Riba, Gharar and Islamic finance AUSAF AHMAD Islamic Cultural Centre of India New Delhi May 04 2008.

RibaRiba, , GhararGharar and and Islamic financeIslamic finance

AUSAF AHMADAUSAF AHMADIslamic Cultural Centre of IndiaIslamic Cultural Centre of India

New DelhiNew DelhiMay 04 2008May 04 2008

ISLAMIC NORMS OF BUSINESS ISLAMIC NORMS OF BUSINESS TRANSACTIONSTRANSACTIONS

Should not indulge Should not indulge in in RibaRiba

Should not involve Should not involve in in GhararGharar

Should not indulge Should not indulge in fraudulent in fraudulent behaviorbehavior

Should not coerceShould not coerce Should not deal in Should not deal in

prohibited goods. prohibited goods.

Should not take Should not take advantage of advantage of anybody’s needsanybody’s needs

Should not withhold Should not withhold supplies to raise supplies to raise pricesprices

Should not withhold Should not withhold information to take information to take advantage of advantage of ignorance. ignorance.

Prohibition of Prohibition of RibaRiba in in Qur’anQur’an

FIRST REVEALATION:FIRST REVEALATION:

That which you give as Riba That which you give as Riba (interest) the people’s wealth (interest) the people’s wealth increases not with God; but that increases not with God; but that which you give in Charity, seeking which you give in Charity, seeking the goodwill of God, multiplies the goodwill of God, multiplies manifold. [ 30 : 39] manifold. [ 30 : 39]

Prohibition of Prohibition of RibaRiba in in Qur’an [contd.]Qur’an [contd.]

SECOND REVEALATION:SECOND REVEALATION:

And for their taking interest even And for their taking interest even though it was forbidden for them, though it was forbidden for them, and their wrongful appropriation and their wrongful appropriation of other people’s property, We of other people’s property, We have prepared those among them have prepared those among them who reject faith a greivous who reject faith a greivous punishment. [4: 161]punishment. [4: 161]


THIRD REVEALATION:THIRD REVEALATION:

o believers, take not doubled o believers, take not doubled and redoubled interest, and and redoubled interest, and fear God so that you prosper. fear God so that you prosper. Fear the fire which has been Fear the fire which has been prepared for those who reject prepared for those who reject faith, and obey God and the faith, and obey God and the Prophet so that you may Prophet so that you may receive mercy [3: 130-2]receive mercy [3: 130-2]


FOURTH REVELATIONFOURTH REVELATION

Those who benefit from interest Those who benefit from interest shall be raised like those who have shall be raised like those who have been driven to madness by the been driven to madness by the touch of the Devil; that is because touch of the Devil; that is because they say: “Trade is like interest” they say: “Trade is like interest” while God has permitted trade and while God has permitted trade and forbidden interest. [2: 275]forbidden interest. [2: 275]


God deprives interest of all God deprives interest of all but blesses Charity. He loves but blesses Charity. He loves not the ungrateful sinners not the ungrateful sinners (276)(276)


O believers ! Fear Allah and give O believers ! Fear Allah and give up interest that remains up interest that remains outstanding, if you are true outstanding, if you are true believers. [2: 278] believers. [2: 278]


If you do not, then be sure of being at If you do not, then be sure of being at war with God and His messenger. But war with God and His messenger. But if you repent, you can have your if you repent, you can have your principal. Neither you should commit principal. Neither you should commit injustice nor you be subjected to it. injustice nor you be subjected to it. (279)(279)

If the debtor is in difficulty, let him If the debtor is in difficulty, let him have respite until it is easier, but if you have respite until it is easier, but if you forego out of charity, it is better for forego out of charity, it is better for you if you realize.(280)you if you realize.(280)

Riba in HadithRiba in Hadith

From Jabir: “ The Prophet (pbuh) From Jabir: “ The Prophet (pbuh) cursed the receiver, the payer of cursed the receiver, the payer of interest, the one who records it interest, the one who records it and the two witnesses of the and the two witnesses of the transaction and said: They are all transaction and said: They are all alike (in guilt)alike (in guilt)

[[Reported by Muslim, Tirmidhi and Reported by Muslim, Tirmidhi and Ahmad]Ahmad]

Riba in Hadith Riba in Hadith [contd.][contd.]

Jabir b. Abdallah said: The Prophet Jabir b. Abdallah said: The Prophet (pbuh) said, “All of the riba of (pbuh) said, “All of the riba of Jahiliyah is annulled. The first riba Jahiliyah is annulled. The first riba that I anul is our riba, that accruing that I anul is our riba, that accruing to ‘ Abbas b. Abd al Muttalib; it is to ‘ Abbas b. Abd al Muttalib; it is being cancelled compeletely.being cancelled compeletely.

[ Reported by Muslim and Ahmad : [ Reported by Muslim and Ahmad : Last Sermon of the Prophet (Pbuh)]Last Sermon of the Prophet (Pbuh)]

Meaning of Meaning of RibaRiba

Meaning: Derived from Riba yarbouMeaning: Derived from Riba yarbou Literal meaning: to growLiteral meaning: to grow Technical meaning: interest, usuryTechnical meaning: interest, usury Illah: two considerations: (1) Excess Illah: two considerations: (1) Excess

of Amount (2) delay in deliveryof Amount (2) delay in delivery Example: gold for gold: (i) equal Example: gold for gold: (i) equal

amount (2) on the spot. Implies No amount (2) on the spot. Implies No Riba. Riba.

