RIBA and GHARAR

Ameenullah Shaikhameenullah.shaikh@iqra.edu.pk

IntroductionProhibition of Riba and Gharar are core concepts of Islamic economic and financial law. All transactions and contracts must be free from elements of Riba and Gharar apart from other Shari’ah prohibitions.

Understanding of Riba and Gharar and their modern application is crucial and fundamental for understanding of Islamic financial system.

What is Riba?Riba literally means increase, addition, excess, expansion or

growth.

Riba means any excess compensation over and above the principal which is without due consideration. It’s a premium paid to the lender in return for his waiting as a condition for the loan.

Riba in QuranFirst Revelation: “And whatever Riba you give so that it may increase in the wealth of

the people, it does not increase with Allah; but that which you give in charity, seeking the goodwill of God, multiplies manifold.”

(Al Rum, Verse 39)

Second Revelation:“O those who believe, Do not eat up Riba, doubled and redoubled,

and be mindful of Allah so that you may attain true success”. ( Al’ Imran: 130)

Riba in QuranThird Revelation:“Those who take Riba (usury or interest) will not stand but as stands

the one whom the demon has driven crazy by his touch…”.“…Allah destroys Riba and nourishes charities. And Allah does not

like any sinful disbeliever…”.“… O those who believe, fear Allah and give up what still remains of

the riba if you are believers. But if you don not, then listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your principal. Neither you wrong, nor be wronged”.

(Al Baqarah: 275-281)

Riba in Hadith 1. From Jabir:

The Prophet, may peace be upon him, cursed the receiver and the payer of interest, the one who records the transaction and the two witnesses to the transaction and said: "They are all alike [in guilt]” (Muslim, Kitab al-Musaqat, also in Tirmidhi and Musnad Ahmad).

2. Jabir ibn Abdullah said: The Prophet, peace and blessings of God be on him, addressed the people and said: All of the riba of Jahilliyyah is annulled. The first riba that I annul is our riba, that accruing to Abbas ibn Abd al-Muttalib [the Prophet's uncle]; it is being cancelled completely.

(Muslim, Kitab al-Hajj, also in Musnad Ahmad).

Riba in Hadith3. From Abdullah ibn Hanzalah: The Prophet, peace be upon him,

said: "A dirham of riba which a man receives knowingly is worse than committing adultery thirty-six times" (Mishkat al-Masabih)

4. From Abu Hurayrah: The Prophet, peace be upon him, said: "On the night of Ascension I came upon people whose stomachs were like houses with snakes visible from the outside. I asked Gabriel who they were. He replied that they were people who had received interest” (Ibn Majah, also in Musnad Ahmed)

Classification of Riba Riba is mainly of two types:

1. Riba al Nasiah or Riba al Jahilyya or Riba al Quran

2. Riba al fadhl or Riba al Bai or Riba al Hadith

Riba al NasiahDefinition of Riba-al-Nasiah from Hadith:

It is reported from Hazrat Ali (RA) that the Holy Prophet الله صلىوسلم :has said عليه

“Every loan that derives any benefit (to the creditor) is Riba”

“kind of loan where specified repayment period and an amount in excess of capital is predetermined”. (Imam Abu Bakr Hassas Razi)

Riba al Nasiah …contd It had different forms in the days of Jahiliyya:

a) Claiming an increased amount over the principal with a clearly stipulated condition.

b) Charging a monthly return from debtor while keeping principal amount remain till the day of maturity.

c) By selling a commodity for a price payable at a future specific date, and increase the amount payment upon extension in maturity.

Riba al Nasiah …contdExamples

• Return on Conventional Bank Deposits• Conventional Bank TDRs• Conventional Bank OD limits• Annuities• Prize Bonds• Coupons• etc

Classification of Riba Al Nasseah:◦Commercial interest (Tijarti Sood)

interest paid on loan taken for productive and profitable purpose

◦Usury (Sarfi Sood) interest paid on loan taken for personal

need and expenses

Riba al Nasiah …contd

Riba Al Fadl

Definition of Riba-al-Fadl from Hadith:

“Any excess taken in exchange of specific commodities which are homogenous”.

