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The Concepts Of

Interest, Usury And Riba

 Introduction
 Definition of riba
 The prohibition of riba
 Types and classifications of riba
 The differences between riba and profit
 Conclusion
INTRODUCTION

 Interest in the modern financial world is


commonplace.
 It is a staple feature of capitalist system that values
profits above everything else, via competition rather
than co-operation.
 Despite the amount of wealth that the Western
economic system has created, there are major
concerns over the huge disparities that have
developed between rich and poor.
THE MEANING OF RIBA

 Riba has been extracted from Raba. It means


addition, increase. So, riba literally means to
increase, to grow to rise, to add, to swell. It is,
however, not every increase or growth which has
been prohibited by Islam
THE MEANING OF RIBA
 In the Shari’ah, “riba” technically refers to the
premium that must be paid by the borrower to the
lender along with the principal amount as a condition
for the loan or for an extension in its maturity.
 In this sense riba has the same meaning as interest in
accordance with the consensus of all jurists without
any exception.
 So the Holy Qur’an and the Hadith do not make any
such difference between usury and interest. Interest
and usury both are taken as synonymous for the
Arabic word riba.
PROHIBITION OF RIBA IN THE HOLY
QURAN
 In several verses of the Holy Qur’an, Allah(swt) has
mentioned the consequences of riba.
 The Qur’an did not declare the prohibition of riba in
the early stage of revelation, rather we find that the
complete prohibition of interest came sequentially.
PROHIBITION OF RIBA IN THE HOLY
QURAN
 “Those who devour usury will not stand except as
stands one whom the evil one by his touch has driven
to madness. That is because they say: ‘Trade is like
usury.’ But Allah has permitted trade and forbidden
usury. Those who after receiving direction from their
Lord, desist, shall be pardoned for the past; their case
is for Allah (to judge). But those who repeat (the
offence) are companions of the fire, they will abide
therein (forever)” (2:275 Surah Al-Baqara)
PROHIBITION OF RIBA IN THE HOLY
QURAN
 “That they took riba (usury), through they were
forbidden and that they devoured men’s substance
wrongfully – We have prepared for those among men
who reject faith a grievous punishment.” (4:161)
PROHIBITION OF RIBA IN THE HADITH

 Jabir reported: The Prophet (saw), cursed the receiver


and the payer of interest, the one who records it (the
contract) and the two witnesses to the transaction and
said, “they are all alike (in guilt).”

 Abu Hurayrah (ra) narrated that the Prophet (saw)


said: “”God would not allow four persons to enter
paradise or to taste its blessings: he who drinks wine,
he who takes riba, he who usurps an orphan’s
property without right and he who is undutiful to his
parents.”
TYPES OF RIBA
 RIBA AL- NASI’AH

 The term nasi’ah means to postpone or to wait and it


refers to the time period that is allowed for the
borrower to repay the loan in return for the addition
of the premium.
 Hence it refers to the interest on loans. The
prohibition of riba al nasi’ah essentially implies that
the fixing in advance of a positive return on a loan as
a reward for waiting is not permitted by the Shari’ah.
Examples

 A person, for example, may lend another person a


sum of money to be paid back on a specified date.
When the date agreed upon is due, the Lender gives
the Borrower the choice either to repay the debt or
defer repayment in return for charging additional
interest on the principal.
TYPES OF RIBA
 RIBA AL-FADL

 Riba al-fadl is the excess over and above the loan paid in kind.
It lies in the payment of an addition by the debtor to the
creditor in exchange of commodities of the same kind.
 It is related that Abu Saed al-Khurdi said: “the Prophet
Muhammad (saw) has said that gold in return for gold, silver
for silver, wheat for wheat, barley for barley, dates for dates
and salt for salt, can be traded if and only if they are in the
same quantity and that is should be hand to hand. If someone
gives more or takes, then he is engaged in riba and accordingly
has committed a sin.”
TYPES OF RIBA
 Riba al-Qard
 The term qard means to borrow;
 Riba qard refers to a benefit or profit which creditor
has to pay along with the amount of loan because of
duration.
 The benefit/ profit can be a cash or an usufruct
(manfa’ah/ benefit from object).
 Any attempt to get profit from loan contract is
considered ‘al riba’ (taking interest) as in maxim of
fiqh: All loans lead to a benefit are riba (i.e. interest).
 Riba al-qard is a part of (riba al-duyun-Interest on
Debt).
TYPES OF RIBA

Riba al-Yad
 The term yad means hand.

