of the parts in price” means that each part of a thing is equal in price to every other part of the same thing. In other words, when the price of half of a commodity (e.g., 20 kg wheat) is equal to £10, the price of the other half also is £10.
Therefore, every commodity of one class of a kind or genus is regarded as Mithli with regard to the other commodities under the same class. Thus, if the obligation of a borrower is a specific amount from a class, he must pay an equal amount from the same class. This is what the definition of Mithli entails.
It is to be noted that there is no evidence in the sources of Islamic law to provide for the division of commodities into fungible and non-fungible. This division has no origin and root either in the Qur’an or the traditions. This division has been underlined by Islamic jurists in order to facilitate the discussion about the claim of the creditor.
How a debt or liability should be paid does not relate to Islamic law since it is not a matter of law. It is the judgement of reasonable people who say that in fungible commodities the equivalent must be paid and the price in non-fungible commodities.
The criterion of mithli and qimi may change in time and in place. For example, clothes were qimi earlier, but now most of them are mithli, because most of them are woven similarly and they often look like each other, in addition to the fact that their price and their profit also are similar.
F. Condition of excess
If a lender gives a loan on condition that the borrower repays him the debt as well as an addition, this is riba on loan and has been strongly forbidden. There is no difference between an excess which is material or physical, such as lending £10 in return for £12, or the excess which is an action, such as tailoring and sewing a dress.
It also does not matter that the excess is a profit, such as profiting from a mortgage, or a quality, such as lending some broken dirhams in exchange for some unbroken ones. Also, there is no difference between the case where the borrowed property is a ribawi or riba commodity i.e., it is measured by capacity or by weight, and non-ribawi commodities. A specific rule in Islamic law states that any loan which involves profit or interest is unlawful.
The argument that jurists of all schools endorse a loan in which it has been stipulated that the borrower who has borrowed 1,000 copper coins should pay 1200 pieces or more when the debt falls due, is unjustified.
It is to be noted that what is unlawful and regarded as riba is an excess in favour of the lender against the borrower. Therefore, there is no problem in providing an excess in favour of the borrower.
F. Is interest Riba?
It should be mentioned at the outset that there is no disagreement among the Islamic jurists, who follow the traditional line of thought, and the leading Orientalists that a charge of interest of any kind and at any rate whatsoever is unlawful under Islamic law.
There exists, however, a difference of opinion with regard to the interpretation of riba in modern commercial transactions, especially in banking transactions. There is a disagreement as to whether or not the prohibition of riba covers interest as well.
The Oxford English Dictionary defines interest as the money paid for the use of money lent (the principal), or for forbearance of a debt, according to a fixed ratio. Usury, on the other hand, consisted formerly of compound interest but now occurs when interest is charged at a rate beyond what is considered legitimate or just.
Almost the same definition of interest has been adopted in economics and law. For example, economists define interest as the price paid for the use of money over a period of time. The legal definition of interest consists of “the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another”.
Following this definition, riba, as an excess or addition over and above the principal sum that is loaned, covers both interest and usury. This view has been attributed to Muslim scholars. It is even said that there is now a consensus among Muslim economists that the prohibition of riba extends to interest as well. This is the position of Iranian law, for which riba includes both usury and interest.
There are a number of provisions that expressly prohibit interest, primarily:
1. Article 653 of the CC, which provided indirectly for the taking of interest, was repealed during the course of amendment of the CC by the Judicial Committee of the Parliament in 1361 (1982) and this repeal was ratified by the Parliament itself when it revised the first amendment in 1370 (1991).
2. The provisions of the CPC and RC concerning the legality of a fixed amount of interest as “late payment damages” were abrogated by the Council of Guardians as being riba and thus inconsistent with Islamic law.
3. As noted above, the legality of interest had been provided under the Social Security Act of 1975. In 1361 (1982) the ICA adopted an act called the Prohibition of Taking Damages, Penalties, and Interest Incorporated into the Social Security Act, abrogating all provisions that allowed the charge of interest.
4. Article 595 of Book Five of the Islamic Punishment Code adopted in 1996 considers riba (including interest) to be a crime and provides severe punishments for those who enter into ribawi contracts, including the contracting parties (e.g., lender and borrower), and who arrange such dealings. It should be noted, however, that these punishments are not meted out to the borrower.
