One of the most vexing problems that modern high courts face when interpreting and applying Islamic law concerns the taking of money interest. The framework of the basic problem tends to be the same, whether the state is Egypt, Iraq, or Pakistan. Libya’s most recent foray into this field deserves some attention, however, because it seems to be a subtle and yet important move away from the dominant interpretations of the meaning of the ribā ban in our times.
By way of background, the core problem arises from the fact that, until the recent Libyan case, few contemporary courts showed any interest in taking the comparatively radical step of declaring some forms of interest to be Islamically lawful, even though this approach has significant precedent. Indeed, the great 20th century Arab jurist ʿAbd al-Razzāq al-Sanhūrī carefully and extensively defended his decision to include provisions permitting interest in the Egyptian Civil Code in his historic work Maṣādir al-ḥaqq fī al-fiqh al-Islāmī. To reduce the matter considerably, Sanhūrī maintained that the prohibition against the taking of simple interest on a loan or for a delay in repayment was a “prohibition of means” (taḥrīm wasīla). The purpose of this prohibition in essence was to prevent the possibility of the core sin of what is known among classical jurists as ribā al-jāhilīyya, where a creditor increased an amount owed by a distressed debtor upon the due date of the debt in exchange for giving the debtor additional time to repay the loan. In other words, translated to modern times, it is the taking of interest upon interest (i.e. the capitalization of interest, or the taking of complex interest) that is, in Sanhūrī’s view, absolutely banned (taḥrīm maqṣad). In contrast, simple interest, because it only a prohibition of means, could be permitted in times of “need.” In modern capitalist economies, such “need” was self-evident to Sanhūrī; hence, Article 227 of the Egyptian Civil Code permits parties to agree to an interest charge for a delayed repayment up to an amount of 7% of the debt due. Article 226 imposes a default statutory interest for delayed repayment in the absence of an agreement of 4% for civil transactions, and 5% for commercial ones.
Sanhūrī was not the first jurist to adopt a position of this sort. Indeed, his argument borrows much from Muhammad ʿAbduh and, to an even greater extent, Rashīd Riḍa, the latter of whom used the more familiar Sunni jurisprudential term sadd al-ḍarāʾiʿ to describe simple interest taking. However, none had given the subject the extensive attention that Sanhūrī did, and none had gone so far as to suggest that interest taking could be rendered legislatively permissible.
In the near term, Sanhūrī’s work proved immensely significant. As a result of his influence and at times his actual legislative drafting, comparable provisions on the taking of interest spread to the civil code provisions of other Arab countries as disparate as Iraq in the east (Articles 171 and 172) and Libya in the west (Articles 229 and 230). Interestingly, however, while the interest provisions of the Civil Code have survived across the Arab world, Sanhūrī’s defenses of their compliance with Islamic law have not. Courts, that is, rarely defend these provisions as Islamic. In this sense, the advocates of Islamic finance, who have long argued that any sort of taking of money interest on a debt is absolutely banned as a matter of Islamic law, have won the day. To challenge this determination is to be delegitimized as a colonialist, all too willing to subvert the true meaning of God’s Word in order to ape hegemonic Western practices.
On the other hand, courts seem implicitly aware of the point that Sanhūrī made so many decades ago respecting the need to permit interest taking in the contemporary world. To do otherwise would, almost surely, prove disastrous. While it is true that putatively interest free Islamic finance has exploded since that time, growing from near irrelevance at the time of Sanhūrī’s death in 1971 into one that holds well over $2 trillion in assets as of the end of 2019, it thrives as a voluntary practice. Islamic finance transactions, are overwhelmingly of the form where parties contractually design the transaction in a manner that avoids interest taking (in form, at least). The contract is then blessed by a “shari’a review board” that certifies that it complies with the interest ban and other limitations set forth by Islamic law. Enforcement of the transaction, according to the contractual documents themselves, then takes place in a tribunal, such as a New York or English court, that does not itself know or care about the underlying compliance of the transaction with Islamic law. Rather, the tribunal merely enforces the deal the parties have written. Whatever the merits of this approach (a subject for another time), it clearly is not the basis for the establishment of an “interest free” jurisdiction—indeed, it depends upon the predictability of conventional, interest taking justice systems in order to enforce its own transactions.
Without a real economic alternative to permitting interest in their respective jurisdictions, courts have been stuck between the Scylla of somehow declaring interest Islamically permissible, and thereby risking their own delegitimization, or the Charybdis of declaring it prohibited, and causing some sort of economic catastrophe. The solution, spearheaded by the Egyptian Supreme Constitutional Court more than three decades ago, has long been to avoid the question entirely and send the matter back to the legislature to address. That court’s specific method of doing so was clumsy—in essence indicating that because the Civil Code predated the 1981 constitutional amendment that required all legislation to be consonant with “the principles of the Islamic shari’a”, it was somehow immune from judicial review. The Court’s job, under this approach, was to prevent new legislation from being repugnant to Islam, while the legislature’s was to amend existing legislation to cause it to conform to Islamic rules. One could imagine all sorts of perfidy arising from this sort of approach to constitutional amendment—a ruling, for example, that the Thirteenth Amendment’s ban on slavery in the US constitution did not invalidate existing slavery laws, but only prevented the enactment of new ones.
