Riba: Definition,

Prohibition, Classification,
and Misconceptions
 Definition of Riba

 The Arabic word: riba, literally means growth, excess,
addition, expansion, surplus or increase

 According to Shariah terminology, implies any excess

compensation without due consideration (consideration
does not include time value of money)

 “O those who believe, fear ALLAH and give up what

still remains of the riba if you are believers. But if you
do not do so, then be warned of war from ALLAH and
His Messenger. If you repent even now, you have the
right of the return of your capital; neither will you do
wrong nor will you be wronged.” Al Baqarah 2:278-9
 PROHIBITION OF RIBA IN ISLAM


Stages of Revelation:

 First stage: al-Rum, 39

 Second stage: al-Nisa’, 161

 Third stage: al-i’Imran, 130

 Fourth stage: al-Baqarah, 275-281

 PROHIBITION OF RIBA IN ISLAM
Stages of Revelation

 First stage: al-Rum, 39


َ‫و َ ﺟ ۡ ﮧ‬ ٍ ‫ز َ ﮐٰﻮة‬ ِ ‫اَﻣ ۡﻮ َال‬
“And whatever riba you give so that it may increase in the wealth
of the people, it does not increase with ALLAH.”

 Second stage: al-Nisa’, 161

ِ‫ﻣ‬
“And because of their charging riba while they were prohibited
from it.”
 PROHIBITION OF RIBA IN ISLAM
Stages of Revelation (continued….)
 Third stage: al-i’Imran, 130

َ‫ن‬ ً ‫ﻌ َ ﻔَ ۃ‬ ‫ﮩَ ﻦ َ ا ٰ ا ﻻ َﳇ ُ ُﻮا اﻟﺮ ّ ِﺑٰۤﻮا‬
“O those who believe do not eat up riba doubled and redoubled.”

 Fourth stage: al-Baqarah, 275-281

َ ‫ﻊَ و‬ َ‫ﻮا ۘو َ ا‬ ِ‫ﳇ ُ ُﻮن ۡ َ اﻟﺮ ّ ِﺑٰﻮاﻻ َ ﻘﯾ َُﻮﻣ ُۡﻮ ۡن َ اِﻻ ﻘُﻮ ۡ ﺘ ﯾ ََﺨ َﺒﻄ ُ ﮧُﻦ ُ ﻣﻄ ِٰﻦ َ اﻟۡﻤ َﺲ ِّ ؕذ ٰ ﻢ ۡﻧﮩُ ﻗَﺎﻟُﻮ ۡۤ ا ا‬
ِ‫ﻮ اﻓَؕﻤ َﻦ ۡ ﻣء َە َٗﻮ ۡ ﻋ ِﻈ َ ۃﻣٌ ِّﻦ ۡ ﻓَﻣﺎﻧَۡﺎﺘَﮩٰﺳ َ ﻠَﻒ َ ؕ و َ اَﻣ ۡﺮ ُ ە ٗۤ ا‬
﴾۲۷۵﴿ َ ‫ُ ﮩَ ن‬ ٰ ۡ َ‫ِﮏ َﲱا‬ ٓ ٰ‫ﺌ وﻟ‬ َ‫و‬
“Those who take interest will not stand but as stands whom the demon has
driven crazy by his touch. That is because they have said: ‘Trading is but like
riba‘. And ALLAH has permitted trading and prohibited riba. So, whoever
receives an advice from his Lord and stops, he is allowed what has passed, and
his matter is up to ALLAH. And the ones who revert back, those are the people
of Fire. There they remain for ever.”
 PROHIBITION OF RIBA IN ISLAM
Stages of Revelation (continued….)

﴾۲۷۶﴿ ٍ ۡ ‫ﺛِﲓ‬
 ُِ ‫ﳛ‬ ؕ ِ‫ﺖ‬ ُ َ ‫ﻮا و‬ َ‫ﯾ‬
“ALLAH destroys riba and nourishes charities. And ALLAH
does not like any sinful disbeliever.”

ۡ ‫ﻮة َ ﻟَﮩُﻢ ۡ اَ ﻢ ۡ ﻋﺪ ِ َﻨۡ ر َ ﺑ ّ ِﮩِﻢ ۡو َ ۚ ﺧﻻ ََﻮ ۡف ٌ ﻢ ۡ ﮩِو َ ﻻ َ ُﻢ‬ ٰ ‫ﻮة َو َ ا‬ َ‫ﺖ ِ و َ ا‬

ٰ ‫اِ ﻦ َ ا ا ٰو َ ﲻ َ ِﻠُﻮا اﻟﺼ ّ ٰﻠِﺤ‬
﴾۲۷۷﴿ َ ‫ﳛﺰ َ ۡﻧ ُﻮ ۡن‬
“Surely those who believe and do good deeds, establish Salah
and pay Zakah, have their reward with their Lord, and there is
no fear for them, nor shall they grieve.”
 PROHIBITION OF RIBA IN ISLAM:
Stages of Revelation (continued….)

