Riba in Islam

&
The Islamic Banking
Alternatives
by: Mufti Mahmood Ahmad
“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 Abi 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

Homogenous 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).
•No of direct exchange of commodities of the same
kind
•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 and the cash proceeds used to buy the
other 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
 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 taking 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

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
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 is 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, how ever, do not subscribe to this

presumptions. Money and commodity have different
characteristics and there fore 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 with out 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,
there fore 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)

 There fore 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 betweens hands and act as a fair judge
between different Commodities.
 So the one who is using money in an manner contrary
to its basic purpose is, in fact, disregarding the blessing
of Allah.
 Money is neither a Consumption
Goods nor a Production Goods
 Ludwing 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 n 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