Norms of Islamic Finance Prohibition of Riba: Ausaf Ahmad

NORMS OF ISLAMIC
FINANCE
Prohibition of Riba
AUSAF AHMAD
IBF-NET COURSE ON ISLAMIC FINANCE
Chennai
October 04 2008
In the name of
ALLAH
the most kind
The most merciful.
Islamic Finance: A Value
based Project
 Modern Economics claims to be
positive, universal and value neutral.
 Its value judgments are hidden.
 Islamic Finance does not hide its value
premises.
 The values of Islamic Finance are
based on Islamic norms and Islamic
Philosophy.
ISLAMIC NORMS OF BUSINESS
TRANSACTIONS
 Should not indulge in  Should not take

Riba advantage of
 Should not involve in anybody’s needs
Gharar  Should not withhold
 Should not indulge in supplies to raise prices
fraudulent behavior  Should not withhold
 Should not coerce information to take
advantage of
 Should not deal in
ignorance.
prohibited goods.
Prohibition of Riba in
Qur’an
FIRST REVEALATION:
That which you give as Riba (interest)
the people’s wealth increases not with
God; but that which you give in
Charity, seeking the goodwill of God,
multiplies manifold. [ 30 : 39]
Qur’an [contd.]
SECOND REVEALATION:
And for their taking interest even though
it was forbidden for them, and their
wrongful appropriation of other
people’s property, We have prepared
those among them who reject faith a
greivous punishment. [4: 161]
Qur’an [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]
Qur’an [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]
Qur’an [contd.]
 God deprives interest of all but
blesses Charity. He loves not the
ungrateful sinners (276)
Qur’an [contd.]
 O believers ! Fear Allah and give up

interest that remains outstanding, if
you are true believers. [2: 278]
Qur’an [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 is compulsory payment built in the
contract as a necessary condition. It is held
that any excess paid by by the debtor
voluntarily shall not be considered Riba.
Is Bank interest Riba?
 Difference of opinions:
 Traditional View:
– Yes, It resembles Riba al Diyun where it
is built in the contract.
 Liberal View:
 No, it is radically different from Riba al Diyun
 There is near consensus around the

traditional View.
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 the Hadith
 Is Riba confined to six commodities: Gold,
silver, wheat, barley, dates and salt.
 Two categories: precious metals (medium
of exchange) and food items
 Is Riba confined to these two categories?
 What is the meaning for Like for Like and
hand to hand [ Mthlin bi mithlin, yadin bi
yadin.
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
 The attempts to dilute the injunction
against Riba have not been
successful.
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.
ISLAMIC BANKING AND
FINANCE
 The justification of Islamic banking
and finance is built around the
prohibition of Riba
 It assumes that Riba is prohibited.
 It suggests to conduct banking and
financial activity on interest free basis .
That is why it is known as interest free
banking also.
THANK YOU VERY MUCH.

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NORMS OF ISLAMIC

 Should not indulge in  Should not take

 O believers ! Fear Allah and give up

Jabir b. Abdallah said: The Prophet

 There is near consensus around the

 Narrated by : Abu Saeed Khudri

 It is related with the exchange of one

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