5. After the revolution, the banks had already moved towards an interest-free system. Interest was eliminated from banking operations and replaced by a service charge and a minimum rate of profit. But the most important step was the adoption of IFBOA in 1983. The IFBOA and its executive regulations or by laws constitute the framework of Islamic banking in Iran.
It was argued that under the new banking law, the existing transactions had to be converted to the prescribed method within a year for depositors and that all banking operations had to be carried out according to the new law within three years after its enactment. It was even argued that there were a number of periods or phases for this implementation.
In fact, the reality was different. Periodisation had been provided for by Parliament as a “note or sub-Article” to Article 27 of IFBOA, but when the Act was sent to the CG for ratification, the Council held that such provision was inconsistent with Islamic law. The Council could not accept interest for a period of 18 months for deposits and a period of three years for loans and credits.
This Act instructs banks to conduct their transactions without being engaged in riba. Article 1, which explains the aims and objectives of the banking system, stipulates that the monetary and credit system must be based on truth and justice, i.e., on the basis of Islamic precepts.
Article 2, which lists the duties and responsibilities of the banking system, provides that banks must grant a loan without riba. The Central Bank has been prohibited from being engaged in transactions which involve riba with other banks. Other banks also cannot engage in riba in transactions between themselves. It is interesting to note that wherever the term riba is mentioned in the Act and its executive regulations, it is translated explicitly as “bahrih” (interest).
In addition to the prohibition of riba, the Act not only prohibits interest but also instructs banks how to conduct their operations. These operations consist of a number of transactions and direct investment by the banks themselves. Almost all of these transactions have their roots in the Islamic law of contracts and the CC. The contracts that constitute the IFBOA are the basis for dealings between banks and their depositors, and between banks and their other customers.
G. Bank charges
The banks can charge customers a service fee to cover their administrative expenditure. It may be that the service fee, which is a fixed amount, would correspond to some interest rate on a short-term loan, but the legality of bank charges is in conformity with Islamic law if the fixed charge is in proportion to the work done.
The IFBOA provides for the legality of bank charges; in addition, the question of bank charges has been referred to in two Executive Regulations regarding the IFBOA. The most important provision which has been stipulated in the IFBOA, and the Executive Regulation Regarding Chapter 4 of the IFBOA, is that the minimum and maximum amount of bank charges will be determined by the Central Bank on condition that the said amount does not exceed the expenses of the work done by the banks.
H. Banks’ rewards and extra payments
Excess is unlawful only when it is stipulated in loans or if the contract is concluded on that basis. Thus, if the borrower gives an addition to the lender voluntarily, this addition will be lawful. It is even recommended for the borrower to pay more than the amount of the loan to the lender.
In banking there is a consensus of opinion among Shiite jurists regarding the rewards which banks give to their customers in order to encourage and persuade them to deposit their money with the bank or in order to attract new customers; since nobody suffers any loss, such rewards are lawful. The legality of these rewards has been affirmed by the IFBOA.
I. Inflation
The various arguments that are generally associated with inflation are reasonable. Inflation, which is defined as a “continuously falling value of money”, cannot, however, justify interest. Again, the important question is to determine what is the obligation of the borrower in a loan contract in which money is lent.
Some jurists have only discussed the general rule regarding mithli and qimi without specifying whether or not money, i.e., today’s currencies, is fungible or non-fungible. On the other hand, a jurist has expressly said that today’s currencies are mithli, since all notes and coins are the same. It would mean that in the case of inflation the borrower must pay the same amount at face value of the money borrowed.
A fungible commodity, as noted above, consists of a commodity in which price, profit and qualities are the same. The question is whether a £10 note in 1993 is the same as a £10 note in 1995.
In other commodities, if two examples of one class are equal in the above qualifications, they would be regarded as the same, but in respect of money, custom seems to obey a different logic. How a debt should be paid and how the debt can be discharged has been vested with custom.
Furthermore, if we accept that “money” is fungible (mithli), it means that its examples must be equal in price and profit. The question is how the equality in price and profit can be assessed and on what basis. If the price is assessed according to other commodities, then it will become clear that there is a difference between £100 which the lender has given two years ago and £100 which the borrower is going to pay the lender this year.
