Riba in Islam

&
The Islamic Banking
Alternatives
by
Dr. Salman Ahmad Khan
“O’ believers, devour not Riba, doubling its rate
many times. Fear Allah, and you will
prosper.”
Al-e -Imran 130 (Third Revelation)
 Ale-e-Imran 130

 The words “doubled and redoubled interest” are used

to highlight the shameful aspect of compound interest
and not to limit the scope of riba only to compound
interest.

 Similar to Allah’s command “Do not bargain on my

orders for paltry gains in this world”. If one gains the
entire world at the cost of hereafter, it is an
immeasurable loss - a paltry gain.

 It does not mean that it is prohibited to obtain paltry

gains but permissible to obtain a hefty price.
“Those who devour Riba shall rise up before Allah like men
whom Shaitan has demented by his touch; for they claim
that trading is like usury. But Allah has permitted trading
and forbidden usury. He that receives an admonition
from his Rabb and mends his ways may keep what he
has already earned; his faith is in the hand of Allah. But
he that pays no heed shall be among the people of fire
and shall remain in it forever.”
Al Baqarah 275 (Fourth Revelation)
 Al Baqarah 275

 Similarity between a Riba consumer and a mad person:

Both are insensitive to other’s sufferings.

 What does Riba do? Create monopolies & open doors to

selfishness, greed, injustice and oppression

 Islam on the other hand encourage highest moral ethics,

universal brotherhood, collective welfare and prosperity,
social fairness and justice.

 The above verse carries three strong expressions:

a) Haram b) People of Fire c) Forever dwellers
“Allah has laid His curse on Riba and blessed charity with
increase. He bears no love for the ungrateful sinners.”

Al Baqarah 276 (Fourth Revelation)

“O you who believe, Fear Allah and give up what remains
of your demand for Interest, if you are indeed a
believer. If you do not, then you are warned of the
declaration of war from Allah and His Messenger; But if
you turn back you shall have your principal: Deal not
unjustly and you shall not be dealt with unjustly.”

Al Baqarah 278 - 279 (Fourth Revelation)

 What is Riba?

Riba means any excess compensation over

and above the principal which is without due
consideration. Its a premium paid to the
lender in return for his waiting as a condition
for the loan. In the words of Prophet (SAW)
“Every loan that draws interest is riba”.
 Wisdom behind prohibition of Riba

 To prevent individual gains that cause loss to the

whole community. Bank caters loans only to rich
sector. Entire capital is utilized for the benefit of few.
Community gets poorer.

 Validity of a Transaction is not based on the

Financial Status of the party. It rather depends on
the intrinsic nature of the transaction itself. If a
transaction is valid by its nature it is Valid
irrespective of weather the parties are rich or
poor.
 Riba: Selected Ahadith

 From Hazrat Amr bin Al Aas (RA): “When interest

based dealing becomes common among people, they
will start facing draught and shortage of food. And
when bribery becomes norm among people they will
live under constant fear of their enemy”.

 From Hazrat Abu Hurayrah (RA) : The Prophet, peace

be on him, said: "There will certainly come a time for
mankind when everyone will take Riba and if he does
not do so, its dust will reach him." (Abu Dawud, Ibn
Majah)
The prohibition of Interest is not limited to
Islam, but it is shared by Judaism and
Christianity.
• Some of the old testaments have rendered riba as haram (See
Exodus 22:25, Leviticus 25:35-36, Deutronomy 23:20, Psalms
15:5, Proverbs 28:8, Nehemiah 5:7 and Ezakhiel 18:8,13,17 &
22:12).

