Riba vs. Rate of Return 61
In refuting the claims that prohibition was meant for excessive interest
only, Muslim scholars argue that:
■ (^) The verses concerning the prohibition (2:275–81, 3:130–2, 4:161
and 30:39) do not make any distinction between exorbitant or rea-
sonable rates of interest. The injunction in 2:279 (“... and if you
repent then ye have your principal”) is a clear indication that, while
the principal lent is protected, there is no such protection offered for
interest at any level.
■ (^) With the help of a simple mathematical formula, it can be shown that
doubling and re - doubling of the principal can take place even at a very
low interest rate. For example, based on daily compounding (a common
practice in today’s fi nancial markets), a $1 loan will be doubled in 15
years at the rate 4.6 percent.
■ (^) The prohibition of interest is associated with the notion of injustice.
Researchers refer to the verse which says “... neither should you com-
mit injustice nor should you be subjected to it” (2:279) to argue that
riba is categorically linked in its totality with injustice and there is no
mention of excessive or exorbitant rate.
Adjustment for Infl ation or Indexation Allowed?
While the fi rst two issues are relatively easy to resolve, the question of
any adjustment or compensation for “infl ation” or “defl ation” is less
straightforward. The question is often raised as to whether money lent
without riba should be adjusted for any decrease or increase of value
over the period of lending. Indexation of fi nancial obligation refers to an
adjustment in value over a period of time to compensate for the change
in the value arising from infl ationary or defl ationary pressures. Indexing
wages to infl ation is a widely common practice, but indexing investments
or fi nancial obligations is also growing fast in the conventional fi nancial
markets. In the case of fi nancial assets, infl ation - linked securities link
the returns to the consumer price index or to the cost - of - living index. The
adjustments are often in the form of ex post adjustments and the objec-
tive is to guarantee a return equal to the real interest rate rather than the
nominal interest rate.
Indexation is justifi able in the eyes of the Shari’ah for wages, salaries
and pensions, social security payments, and so on, but it does not support
the indexation of fi nancial assets. While some scholars argue that Islam’s
notion of justice is grounds for compensation when lending without riba,
others argue that the prohibition is absolute, pointing to the verse (2:275)
that protects only the principal amount of the loan. They argue that the
prohibition covers all transactions that may make any adjustments similar
to riba, such as the deferred exchange of currency, devaluation or revalu-
ation, and the change in the unit of currency at the time of repayment.