A number of writers have concentrated on the nature of notes and explain that the market value of notes is not inherent in money, contrary to other commodities, such as rice, meat, and wheat, which meet the needs of mankind directly. The market value of notes consists of their purchasing power
In a loan contract, notes have no value in themselves. It is their purchasing power which gives them market value; hence the lender transfers a specific amount of purchasing power and the borrower must return the same purchasing power
When £50 is lent, it is the purchasing power of £50 that is lent, not the note itself, and the borrower must pay back the same amount of purchasing power. If the purchasing power of £50 has declined, the borrower, by paying only a £50 note has not fulfilled his obligation because of inflation and decline in the purchasing power of the £50.
In such a case there exists no riba if the purchasing power of the loan and the return are the same, since no profit has been transferred to the lender.
This argument is acceptable and consistent with the definition of loan in Islamic law, but there seems to remain some confusion between interest and inflation.
The question of inflation has no precedent in the sources of Islamic law, but some examples exist and are mentioned in modern Islamic texts. For example, if a commodity becomes worthless for a while (such as borrowing ice in the summer, which becomes worthless in the winter), the return of the equivalent of that commodity at that time does not release the debtor from his obligation. He must pay its price.
It is accepted that the obligation of the debtor is to return the equivalent after the consumption of the borrowed property, but this rule is not absolute. What is returned must have market value. If it is worthless at the time of payment the borrower must pay the price.
Another example is found in outdated currencies. If the borrowed property relates to notes that are later put out of circulation, the obligation of the borrower is not fulfilled by simply returning the original notes. He must pay the price of those notes at the value they had before being put out of circulation.
Among contemporary Islamic jurists, Shahid Sadr apparently supported the legality of the rate of inflation. It has been reported that he allowed the depositors to demand the rate of inflation from their banks.
III. Exceptions to the General Rule
There are some exceptions to the general rule of prohibition of riba in Shiite jurisprudence. The stipulation of an excess in favour of one of the parties is not regarded as riba. These cases include the agreement reached between a father and his children, between a husband and his wife, between a Muslim and a Harbi (the Muslim party can receive riba from the Harbi).
But the stipulation of an addition in a contract made by a Muslim and a Dhimmi (according to the prevalent view), and other non-Muslims whose property is under protection by means of treaty, etc., constitutes riba and would therefore be unlawful.
One author has indicated that at present, non-Muslims who live in Muslim countries cannot be classified under the term Dhimmi as understood from the Hadiths concerned. Instead, they are Muahad and their property should be respected. Nothing can be taken away from them without justification. Interest can be obtained from them under a contract duly entered into.
But there existed no law providing for the exceptions to the general rule concerning the prohibition of riba except for the legality of interest in foreign transactions under certain conditions specified by the Council of Guardians.
This was the case until 1996, when Book Five of the Islamic Punishment Code was passed by Parliament. This provides some punishments for those who engage in interest-bearing transactions, including the contracting parties and those who arrange such transactions.
But later, in sub-Article 3, a number of people are excluded from the punishments concerned. These people consist of a father and his children as well as the spouses. Each of them can ask the other party to pay interest. There is also a third category that allows only one side of the transaction to charge the interest, that is that a Muslim can take interest from a non-Muslim.
IV: The Status of the Loan Contract which Involves Riba
A further question is whether the unlawfulness of interest affects the validity of a loan contract that involves riba. We need to look at the notion of “conditions” under the CC and Islamic law.
A section of the Iranian law of contract deals with conditions or stipulations incorporated into the contract. The provisions of this section have been borrowed from the Shiite jurisprudence in which conditions are discussed separately under the title “conditions stipulated in the contract”.
For the word shart (condition), a number of meanings have been mentioned. One of the meanings is “to obligate or to undertake to do something outside the framework of the contract or in a sale contract or in other contracts”. The meaning, which is used in the law of contract, consists of an obligation stipulated in a contract either for the promisor or for the promisee or a third party.
An obligation may result from a contract directly or through the stipulation of a condition in the contract at the time of its conclusion. In the second case, the obligation resulting from the stipulation is a secondary and subordinate obligation. A stipulation may be inserted in an onerous contract, such as a contract of sale, or a gratuitous contract.
The stipulation of a condition in a contract not only creates a relationship between the main contract and the condition, but also makes the condition a part of the main contract. However, according to some jurists, the stipulation of a condition outside the contract has no meaning.