• Agibi Bank was established circa 700 B.C. in Babylonian

and functioned exclusively on equity basis.
CLASSIFICATION OF RIBA

• Riba-un-Nasiyah or Riba-al-Jahiliya

• Riba-al-Fadl or Riba-al-Bai
CLASSIFICATION OF RIBA

Riba-un-Nasiyah or Riba-al-Jahiliya

“that kind of loan where specified repayment period

and an amount in excess of capital is

predetermined”( Imam Abu Bakr Jassas Razi)

CLASSIFICATION OF RIBA

Riba-un-Nasiyah or Riba-al-Jahiliya
“all loans that draw interest is riba”(Hadith quoted
by Ali ibn Talib)

“the loan that draws profit is one of the forms of

riba”(definition from Sahabi Fazala Bin Obaid)

CLASSIFICATION OF RIBA

Riba-un-Nasiyah or Riba-al-Jahiliya

real and primary form of riba.

premium paid to the lender in return for his waiting.
giving or taking of every excess amount in
exchange of a loan at an agreed rate irrespective
of whether it is low or high.
CLASSIFICATION OF RIBA

Riba-al-Fadl

excess taken in exchange of specific commodities

which are homogeneous

legal definition defers in every fiqh

CLASSIFICATION OF RIBA

Hadith prohibiting Riba-al-Fadl

‘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
CLASSIFICATION OF RIBA

Hadith prohibiting Riba-al-Fadl

But if a person transacts in excess, it will be riba.

However sell gold for silver anyway you please on

the condition it is hand-to-hand(spot sales) and sell

barley for date anyway you please on the condition

it is hand-to-hand(spot sales)
CLASSIFICATION OF RIBA

Imam Abu Hanifa on Riba-al-Fadl

commodities must have two common
characteristics

Weight
Volume
includes all commodities having weight or volume

and are being exchanged

CLASSIFICATION OF RIBA

Imam Shafi on Riba-al-Fadl

commodities must have two common
characteristics

•be a medium of exchange

•be edible
includes all commodities that are edible or can be

used as a medium of exchange(currency)

CLASSIFICATION OF RIBA

Imam Maalik on Riba-al-Fadl

commodities must have two common
characteristics

•can be preserved
•be edible
includes all commodities that are edible and can be

preserved
CLASSIFICATION OF RIBA

Imam Ahmad Bin Hanbal on Riba-al-Fadl

• First citation conforms to the opinion of Imam Abu
Hanifa
• Second citation conforms to the opinion of Imam
Shafi
• Third citation includes three characteristics at the
same time i.e. edible, weight and volume
CLASSIFICATION OF RIBA

Present day Islamic scholars on Riba-al-Fadl

if two characteristics i.e. weight and use as medium
of exchange is present then the following
transactions are not allowed
•A deferred sale of goods having weight and
homogeneous nature.
•A sale of unequal goods having weight and
homogeneous nature.
THE LAWS OF RIBA AL FADL

THE LAWS OF RIBA AL FADL

First law

Exchange of any of the six commodities with itself

but differing in quality, is allowed only under certain

conditions:
THE LAWS OF RIBA AL FADL

First Law
CONDITIONS OF EXCHANGE

•Any difference in value/quality should be ignored

• The commodities should be exchanged in equal
amounts (equal weight and volume).
•A person should sell his commodity against cash
at the market value and buy someone else’s
commodity in exchange of cash proceeds at the
market value.
THE LAWS OF RIBA AL FADL

Second law

Exchange of a product with its raw material is

allowed under certain conditions:

THE LAWS OF RIBA AL FADL

Second Law
CONDITIONS OF EXCHANGE
• If the characteristics of the product has been
totally changed by the industry, then different
amounts can be exchanged.
• If little difference has been made :-
either the exchange should be in equal weights
or one of the commodities should be sold in the
market against cash and the cash proceeds are

used to buy the needed one.

THE LAWS OF RIBA AL FADL

Third Law
• Exchange of any of the six commodities with one
another is allowed in unequal amounts but the
payment should not be deferred,

•Provided that the general conditions of a sale

contract are fulfilled.

