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Riba, Gharar and

Islamic finance
AUSAF AHMAD

Islamic Cultural Centre of India


New Delhi
May 04 2008

ISLAMIC NORMS OF BUSINESS


TRANSACTIONS

Should not indulge


in Riba
Should not involve
in Gharar
Should not indulge
in fraudulent
behavior
Should not coerce
Should not deal in
prohibited goods.

Should not take


advantage of
anybodys needs
Should not withhold
supplies to raise
prices
Should not withhold
information to take
advantage of
ignorance.

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

Prohibition of Riba in
Quran [contd.]
SECOND REVEALATION:
And for their taking interest even
though it was forbidden for them,
and their wrongful appropriation
of other peoples property, We
have prepared those among them
who reject faith a greivous
punishment. [4: 161]

Prohibition of Riba in
Quran [contd.]

THIRD REVEALATION:

o believers, take not doubled


and redoubled interest, and fear
God so that you prosper. Fear the
fire which has been prepared for
those who reject faith, and obey
God and the Prophet so that you
may receive mercy [3: 130-2]

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

Prohibition of Riba in
Quran [contd.]

God deprives interest of all


but blesses Charity. He loves
not the ungrateful sinners
(276)

Prohibition of Riba in
Quran [contd.]

O believers ! Fear Allah and give


up interest that remains
outstanding, if you are true
believers. [2: 278]

Prohibition of Riba in
Quran [contd.]

If you do not, then be sure of being at


war with God and His messenger. But if
you repent, you can have your
principal. Neither you should commit
injustice nor you be subjected to it.
(279)
If the debtor is in difficulty, let him
have respite until it is easier, but if you
forego out of charity, it is better for
you if you realize.(280)

Riba in Hadith
From Jabir: The Prophet (pbuh)
cursed the receiver, the payer of
interest, the one who records it
and the two witnesses of the
transaction and said: They are all
alike (in guilt)
[Reported by Muslim, Tirmidhi and
Ahmad]

Riba in Hadith
[contd.]
Jabir b. Abdallah said: The Prophet
(pbuh) said, All of the riba of
Jahiliyah is annulled. The first riba
that I anul is our riba, that accruing
to Abbas b. Abd al Muttalib; it is
being cancelled compeletely.
[ Reported by Muslim and Ahmad :
Last Sermon of the Prophet (Pbuh)]

Meaning of Riba

Meaning: Derived from Riba yarbou


Literal meaning: to grow
Technical meaning: interest, usury
Illah: two considerations: (1) Excess
of Amount (2) delay in delivery
Example: gold for gold: (i) equal
amount (2) on the spot. Implies No
Riba.

TYPES OF RIBA

RIBA OF DEBT (Riba al Diyun)


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

RIBA OF Debt [Riba al


diyun]

Riba of the period of Jahiliyah:


Prevailing in Arabia before the
advent of Islam
The debt is linked with time. Any
extension in time is granted only by
raising the price of debt (interest).
Prohibited on the strength of
Quranic injunction.

RIBA OF TRADE [ Riba


al fadl]

The Prophet (pbuh) said: Gold for


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

Narrated by : Abu Saeed Khudri


Reported by: bukhari

Meaning of Riba al
Fadl

It is related with the exchange of


one good with the same good.
Some experts consider it to be a
form of Bay al fasid (illegal
sale)
Barter between different goods is
allowed.

RIBA, INTEREST AND


USURY

No distinction between interest


and usury i.e. between low and
high rates.
No distinction between
consumption and production
loans
No distinction between individual
and institutional loans

AVOIDANCE OF
GHARAR

Definition of Gharar
Uncertainty / Ambiguity
Ambiguity of Quantity [Gharar fil
Miqdar]
Ambiguity of Attributes [Gharar
fis sifah] such as
Ambiguity in time or place of delivery
Ambiguity in price etc.

TYPES OF ISLAMIC
CONTRCTS
Islamic Contracts

Muwadat

Fixed Payment

No Gharar

Musharakat

Tabarruat

Ratio is determined Nothing is determined

Some Gharar

Gharar is allowed

TYPES OF ISLAMIC
CONTRCTS [contd.]

Contracts of Sale / Lease are Muawadat.


Gharar is not allowed in such contracts.
Mudarabah and Musharakah are
contracts of Musharakat. Some amount
of gharar may be tolerated in such
contracts.
Sadaqat and Hadaya are Tabarruat. No
objection to Gharar in these type of
contracts.

DEBT FINANCE
Vs.
PARTICIPATORY FINANCE

Participatory finance, in
comparison, to debt finance is:

More just
More equitable
More efficient
More growth oriented.

DISADVANTAGES OF
RIBA BASED FINANCE

Riba based finance is inefficient.


Riba based finance is unjust
Riba based finance discourages
growth.
Riba based finance leads to
economic instability.
Riba based finance leads to
economic inequalities.