Iraq’s Federal Supreme Court has adopted a similar approach in other areas, and most notably family law. Relying on the fact that Article 41 of the Iraqi Constitution both seems to indicate that individuals are “free” to follow their own religion and sect based rules on personal status, and that this will be organized by subsequent legislation, the Court has repeatedly ruled that it cannot invalidate mandatory legislative provisions of the Personal Status Code that are in conflict with traditional rulings of fiqh. The reason, according to the Court, is that the reorganization of family law and personal status is to be regulated in future legislation according to the Constitution itself, and therefore nothing can be done until the legislature acts.
The most recent entry into these roiling debates is the Libyan Supreme Court, which takes a comparatively novel approach. To provide some context, since the fall of the Gaddafi regime, Libya’s lawmakers have sought to Islamize their state in fits and starts. Article 1 of the interim Libyan Constitution of 2011 currently in force indicates that “the Islamic sharia is the principal source of legislation.” While it is interesting to note that the 2017 draft Constitution, if ever approved in a referendum, downgrades the shari’a to “a source of legislation,” this still contemplates a far more important role for shari’a than was present in Gaddafi era Libya, where the only reference to shari’a related to inheritance law.
Beyond the Constitution, Libya’s lawmakers have been undertaking efforts to Islamize the laws of the state. Perhaps the most interesting is Law 6 of 2016, which is specifically designed to Islamize the Civil Code and which does not address Articles 229 or 230 at all. The omission seems startling, given that these Articles more than any other seem to conflict with broadly understood sharia principles. One important reason that Libya’s lawmakers may have exempted Articles 229 and 230 from Law 6/2016 is that they addressed the matter of interest in earlier legislation.
Specifically, Law 1 of 2013, entitled “On the Matter of the Prohibition of Ribāwī Transactions,” contained the following salient provisions:
Article 1
Transacting in interest, as lender or creditor, in all civil and commercial transactions which occur between natural and juridical persons is prohibited. Entirely void is all ribāwī interest arising from such transactions, whether open or concealed. Deemed a type of concealed interest is every benefit or commission of whatever type that the creditor imposes as a condition if it is shown that this benefit or commission is not commensurate with a legitimate benefit or service that the creditor provided.
Article 2
Demands for ribāwī interest arising out of civil or commercial transactions earned before the effective date of this law and not paid are not permitted, even if final judgment has been awarded on them.
These articles seem rather obvious and comprehensive respecting what they prohibit—any sort of fee, charge, or benefit that arises as a consequence of extending credit, whether in the context of a civil transaction (between two nonmerchants for example), or a commercial one (between a vendor and a retailer, for example).
In a case decided a few months ago, the Libyan Supreme Court decided otherwise. The case involved the failure of the Libyan Ministry of Agriculture to pay the transport fees provided to it by a shipping company. The company sued for late payment, and claimed in addition the 5% interest set forth in Article 229 of the Civil Code. The Ministry responded that the interest fee violated Articles 1 and 2 of the Libyan Civil Code.
In its rather surprising ruling, the Libyan Supreme Court indicated that Law 1/2013 was intended solely to deal with loans and lending, rather than credit more generally. In so doing, it pointed to the fact that the creditor in this case—a shipping company—had suffered damages from the delayed payment. Article 229 was therefore a form of compensation for injury rather than ribāwī interest. The Court also indicated that Article 4 of the same law, which calls for the creation of a fund to distribute interest free charitable loans (iqrāḍ ḥaṣan), demonstrated that the law solely concerned loans.
Kilian Bälz provides a much richer account of the decision, along with a full translation of it into English in the most recent issue of the Arab Law Quarterly. It suffices to note that for this commentator it is hard to see precisely how that which is described in the law as an “absolute ban” on interest in “civil and commercial transactions” can somehow be understood as relating only to loans rather than credit sales or services contracts.
More noteworthy, however is the justification provided. The Court seems to be suggesting that it is perfectly legitimate for a merchant to charge interest for a late payment, because the merchant is self-evidently incurring some sort of damage. This obviously leads to a series of important questions. First, to what extent is the court supposed to require the merchant to show that the damage incurred is equal to the amount of interest charged? If so, how would the merchant show that harm, without using the cost of credit as a basis? If not, why is this creditor treated differently from other parties claiming wrongful injury, who always must show the extent of the harm to recover compensation?
Finally, and perhaps most importantly, precisely how is this “harm” different from any sort of cost that a bank incurs when it extends a loan? Is it not in the end unsustainable to castigate a bank for not being willing to offer interest free loans, deriding the bank’s “benefit” as somehow illegitimate and calling for an interest free loan fund, while at the same time describing the hardship a service provider suffers because of delayed repayment as being deserving of compensation?
Obviously, the Court deals with none of these questions, and they are left for another time and another case. It is nonetheless extremely interesting that the Court seems to be groping toward some sort of theory that a payment to a creditor for a delay is permissible when it seems to be roughly commensurate with the cost of the credit, which the creditor has incurred as a form of “damage”. Interest is then only illegitimate and “ribāwī” when it seems to exceed this amount. The jump from this to the broad permissibility of moderate interest payments is not a great one, though it would be a revolutionary transformation of the understanding of the Qur’an’s ban on ribā. Whether this or other courts will wish to take such a jump in the future is, of course, a matter that remains to be seen.