 Riba yad refers to a benefit derived from the duration


between delivery and acceptance of contracted item
and price.
 In money exchange (e.g. AFS to USD), the delivery of
money from money changer to a buyer shall take place
at the same time and place (same majlis) where the
money changer accepted the buyer’s money.
TYPES OF RIBA

Riba al-Yad
 In cash and carry contract, the seller has to
surrendered the contracted item whereby he holds the
payment from buyer.
 Delay in surrendering the contracted item or the
payment, in cash contract, from any side of the parties
involved, is prohibited because that party can access
to the benefit of received item but not the other party.
The Nature of Money

One of the presumptions of the theory of interest is that

MONEY HAS BEEN TREATED AS A COMMODITY


• If merchant can sell a commodity for a price
higher than his cost, he can also sell his money
for a higher price than its face value.
• If one can lease his property and charge a rent
against it, he can also lend his money and claim
interest there upon.

ISLAMIC PRINCIPLES
DO NOT SUBSCRIBE TO THIS
In Islam, MONEY and
COMMODITY
have different characteristics
and uses
MONEY COMMODITY
• Has no intrinsic utility Has intrinsic utility
- cannot be utilized in direct - can be utilized directly
fulfilment of human needs without exchanging it for
- can only be used for some other thing
acquiring some goods &
services

• Money has no quality except A commodity can be of


as a measure of value and different qualities
medium of exchange
- all same denomination
money equals 100% to each
other

• Money cannot be pin- Commodity sold or


pointed in a transaction of purchased are identified to
exchange a particular unit
Islamic alternatives to interest Rates

 Trading as a way to avoid interest.


 Trading through various types of contracts such as
sale and purchase contracts, partnership contracts,
leasing and so on.
THE DIFFERENCES BETWEEN INTEREST AND
TRADE
Trade/Profit Interest

In trade the purchaser In interest the creditor get


and the vendor exchange for himself a definite
on the basis of equality.
For the purchaser derives amount of money for his
profit from that which he loan but all that the
purchased from vendor, debtor is certain of is the
while the latter gets time to use the money.
profits in consideration of During this time period it
the labour and time. is not always possible for
debtor to make a profit.
Trade/Profit Interest

From the point of view But in the case of


of trade, the moment a interest, the debtors
commodity is exchanged actually spends the
for its price, the amount borrowed from
transaction comes to an the creditor and has to
end. return the same amount
with an addition by way
of interest.
Trade/Profit Interest
The settlement of profit In the case of interest,
between the buyer and obviously the debtors
the seller is made on cannot settle the
equal terms. The buyer transaction on equal
purchases the article he terms with the creditor
needs and the seller gets because of his weaker
profit for the time, position.
labour and brains he As far as the money
employs in providing lender is concerned, he
that article to the gets that fixed sum of
buyers. interest which he
considers as his profit.
Trade/Profit Interest

If the debtors spends the Thus lending money at


borrowed money in interest might bring a
Fulfilling his personal guaranteed and fixed
needs, the time factor profit to one party and
definitely does not bring loss to the other, or a
any profit at all. And if guaranteed and fixed
he invests that money profit to one party and
in trade, commerce, an uncertain and
industry, agriculture, indefinite profit to the
then there are equal other.
chances of profit or loss.
Trade/Profit Interest

The trade charges his But money lender goes


profit, however high it on charging interest over and
may be, once and for all, over again and goes on
increasing with the passage of
time.
Trade/Profit Interest

The profit which the But there is no limit


Debtor makes on money to the interest the creditor
of the creditors, however, may charge on his money.
large it may, has after all
its own limits. He may, as something
Actually happens, receive all
the earning of the debtor,
may even deprives him of all
the means of livelihood or of
the articles of his personal
use and still might have the
same amount of debt against
him that was at the
time of borrowing.
Trade/Profit Interest

The transaction in trade But in the case of the


comes to an end as soon principal the debtor has to
as the article and its
price change hands. spend it first and the
After this the buyer is reproduce it and return it, to
not required to return the creditor along with the
anything to the seller. interest. Thus the debtor
As regards the rent of runs a double risk, he has to
furniture, house, land, reproduce the principal and
the lent thing is not also to produce its interest.
itself spent up but it
returned to the owner
after the term.
Thank you