Q: As-salamu `alaykum. If I were to pawn an item in order to get $200 and then, a month later, go back to buy it back at $225, would that be usury (riba)? Baraka llahu fik:

A:Wa-`alaykum as-salamu wa-rahmatullah.

There are several likely scenarios:

Scenario One

   1) If the first transaction were actually a sale (as opposed to a loan), (as indicated by the contract that you entered into with the pawnbroker) and

   2) If, at the time of the first sale, you did not agree (or promise) to repurchase the item at a higher price (but rather, for example, came back later, happened to find that the pawnbroker had not sold the item yet and decided to buy it back from him/her at that time) then the two sales (i.e. both the first and second) are valid (sahih), the transaction would not be usury (riba) and the transaction would be permitted (ja'iz). 

Basis (mustanad): Allah says <<wa-ahalla llahu l-bay`a wa-harrama r-riba>> i.e.  "Allah has permitted buying (and selling) but prohibited usury [riba]". (Baqara)

Scenario Two

However, if the first transaction were not a sale--but were rather a loan (of, say, $200) that the pawnbroker advanced to you and, as part of the loan transaction, you pledged your item as collateral (e.g. on the basis that if you did not pay the pawnbroker $200 plus interest [i.e. finance charge, service charge, etc] within 30 days, the item would become the  pawnbroker's)--and then you returned within 30 days and paid a higher amount (e.g. $225= $200 plus finance charges of $25) as repayment of the loan (not as the sales price in an actual repurchase of the item) then this would be usury (riba) and would be impermissible.

Basis (mustanad): It is transmitted from the Prophet (salla llahu `alayhu wa sallam) that he said <<Kullu qard jarra manfa` fa-huwa riba>> i.e. "Every loan that draws a benefit is usury."  Note: The transmission chain (isnad) of this hadith is defective according to several hadith specialists (muhaddithin), but the text has been adopted as a fiqh principle (qa`idah) by our legists (fuqaha').

Scenario Three

If the first transaction were a loan (of, say, $200) (as in Scenario Two above) but you were to return after the item had already become the pawnbroker's (e.g. you were unable to repay the loan principal in 30 days but returned to the pawn shop after 40 days had elapsed) and then were to pay a higher amount (e.g. $225) as the actual repurchase price of the item (not in repayment of the loan), then the final repurchase here would not be usury (riba) and would be permitted (ja'iz) provided that 1) you did not agree or promise to repurchase the item at the higher price at the time of the first sale and 2) you did not intend to let the default period expire when you took out the loan.

Note: The first lending transaction itself may be invalid in this case, depending on specifics of the loan contract/pawn agreement. [See "Advice" below].

Advice (nasihah): I strongly counsel you (and any other Muslim, for that matter) against dealing with pawnbrokers (even according to Scenario One) since 1) pawnbrokers are known usurers (i.e. dealers in riba) and 2) the technical differences between the scenarios that I describe above may be difficult for many to discern, because of the duplicity of pawnbrokers, a lack of clarity in the contract or other reasons.

Wa llahu a`lam

[The following is an excerpt from a paper that I was invited to write earlier this year]

...It would be helpful for us, however, to briefly review the proximate causes of the current financial crisis, from the point of view of a student of the Islamic ethico-legal tradition (fiqh). By reminding ourselves of the proximate causes of the problems, we clarify and emphasize the appropriateness of the observations about the theory and practice of risk management that will follow. 

1. Problems

The pain and discomfort that millions of human beings across the world have experienced in the wake of the current economic crisis rightly elicits compassion and concern from any member of the human family.[1] This pain and discomfort, however, should not leave any informed observer surprised—least of all a student of Islamic sacred ethics and law (sharī`a). Muslim theologians (usūliyyūn) and legists (fuqahā’) have taught for centuries that Islamic sacred ethics and law were designed by God in order to achieve interests and deflect harms (jalb al-maṣālih wa-dar’ al-mafāsid), in this life (ḥayāt al-dunyá) as well as in the afterlife (ḥayāt al-ākhirah).[2] Therefore, even a casual student of Islamic transactional ethics and law (fiqh al-mu`āmalāt) should not be surprised to observe that massive and systemic non-compliance with the basic precepts (mabādī`), principles (qawā`id) and normative ethico-legal values (aḥkām) of the sacred law that pertain to this particular arena of human activity, i.e. economics and finance, have resulted in massive pain, discomfort, instability and hardship.

Although, the instances of non-compliance that are associated with the current financial crisis are legion, those that should draw our attention here are summarized in the following list: 1) interest-bearing transactions, 2) debt sales and 3) derivatives.

1.1 Interest bearing loans

The practice of originating interest-bearing loans is in direct contravention of the prohibition of usury (ribá).

1.2 Trading in Debt

The practice of creating and trading financial products that are essentially bundles of debt obligations resulting from the aforementioned loans (e.g. home loans) contravenes the prohibition on the sale of debt for cash or for debts.  Selling debts obligations for cash is usury or a practice that leads directly to usury, according to most of the legists.

1.3 Derivative Contracts

The practice of executing derivative contracts (such as credit default swaps and interest rate swaps) that are based on the aforementioned securities, and which are meant to hedge against the risks associated with them, is impermissible since such contracts are characterized by major indeterminateness (gharar).

2. Solutions

             Generally speaking, the solution, sharī`a wise, is to reorient societies away from non-compliant practices and toward compliant practices, where such substitutes exist. Reorientation would consist of discontinuation [of elements of establish financial practices]…with appropriate application of the fiqh principles of consideration of necessity and consideration of exigency.

2.1 Non-Interest Based Financing

Governmental and regulatory authorities should prohibit interest based financing and replace them with non-interest based financing methods...