Riba vs Trade

Riba vs. Trade: Understanding True Shariah Compliance

One of the most confusing issues for most people when they look at Islamic home financing programs is trying to determine if the program is structured according to Shariah, or if it only appears to be so.

Unfortunately, many programs today are based on a traditional mortgage structure with the terms reworded, creating confusion in people's minds and a false sense of comfort.

True Compliance

While it may appear that rewording is sufficient to comply with Islamic Law, we are reminded of the violators of the Sabbath mentioned in the Quran. Allah warns us against subverting His rules with the appearance of technical correctness.

The story tells of a fishing village where adherent Jews who observed the Sabbath faced an economic trial. Fish would flock to the waters on the Sabbath when they were commanded not to work, yet would be sparse on other days.

Some villagers decided to set out nets and traps before the Sabbath and collect the fish once it had passed. While it appeared to comply with the letter of the law, it certainly did not comply with the spirit of what Allah had ordered.

It is clearly unacceptable to try to work around Allah's commandments with 'clever' solutions, yet the similarity to many "Islamic" financing programs today is astounding.

Beyond Interest & Risk

The main focus for many programs is to obscure the most familiar components and terms of a riba-based loan. People are quickly comforted when they don't see the term "interest" and accept assurances that the program is Shariah-compliant.

The real difference between engaging in trade and engaging in riba is whether the rights and responsibilities belong to a lender or belong to a trader or investor.

Risk is present in any human activity, including lending money with interest. Interest-based mortgage loans always involve risk to the lender. Many banks went bankrupt during 2007-2009 for just that reason.

Therefore, risk is not what differentiates riba from trade. What matters is the structure of rights and responsibilities.