For example: 10 kg wheat with 15 kg wheat 05 grams gold with 06 grams

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Hadith prohibiting Riba-al-Fadl

Ubadah Ibn Al Samit narrated that the Holy Prophet (SA) said Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt - equal for equal and hand to hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand to hand. (Muslim)

Riba Al fadl …contd

Riba Al fadl …contdUnder Riba al-fadl, the Holy Prophet, sall-Allahu alayhi wa sallam, has identified six specific

commodities i.e.◦ Gold,◦ Silver,◦ Dates◦ Salt,◦ Wheat, and◦ Barley

If the transacted commodities are of same nature then: Spot delivery – immediate delivery of both commodities; Same quantity on both sides; Like exchange of wheat with wheat;

If the transacted commodities are of different then: Spot delivery – immediat delivery of both commodities; But the quantity may differ; Like exchange of wheat with barley;

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Imam Abu Hanifa sees two common characteristics in these six commodities namely:

1 )Weight or Volume2 )Exchange between similar commodities

Meaning all these six goods are sold by either weight or volume .

Therefore all those commodities, which are measured through either the unit of weight or the unit of volume and are exchanged against similar commodities will fall under the rules

of Riba al Fadl .

For Example: 08 kg raisins with 10 kg raisins 50 kg rice with 60 kg rice

Riba Al fadl …contd

Arguments in favor of Riba (common myths) & their rebuttal...

A: It was not in the prevalent modern shape in those days.

Ans:When some thing is prohibited, it is not directed to a particular form of it but it covers every form which comes in its general sense, e.g. gambling and pork, liquor and adultery are as Haram as they were in Jahiliya.

Arguments in favor of Riba (common myths) & their rebuttal...

B: Doctrine of necessity and wisdom requires to allow it.

Ans: 1) It does not, it is not at all a necessity in Shari’ah. And from economic point of view also the modern interest has brought more problems to the humanity than the premature forms of usury.

2) Necessity is acceptable where there is no alternative.

Arguments in favor of Riba (common myths) & their rebuttal...

C: Both parties agree on interest then why it is not permissible.

Ans: Only agreement is not sufficient e.g. adultery is not permissible in any condition.

Arguments in favor of Riba (common myths) & their rebuttal...

D: Prohibited thing is interest and what commercial banks charge is “Mark-up”.

Ans: This is only change of name, not change of nature.

E: Due to “Inflation” interest should be permissible

Ans: Inflation is reaction of RIBA based system.

Effects of Riba in the Society

• Riba is as a combination of evil and sins. • Riba is bad practice to earn & gain.• Riba brings instability in the community life.• Riba is the source for the increase of inflation.• Riba creates classes in the society.• Riba creates injustice in seeking the rights.• Riba is non transparent economic activity.• Riba is the most hated practice in Islam• Riba is the social crime

Effects of Riba in the Society

Riba is also the cause of Inflation & Recession

in the economy…how???..let’s watch!

GHARAR

What is Gharar?Gharar is an uncertainty, hazard, chance or risk

Gharar is one of those impediments which make the contract illegitimate.

An agreement that has any element of Gharar is not Valid from the Shari’ah point of view irrespective of whether the parties of the agreement agree upon the

contract or not .

Gharar - Defined

“The uncertainty that is present in the basic elements

of an agreement:Wording, Subject Matter &

Consideration”.

Gharar in Ahadith

Examples of events which have been prohibited in Ahadith because of Gharar

Sale of unborn Camel’s baby still in the mother’s abdomen. Sale of Flowers before they appear on the plant. Sale of Milk in the Lactose Glands. Sale of Fish that comes in one throw of net. Sale of Fruits on the tree from mere estimation. Sale of any one of the animals from the herd. Sale of wool on the body of the animal Sale of camel on deferred payment until it gives the birth.

Gharar - Types

1. Minor Gharar – Uncontrollable e.g. Business profits/loss, contract of marriage

2. Excessive Gharar – Controllable e.g. next slide

Gharar- Few Instances

• Selling goods that the seller is unable to deliver • Selling known or unknown goods against an unknown

price • Selling goods without proper description • Selling goods without specifying the price • Making a contract conditional on an unknown event • Selling goods on the basis of false description• Selling goods without allowing buyer to properly

examine the goods• Gambling is a form of Gharar because the gambler is

ignorant of the result of his gamble

ANY QUESTIONS??

THANK YOU