Conditions, under Shiite jurisprudence and the CC, are divided into void and valid conditions. The question concerning us is whether the stipulation of a void condition into the contract makes the contract void as well. Following the majority view of Shiite jurists, the CC has divided the void conditions into two categories. First, conditions whose invalidity or voidness has no effect on the contract. Secondly, invalid conditions which render the contract itself invalid.
Article 232 provides that the following conditions have no effect though they do not nullify the contract itself: (I) conditions that are impossible to fulfil; (2) conditions that are useless and unprofitable; (3) conditions that are unlawful.
It is the third category that provides for the invalidity and nullity of any condition which is unlawful. This includes any condition that provides for an action or omission which is unlawful under the laws in force or under Islamic law, such as a condition that provides for commission of a crime or for forbearance of a duty and obligation, such as refraining from paying the maintenance of wife and children.
It was noted earlier that Article 653 of the CC was repealed, since it provided for interest indirectly through giving an agency to the lender to transfer an amount of the borrower’s property to himself gratuitously.
Generally speaking, the invalidity of a condition does not affect the validity of a contract, but there are two exceptions in the CC. Article 233 of the CC provides that the following conditions have no effect and invalidate the contract itself: (1) conditions that are contrary to the essence and prescribed effects of a contract; (2) conditions which are uncertain and their uncertainty renders the object uncertain.
With respect to the first category, it should be noted that every contract has two kinds of prescribed effects. The first (which can be called the principal effect or effects) consists of the effects which under custom or law are considered to be inseparable from the contract. In other words, it relates to the essence of the contract and to the main purpose, cause or objective for which the contract is made.
For example, the main purpose of the contract of sale consists of the transfer of goods to the buyer and the transfer of price to the seller. If a condition is made against this purpose in the contract, it will not come into being, such as a condition that negates the ownership of the seller over the price and the ownership of buyer over the goods in sale contract.
The second kind of effect relates to the generality of the contract. It consists of the effects which, generally, result from a contract if there is no stipulation to the contrary. Therefore, if a condition does not affect the essence of the contract, parties can insert it in the contract. The CC lists many cases in which the contracting parties can make such conditions.
For example, expenses relating to the payment of a debt must be incurred by the debtor unless a condition to the contrary has been made. If in a sale contract no condition has been stipulated or no time limit has been fixed for the delivery of the goods or the payment of the price, the sale is considered to be complete and the price must be paid immediately.
The second category of conditions which are void and make the contract void as well, are those which are uncertain and the uncertainty of which renders the object uncertain. Since one of the essential conditions for the validity of a contract is that the object must be certain, it must be precisely determined. An example is a house that is sold with the stipulation that the buyer pays the price when his father dies.
There is therefore no doubt that the stipulation of interest is unlawful and void. The question is whether the voidness of this condition results in the voidness of the contract.
There exist different opinions in this regard. Some jurists say that the loan itself becomes void. But for most Shiite jurists, such as Hanafi jurists, interest is separate from the transaction. A loan contract in which an excess has been stipulated is valid. But the condition is void and unlawful. The lender must return the addition he received from the borrower but the contract stands.
The latter view seems to be more justifiable than the first one since the two categories of conditions, mentioned above, which make the contract void are not found in the case of interest. In other words, the stipulation of interest neither brings uncertainty into the contract nor is it in contradiction with the essence or principal effects of a loan contract.
V. Conclusion
Riba, qua interest, was lawful under the Iranian legal system before the revolution. But since the revolution, a number of steps have been taken in order to remove riba from the legal system of Iran and from the commercial activities of institutions, such as banking and insurance. It was also outlawed in private transactions.
In loan contracts, any stipulation of interest is considered to be riba, and thus forbidden, but without stipulation, the paying of an excess over and above the amount of the loan is permissible.
In banking, bank charges in proportion to the work done are lawful. What customers receive from banks as rewards are lawful as well. The question that is still not totally settled concerns the rate of inflation. Could increase resulting from inflation be demanded from the debtor, as one court has ruled, or is it riba and consequently forbidden?
It seems that what can be considered definitely to be riba is “net interest” or “pure interest”. Therefore, the categorical prohibition of interest should be directed to the net interest, not the gross interest, which includes other elements, such as bank charges and the rate of inflation.
The stipulation of interest in favour of one of the contracting parties is void. But the voidness of this stipulation does not result in the voidness of the contract itself. The loan contract is valid, but the person who receives the interest must return it to the borrower.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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