TYPES OF RIBA

Riba al Nasiah is classified in two types:-

•Sood-e-Mufrad( Simple Interest)
interest calculated only on the initial investment
•Sood-e-Murakkab(Compound Interest)
reinvestment of each interest payment, on
money invested, to earn more interest.
TYPES OF RIBA

Quranic verses on absolute prohibition of Riba:

“O believers fear God and give up the interest that

remains outstanding (i.e. whether it is simple

interest or multiplied interest) if you are believers”

(Surah Al-Baqrah, verse 278)

TYPES OF RIBA

Quranic verses on absolute prohibition of Riba:

“If you do not do so then be sure of being at war
with God and His Messenger. But if you repent, you
can have your principal only (not any kind of
interest or premium). Neither should you commit
injustice nor should you be subjected to it”
(Surah Al-Baqrah, verse 278)
TYPES OF RIBA

Tijarti Sood(Commercial interest)

•interest paid on loan taken for productive and
profitable purpose
Sarfi Sood (Usury)
•interest paid on loan taken for personal need and
expenses
TYPES OF RIBA
 Riba: Present day arguments
Commercial interest and Usury

In the 17th Century, two new technical terms of interest

emerged after the establishment of Banking system
namely:

1. Tijarti Sood (Commercial Interest): Interest paid on

loan taken for productive and profitable purposes.

2. Sarfi Sood (Usury): Interest paid on loan taken for

personnel need and expense.
 Riba: Present day arguments
Commercial interest and Usury

There are two schools of thought on this issue.

First School:
This school present two arguments:

1. Riba as practiced during the days of Prophet

(SWS) was Usury.

2. Commercial interest does not exist during the

days of Prophet (SWS)
 Riba: Present day arguments
Commercial interest and Usury
Counter Argument:

1) “Riba as practiced during the days of the Prophet

(SAW) was only Usury”.

 Islam when prohibiting something does not only

prohibit the prevalent form, but all forms that might
erupt in future. The changed state does not change
the ruling.
E.g. Liquor, Pork, Corruption/Immorality: Today’s
modern and sophisticated forms does not change their
rulings.

 The same applies to interest and gambling.

 Riba: Present day arguments
Commercial interest and Usury
Counter Argument:
2) “Commercial interest did not exist in the days of
Prophet (SAW).”
 This claim is wrong as both forms of interest existed in
Islamic and pre Islamic history. Some examples:
 The tribe of Umr bin Aamir used to take interest from
the tribe of Mughairah.
 The tribe of Thaqeef advanced cash as well as
commodities on interest to the natives of Taif, the tribe
of Mughairah and the business community of Makkah.
 H.Abbas and H. Khalid bin Waleed (RA) formed a
company with joint capital whose prime business was
cash advancement on interest.
 Hazrat Usman (RA) lent money on interest.
 Riba: Present day arguments
Commercial interest and Usury

Second School of Thoughts:

This school present two arguments:

1) “In the present day banking since no-one is

exploited or faces injustice, therefore it cannot be
called Riba.”

Counter Argument:
Islam has not only prohibited that one party faces a
loss and the other gets profit but also prohibits one
party getting confirmed profit and the other party
unconfirmed profit from the same investment.
 Riba: Present day arguments
Commercial interest and Usury

2) There is a Qura’nic verse “O believers do not

devour one another’s possession wrongfully;
rather than that, let there be trading by mutual
consent” (Al Nisa verse 29). “Wrongful devouring”
only arise if the consent of one of the parties is
absent but in commercial interest the mutual
consent is present of both parties, so its not Riba.
 Riba: Present day arguments
Commercial interest and Usury

Counter Argument:

Mutual consent is not the criteria to render anything halal

which is haram. Would the act of adultery be allowed if
the condition of mutual consent is fulfilled? Similarly
there are many transactions in business which are
rendered illegal even with mutual concern.