TYPES OF RIBATYPES OF RIBA

RIBA OF DEBT (Riba al Diyun)RIBA OF DEBT (Riba al Diyun) RIBA OF TRADE (Riba al Fadl)RIBA OF TRADE (Riba al Fadl) Both types of Riba are prohibited Both types of Riba are prohibited

in Islam. Riba al Diyun is also in Islam. Riba al Diyun is also known as Riba al jahiliah. It is known as Riba al jahiliah. It is prohibited by the Quranic prohibited by the Quranic injunctions. Riba al Fadl is injunctions. Riba al Fadl is prohibited by Hadith of the prohibited by Hadith of the Prophet (pbuh). Prophet (pbuh).

RIBA OF Debt [Riba al RIBA OF Debt [Riba al diyun]diyun]

Riba of the period of Jahiliyah: Riba of the period of Jahiliyah: Prevailing in Arabia before the Prevailing in Arabia before the advent of Islamadvent of Islam

The debt is linked with time. Any The debt is linked with time. Any extension in time is granted only extension in time is granted only by raising the price of debt by raising the price of debt (interest). (interest).

Prohibited on the strength of Prohibited on the strength of Quranic injunction.Quranic injunction.

RIBA OF TRADE [ Riba RIBA OF TRADE [ Riba al fadl]al fadl]

The Prophet (pbuh) said: “ Gold for The Prophet (pbuh) said: “ Gold for Gold, Silver for Silver, Wheat for What, Gold, Silver for Silver, Wheat for What, barley for barley, dates for dates, salt barley for barley, dates for dates, salt for salt - like for like, hand to hand. for salt - like for like, hand to hand. Whoever pays more or takes more, Whoever pays more or takes more, indulges in indulges in Riba. Riba. The taker and giver The taker and giver are alike (in guilt). are alike (in guilt).

Narrated by : Abu Saeed KhudriNarrated by : Abu Saeed Khudri Reported by: bukhariReported by: bukhari

Meaning of Riba al Meaning of Riba al FadlFadl

It is related with the exchange of It is related with the exchange of one good with the same good. one good with the same good.

Some experts consider it to be a Some experts consider it to be a form of form of Bay’ al fasid Bay’ al fasid (illegal (illegal sale)sale)

Barter between different goods is Barter between different goods is allowed. allowed.

RIBA, INTEREST AND RIBA, INTEREST AND USURYUSURY

No distinction between interest No distinction between interest and usury i.e. between low and and usury i.e. between low and high rates.high rates.

No distinction between No distinction between consumption and production consumption and production loansloans

No distinction between No distinction between individual and institutional loansindividual and institutional loans

AVOIDANCE OF AVOIDANCE OF GHARARGHARAR

Definition of GhararDefinition of Gharar Uncertainty / AmbiguityUncertainty / Ambiguity Ambiguity of Quantity [Gharar fil Ambiguity of Quantity [Gharar fil

Miqdar]Miqdar] Ambiguity of Attributes [Gharar Ambiguity of Attributes [Gharar

fis sifah] such asfis sifah] such as Ambiguity in time or place of deliveryAmbiguity in time or place of delivery Ambiguity in price etc. Ambiguity in price etc.

TYPES OF ISLAMIC TYPES OF ISLAMIC CONTRCTSCONTRCTS

Islamic Contracts

Muwadat Musharakat Tabarruat

Fixed Payment Nothing is determined

No Gharar Some Gharar Gharar is allowed

Ratio is determined

TYPES OF ISLAMIC TYPES OF ISLAMIC CONTRCTS [contd.]CONTRCTS [contd.]

Contracts of Sale / Lease are Muawadat. Contracts of Sale / Lease are Muawadat. GhararGharar is not allowed in such contracts. is not allowed in such contracts.

MudarabahMudarabah and and MusharakahMusharakah are are contracts of contracts of MusharakatMusharakat. Some amount . Some amount of of gharargharar may be tolerated in such may be tolerated in such contracts.contracts.

Sadaqat Sadaqat and and Hadaya Hadaya are are TabarruatTabarruat. No . No objection to Gharar in these type of objection to Gharar in these type of contracts.contracts.

DEBT FINANCE DEBT FINANCE Vs. Vs.

PARTICIPATORY FINANCE PARTICIPATORY FINANCE

Participatory finance, in Participatory finance, in comparison, to debt finance is:comparison, to debt finance is:– More justMore just– More equitableMore equitable– More efficientMore efficient– More growth oriented. More growth oriented.

DISADVANTAGES OF DISADVANTAGES OF RIBARIBA BASED FINANCE BASED FINANCE

RibaRiba based finance is inefficient. based finance is inefficient.Riba Riba based finance is unjustbased finance is unjustRiba Riba based finance discourages based finance discourages growth.growth.RibaRiba based finance leads to based finance leads to economic instability. economic instability. Riba Riba based finance leads to based finance leads to economic inequalities. economic inequalities.

Riba, Gharar and Islamic finance AUSAF AHMAD Islamic Cultural Centre of India New Delhi May 04 2008.

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