60 AN INTRODUCTION TO ISLAMIC FINANCE
well documented. Considering that the economy during that time was pri-
marily an agricultural economy, it is reasonable to conclude that riba - based
loans for non - consumption purposes existed and were subject to the prohibi-
tion. Second, it is a historical fact that the business community of Mecca was
part of a sophisticated network of traders and it is known that some of these
traders would borrow on the basis of riba to fi nance their trade expeditions.
It was a common practice to raise funds to purchase local products before
embarking on a trade journey. In some cases, such journeys were undertaken
and fi nanced by riba - based loans. The Prophet (pbuh) signed a pact with
the people of Taif, who were renowned for their moneylending business,
which included the condition that riba - based businesses be abolished. After
the prohibition, the journeys continued, but were fi nanced through partner-
ships rather than loans.
Pre - prohibition Lending Practices Siddique (1995) records the following exam-
ples of practices that were common prior to the prohibition of riba:
■ (^) A person would sell goods to another on the understanding that the
price would be paid within an agreed period. If the price was not paid
within that period, an amount was added to the price and the period of
repayment was extended.
■ (^) A person would lend money to another on the understanding that a
fi xed additional amount would be paid besides the principal, within
a fi xed period.
■ (^) A rate would be agreed between borrower and lender according to which
the principal, along with the additional amount, would be repaid. If a
further period for repayment was required, then the rate was increased
for the extended period.
There is clear and suffi cient evidence that at the time of the prohibition,
borrowing and lending was for both commercial and productive purposes
and therefore prohibition was intended for all forms of lending.
Excessiveness or Compounding Only?
As mentioned earlier, the literal meaning of the word “usury” has changed
over time, from simple interest of any kind and at any level to excessive inter-
est above a certain legal limit. This has become a source of confusion for
some researchers, who take the current defi nition to be its original meaning
and therefore come to the conclusion, wrongly, that only the charging of
excessive interest is prohibited. Similarly, out - of - context interpretation of the
verse in the Qur’an (3:130) that says “Do not devour interest doubled and
redoubled,” often leads to the misunderstanding that the prohibition is for
a compounded rate of interest and does not apply to other forms of simple,
fair or legal rates.