Similarly mutual consent is present in commercial

interest and gambling too but inspite of that it has been
prohibited.
 Nature of Money in Islam

 One of the wrong presumptions on which all theories of

interest are based is that money has been treated as a
Commodity.
 It is therefore argued that just as a merchant can sell
his commodity for a higher price then its cost, he can
also sell his money for a higher price than its face
value, or just as he can lease his property and can
charge a rent against it, he can also lend his money
and claim interest there upon.
 Nature of Money in Islam

 Islamic principles, however, do not subscribe to this

presumptions. Money and commodity have different
characteristics and therefore they are treated
differently.
 Difference between Money
and Commodity
 Money has no intrinsic utility. It  A commodity, has intrinsic
cannot be utilized in direct utility and can be utilized
fulfillment of human needs. It directly without exchanging it
can only be used for acquiring for some other things.
some goods or services.  The commodities can be of
 The money has no quality different qualities.
except that it is a measure of Every commodity is different
value or a medium of from other like an old car and
exchange. new car have a different value.
 All the units of money of the  In commodities, the
same denomination, are transactions of sale and
hundred percent equal to each purchase are effected on an
other. identified particular commodity.
 An old and dirt note of  If A has purchased a particular
Rs.1000/- has the same value car by pinpointing it, and seller
as a brand new note of has agreed, he deserves to
Rs.1000/-. receive the same car.
 Difference between Money
and Commodity

 Money cannot be pinpointing in a transaction of

exchange.
 If A has purchased a commodity from B by showing
him a particular note of Rs.1000/- he can still pay him
another note of same denomination.

Conclusion:
Money (of the same denomination) is not held to be the
subject matter of trade like other commodities, it can
only be used as a medium of exchange. If for
exceptional reasons, money has to be exchanged for
money or it is borrowed, the payment on both side
must be equal.
 Nature of Money according to
Imam Al-Ghazali (R.A)

Imam Al-Ghazali (R.A) the renowned jurist and

philosopher of the Islamic history has discussed the
nature of money in an early period when the
western theories of money were not existent, at all.
He says:
The creation of Dharhams and Deenars (Money) is
one of the blessing of Allah. They are stones having
no intrinsic use of usufruct or utility but all human
beings need them, every body have a different
necessities and they have to fulfill there necessity,
therefore the transaction of exchange are inevitable.
But there must be a measure on the basis of which
price can be determined…….
 Nature of Money according to
Imam Al-Ghazali (R.A)

 Therefore all these commodities need a mediator to

judge their exact value….. Allah Almighty has, created
Dharhams and Deenars as judges and Mediators
between all Commodities so that all objects of wealth
are measure through them.
 That is why Allah has created them, so that they may
be circulated between hands and act as a fair judge
between different Commodities.
 So the one who is using money in a manner contrary to
its basic purpose is, in fact, disregarding the blessing of
Allah.
Money is neither a Consumption
Goods nor a Production Goods
 Ludwig Von Mises, the well-known economist of the
present century has dealt with the subject in detail. He
says:
 “it is true that the majority of economists reckon money
among production goods. Nevertheless, arguments from
authority are invalid: the proof of a theory is in its
reasoning, not in its sponsorship; and with all due
respect for the masters, it must be said that they have
not justify their position very thoroughly in the matter”.
He then concludes:
“Regarded from this point of view, those goods that are
employed as money are indeed what Adam Smith called
them, “dead stock, which… produces nothing. ”
 Islamic vs. Conventional Banks

CONVENTIONAL
 Borrows funds from the depositors paying
interest on the liability side of its balance-sheet.
ISLAMIC
 Partnership (Mudarabah) or profit and loss
sharing arrangement between the bank and
the depositors.
 Islamic vs. Conventional Banks

CONVENTIONAL
 Lends the funds to the borrowers, charging
higher interest on the asset or investment side.
ISLAMIC
 Profit and loss sharing (Musharaka) or trade
based financing arrangement (Mubadalah)
between the bank and its investment clients.
 Islamic vs. Conventional Banks

CONVENTIONAL
 Between the depositors and the bank, there is
an iron wall.
ISLAMIC
 Islamic bank entitles the depositors
-- to be informed of what the bank does with
their money.
-- to have a say in where their money would
be invested (Mudarabah).
 Islamic vs. Conventional Banks

CONVENTIONAL
 The interest or the return is predetermined or
fixed in advance.

ISLAMIC
 The profit or the return is based on the actual
investment outcome.
Islamic vs. Conventional Banks

CONVENTIONAL
Transactions are financial asset based

ISLAMIC
Transactions are real asset based
Jazak Allah
Khair