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Riba in Islamic Banking and Finance

www.aims.education

Riba in Islamic Banking and Finance

Islamic Finance Lecture

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What is Riba in Islamic Banking? Riba can be roughly translated as "Usury" or unjust, exploitive gains made in trade or

business. The word "Riba", in Arabic language, literally means an "increment' or

addition". In Islamic Fiqh the term riba has a special meaning. Riba in Islamic Banking

is an unjustified increment in borrowing or lending money, paid in kind or in money

above the amount of loan, as a condition imposed by the lender or voluntarily by the

borrower. This definition of Riba Islamic Finance is derived from the Quran and is

unanimously accepted by all Islamic scholar there are two types of Riba, identified to

date by these scholars namely 'Riba An Nasiyah' and Riba Al Fadl'.

'Riba An Nasiyah' is defined as excess, which results from predetermined

interest (sood) which a lender receives over and above the principle

(RasulMaal)

'Riba Al Fadl' is defined as excess compensation without any consideration

resulting from a sale of goods. `Riba Al Fadl' will be covered in greater detail

later.

Prohibition of Riba:

During the dark ages, only the first form (RibaAnNasiyah) was considered to be Riba.

However the Holy Prophet also classified the second form (Riba Al Fadl) as Riba. The

meaning of riba Islamic finance has been clarified in the following verses of Quran:

"O those who believe fear Allah and give up what still remains of the Riba if

you are believers. But if you do not do so, then be warned of war from Allah

and His Messenger. If you repent even now, you have the right of the return of

your capital; neither will you do wrong nor will you be wronged." Al Baqarah

2:278-9

These verses clearly indicate that the term Riba Islamic finance means any excess

compensation over and above the principal which is without due consideration.

However, the Quran has not altogether forbidden all types of excess; as it is present in

trade as well, which is permissible. The excess that has been rendered haram in Quran

is a special type termed as Riba. In the dark ages, the Arabs used to accept Riba as a

type of sale, which unfortunately is also being understood at the present times. Islam

has categorically made a clear distinction between the excess in capital resulting from

http://www.aims.education/study-online/riba-in-islamic-banking-and-finance/

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sale and excess resulting from interest. The first type of excess is permissible but the

second type is forbidden and rendered haram.

"Seized in this state they say: 'Buying and selling is but a kind of interest',

even thoughAllah has made buying and selling lawful, and interest unlawful."

Al Baqarah 2:275

Riba in Quran

The Qur'an states the following on Riba:

That they took riba, though they were forbidden and that they devoured mens

substance wrongfully We have prepared for those among men who reject

faith a grievous punishment

(Qur'an 4:161)

Those who charge riba are in the same position as those controlled by the

devil's influence. This is because they claim that riba is the same as commerce.

However, God permits commerce, and prohibits riba. Thus, whoever heeds this

commandment from his Lord, and refrains from riba, he may keep his past

earnings, and his judgment rests with God. As for those who persist in riba,

they incur Hell, wherein they abide forever (Qur'an 2:275)

It is because trade and usury are absolutely different. In trade one earns profit

as a result of initiative, enterprise, efficiency and hard work. But the interest is

not earned through hard work or any value creating process. It is not the

reward of labour but is in fact unearned income. Moreover interest is fixed

whereas profit fluctuates. In case of trade there is risk of loss also, but in case

of interest the lender gets his fixed amount irrespective of the fact whether the

debtor earns any profit or sustains loss. God has forbidden interest but has

permitted trade.

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God condemns riba, and blesses charities. God dislikes every disbeliever,

guilty. Lo! those who believe and do good works and establish worship and pay

the poor-due, their reward is with their Lord and there shall no fear come

upon them neither shall they grieve. O you who believe, you shall observe God

and refrain from all kinds of riba, if you are believers. If you do not, then

expect a war from God and His messenger. But if you repent, you may keep

your capitals, without inflicting injustice, or incurring injustice. If the debtor is

unable to pay, wait for a better time. If you give up the loan as a charity, it

would be better for you, if you only knew."(Qur'an 2:276-280)

O you who believe, you shall not take riba, compounded over and over.

Observe God, that you may succeed.(Qur'an 3:130)

And for practicing riba, which was forbidden, and for consuming the people's

money illicitly. We have prepared for the disbelievers among them painful

retribution.(Qur'an 4:161)

The riba that is practiced to increase some people's wealth, does not gain

anything at God. But if people give to charity, seeking God's pleasure, these are

the ones who receive their reward many fold.(Qur'an 30:39)

Riba in Hadith of Prophet Muhammad (Peace Be Upon

Him)

Riba is also mentioned in Ahadith and is considered one of the seven major sins:

Jabir said that Allah's Messenger (may peace be upon him) cursed the

accepter of usury and its payer, and one who records it, and the two witnesses,

and he said: They are all equal

(Sahih Muslim)

It is reported on the authority of Abu Huraira that the Messenger of Allah

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Riba in Islamic Banking and Finance

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(may peace be upon him) observed: Avoid the seven noxious things. It was said

(by the hearers): What are they, Messenger of Allah? He (the Holy Prophet)

replied: Associating anything with Allah, magic, killing of one whom God has

declared inviolate without a just cause, consuming the property of an orphan,

and consuming of usury, turning back when the army advances, and

slandering chaste women who are believers, but unwary.(Sahih Muslim)

Abdullah-bin-Hanjalah reported that the Messenger of Allah said: A Dirham of

usury a man devours with knowledge is greater than thirty-six

fornications.(Ahmad, Darqutni)

Types of Riba:

The first and primary type is called Riba Au Nasiyah or Riba Al Jahiliya.

The second type is called Riba Al Fadl, RibaAnNaqd or Riba Al Bai.

The first type was specified in the Quranic verses before the sayings of the Holy

Prophet this type was termed as Riba al Quran. However the second type was not

understood by the Quranic verses alone but also had to be explained by the Holy

Prophet it is also called Riba al Hadees.

RibaAnNasiyah

This is the real and primary form of Riba Islamic Finance. Since the verses of Quran

have directly rendered this type of Riba as Karam, it is called Riba Al Quran. Similarly

since only this type was considered Riba in the dark ages, it has earned the name of

Riba Al Jahiliya. Imam Abu Bakr Hassan Razi has outlined a complete and prohibiting

legal definition of RibaAnNasiyah in the following words:

"That kind of loan where specified repayment period and an amount in excess

of capital is pre determined.".

One of the hadith quoted by Ali IbnTalib (RAA) has defined RibaAnNasiyah in

similar words. The Holy Prophet said:"Every loan that draws excess is Riba.".

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The famous SahabiFazala Bin Obaid has also defined Riba in similar words:

"Every loan that draws profit is one of the forms of Riba.".

The famous Arab scholar Abu lshaqazZajjaj also defines Riba in the following

words: "Every loan that draws more than its actual amount.".

One of the hadith quoted by Ali IbnTalib (RAA) has defined RibaAnNasiyah in

similar words. The Holy Prophet said:"Every loan that draws excess is Riba.".

The famous SahabiFazala Bin Obaid has also defined Riba in similar words:

"Every loan that draws profit is one of the forms of Riba.".

The famous Arab scholar Abu lshaqazZajjaj also defines Riba in the following

words: "Every loan that draws more than its actual amount.".

RibaAnNasiyah refers to the addition of