ISLAMIC BANKING MANAGEMENT BWBS3043

CHAPTER 2:
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

INTRODUCTION

Riba or interest is completely prohibited under Islamic law, Riba is a prominent source of unjustified advantage, because Shariah does not consider money as a commodity such that there should be a price for its use. The existence of interest in todays global economic system is an issue of great importance to Muslims. As the world continues down the path of globalizations. 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, the 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. 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 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 Quran 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 Quran, Allah(swt) has mentioned the consequences of riba. The Quran did not declare the prohibition of riba in the early stage of revelation, rather we find that the complete prohibition of interest came sequentially. In the Quran, the term riba signifies an unlawful and forced addition to the payback value of money or goods lent from one person to another.

PROHIBITION OF RIBA IN THE HOLY QURAN

In the Quran Allah(swt) says: That which ye lay out for increase through the property of (other) people, will have no increase with Allah: But that which ye lay out for charity, seeking the countenance of Allah (will increase): it is these who will get a recompense multiplied. (30:39) That they took riba (usury), through they were forbidden and that they devoured mens substance wrongfully We have prepared for those among men who reject faith a grievous punishment. (4:161)

PROHIBITION OF RIBA IN THE HOLY QURAN

O ye who believe! Devour not usury doubled and multiplied; but fear Allah, that ye may (really) prosper. (3:140) Those who devour usury will not stand except as stands one whom the evil one by his touch hath driven to madness. That is because they say: Trade is like usury. But Allah hath 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) O you who have attained faith! Remain conscious of God, and give up all outstanding gains from Usury, if you are (truly) believers (2: 278)

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 orphans property without right and he who is undutiful to his parents.

TYPES OF RIBA
AL-NASIAH The term nasiah means to postpone or to wait . It refers to the time period that is allowed for the borrower to repay the loan in return for the addition of the premium. It makes no difference whether the return is a fixed or a variable percentage of the principal, an absolute amount to be paid in advance or on maturity, or a gift or service to be received as a condition for the loan Source : Al-Quran AL-FADL The excess over 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.

Arises if gold, silver, wheat, barley, dates and salt (Ribawi items) are exchanged against themselves with unequal proportion. They should be exchanged on the spot and be equal and alike, otherwise any change in transactions will create riba-al-fadl. Source : Hadith

Known as riba hutang ; it refers to the interest on loan.

Known as riba jualan ; it happen in trading transaction

TYPES OF RIBA
AL-NASIAH
This type of riba was quite widespread and well-known during the time of the Prophet (peace be upon him) and was practiced in a variety of ways: 1. The creditor would lend money to a debtor for a fixed period of time. When the time had expired and the debtor was unable to pay the debt, he was allowed more time to repay it on the condition that he would repay more than the principal. 2. The creditor would lend a debtor money for a fixed period of time at a determined rate of interest to be paid monthly. When the time had elapsed the debtor returned the principal to the creditor. 3. The creditor would lend a borrower money for a fixed period of time at a determined rate of interest to be paid together with the principal on the expiration of the time.

AL-FADL
This type of riba is the payment of an addition by the debtor to the creditor in the exchange of commodities of the same kind, such as money for money, flour for flour, rice for rice, etc. The Prophet (peace be upon him) said: Gold is to be paid by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like by like, payment being made on the spot. If anyone gives more or asks for more, he has dealt in riba. The receiver and giver are equally guilty. (Sahih Muslim)

Ribawi Materials

Ribawi goods are subject to Shariah rules on riba in sales, variously defined by the schools of Islamic law: items sold by weight and by measure, foods, etc. The Prophet Muhammad said: sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver, sell dates in exchange of equivalent dates, sell wheat in exchange of equivalent wheat, sell salt in exchange of equivalent salt, sell barley in exchange of equivalent barley, but if a person transacts in excess, it will be usury (riba). If the exchange was between different kinds, you can buy and sell them any how you like, as long as it is immediate such as sell barley for dates anyway you please, on the condition it is hand-to-hand (on the spot)

Ribawi Materials
Basis of Ribawi Materials In Islamic jurisprudence, ribawi materials are made up of 2 types: 1) Commodities 2) Price for exchanging commodities
Basis of Ribawi Material

Medium of Exchange

Food Stuffs

Ribawi Materials
Rule of exchange for Ribawi Materials a) Ribawi material of the same basis and of the same kind: under this scenario we are exchanging gold. i.e., same basis (medium of exchange) and the same kind (gold). The exchange rule is: Material must be of the same weight, measurement or number of units. Exchange of goods must be done immediately, i.e., on the spot and cannot be deferred b) Ribawi material of a Different kind and of the same basis: under this scenario, we are exchanging gold with RM, i.e., the same basis (medium of exchange) and a different kind (gold). The exchange rule is: difference in weight, measurement or number of units allowed. As such, measurement or numbers of exchanged materials need not to be observed. Exchange of goods must be done immediately, i.e., on the spot and cannot be deferred.

Ribawi Materials
c) Ribawi material of a different kind and a different basis: under this scenario, we are exchanging gold with wheat, i.e., a different basis (gold: medium of exchange & wheat: foodstuff) and a different king (gold & wheat). The exchange rule is: Difference in weight, measurement or number of units allowed. Therefore, the measurement or number of materials exchanged, need not be observed. Exchange of goods can be done immediately or deferred.

PROFIT
Halal Derive from trading The buyer purchases the items he needs and the seller gets profit for the time, labour and brains he employs in providing that items to the buyers. The profit which the debtor make on money of the creditors has after all its own limits. The transaction in trade comes to an end as soon as the items and its price change hands. After this the buyer is not required to return anything to the seller.

RIBA
Haram Derive from debt (al-nasiah) and trading (al-fadl) The debtors cannot settle the transaction on equal terms with the creditor because of his weaker position.

There is no limit to the interest the creditor may charge on his money.
The debtor has to spend it first and the reproduce it and return it, to the creditor along with the interest. Thus the debtor runs a double risk.

PROFIT Profit is the difference between the value of production and the cost of production Profit is post-determined, and hence, its amount is not known until the activity is done. Profit can be +ve, 0 or even ve.

RIBA Riba is the premium paid by the borrower to the lender along with principal amount as a condition for the loan Riba is prefixed, and hence, is no uncertainty on the part of either the givers or the takers of the loans Riba cannot be ve, it can at best be very low or 0.

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