﴾۲۷۸﴿

ۡ ُ ۡ‫ا ﻣ َﺎ ﺑَﻘ ﻣِﯽ َِﻦ َ اﻟﺮ ّ ِﺑٰۤﻮا اِن ۡ ﮐُﱲﻨ‬ ٰ ‫ﮩَ ﻦ َ ا‬
O those who believe, fear ALLAH and give up what still remains of
the riba if you are believers.
﴾۲۷۹﴿ َ ‫س ۡ ُﻣ ۡﻮاََاﻟِﲂ ُ ۡ ۚﺗﻻ ََﻈ ۡ ﻠِﻤن َُﻮ ۡ و َ ﺗﻻ َُﻈ ۡ ﻠَﻤ ُﻮ ۡن‬
‫ء ُو‬ ِ‫ﻟِﮧٖ ۚو َ ا‬ ۡ ‫ا ﻓَذﺎَۡﻧ ُﻮ‬ ۡ ‫ﻓَﺎِن‬
But if you do not, then listen to the declaration of war from ALLAH
and His Messenger. And if you repent, yours is your principal.
Neither you wrong, nor be wronged.
﴾۲۸۰﴿ َ ‫ن ۡﱲ ُ ۡﮐُﻨۡ ﺗَﻌ ۡ ﻠَﻤ ُﻮ ۡن‬ ۡ ‫ُﴪ ۡ َﻓةَ ٍَﻈ ِ ﺮ َ ةٌﱃاِ ٰﴪ َ َ ة ٍ ؕو َ اَن‬
ۡ ‫و َ اﰷِنَ ۡ ن َ ذﻋ ُو‬
And if there be one in misery, then deferment till ease. And that you
leave it as alms is far better for you, if you really know.
﴾۲۸۱﴿ َ ‫ﻢ ۡ ﻻ َﻈ ۡﯾُﻠَﻤ ُﻮ ۡن‬ ۟‫٭‬ ِ‫ﮧِ ا‬ َ‫ا ﯾ‬
And be fearful of a day when you shall be returned to ALLAH, then
everybody shall be paid, in full, what he has earned. And they shall
not be wronged.”
 Implication of Quranic Ayahs
pertaining to Riba

 Riba is a type of increase in a loan: ۡ ُ ‫س ۡ ُﻣ ۡﻮاََاﻟِﲂ‬
‫و َ اِن ۡ ﻓَﻠَﲂ ُ ۡر ُء ُو‬
“you shall have your capital sums (ru`us alamwal)”

 Taking riba is zulm on the borrower: َ ‫ﺗﻻ ََﻈ ۡ ﻠِﻤ ُﻮ ۡن َ و َﻻﺗ َُﻈ ۡ ﻠَﻤ ُﻮ ۡن‬
“you do not deal unjustly and you are not dealt with unjustly”

 Depriving the lender of ra`s al-mal is zulm: َ ‫ﺗﻻ ََﻈ ۡ ﻠِﻤ ُﻮ ۡن َ و َﻻﺗ َُﻈ ۡ ﻠَﻤ ُﻮ ۡن‬
“you do not deal unjustly and you are not dealt with unjustly”

 Riba often involved doubling and redoubling of the debt: ً ‫اَﺿ ۡ ﻌ َﺎﻓًﺎ ﻌ َ ﻔَۃ‬
“O you who have believed! Devour not riba, doubled and redoubled.”
 Implication of Quranic Ayahs
pertaining to Riba (continued…)

 Charity is an alternative or an opposite to riba:
ِ‫ﺖ‬ ُ َ ‫ﻮا و‬ َ‫ﯾ‬
“God brings riba to destruction, but gives increase (yurbi) to sadaqah. God
loves not anyone ungrateful and wicked”

 Riba is not like sale:

‫ﻮا‬ َ‫ﻮا ۘو َ ا‬ ِ‫ﻢ ۡﻧﮩُ ﻗَﺎﻟُﻮ ۡۤ ا ا‬ ٰ‫ذ‬
“Those who eat riba do not stand except as stands one whom Shaytan has
thrown by the touch into confusion. That is because they say: "Sale is like
riba". God has permitted sale and forbidden riba”

 Riba leads to destruction and sadaqah to growth:

ِ ‫ﻮاﺮ ۡو َ ُﰉ ِ ﺖ‬ َ‫ﯾ‬
“God brings riba to destruction, but gives increase (yurbi) to sadaqah ”
 Implication of Quranic Ayahs
pertaining to Riba (continued…)

 Dealing in riba is gaining through the wealth of other
people:
“That which you give for riba so that it may increase through the property
of (other) people, will have no increase with God … . “

 Riba was prohibited earlier for the Jews:

‫ﻋَ ﻨۡ ُﮧ‬
“And their taking of riba, though they were forbidden from it ”

 Taking riba is a very serious sin:

‫ﻟِ ٖﮧ‬ ۡ ‫ا ﻓَذﺎَ ۡﻧ ُﻮ‬ ۡ ‫﴾ ﻓَﺎِن‬۲۷۸﴿ ۡ ُ ۡ‫ا ﻣ َﺎ ﺑَﻘ ﻣِﯽ َِﻦ َ اﻟﺮ ّ ِﺑٰۤﻮا اِن ۡ ﮐُﱲﻨ‬ ٰ ‫ﮩَ ﻦ َ ا‬
“O you who believe! Fear God, and give up what remains (due to you) from
riba, if you are believers. If you do not do it, then take a notice of war from
God and his Messenger”
 PROHIBITION OF RIBA IN ISLAM
Evidence from Hadith

َ ‫ آﻛِﻞ‬- َ ‫ﻠﱠﻰ ﷲ ﱠ ُ ﻋ َ ﻠَﯿْﮫِ و َ ﺳ َ ﻠﱠﻢ‬-َ ‫ﻌَﻦ» َ ر َ ﺳ ُﻮل ُ ﷲ ﱠ ِﺻ‬:َ‫ ﻗَﺎل َﻟ‬- ُ‫َﺿ ِ ﻲ َ ﷲ ﱠ ُ ﻋ َ ﻨْﮫ‬- ‫ﻋ َﻦ ْ ﺟ َ ﺎﺑِﺮ ٍر‬
. ٌ ‫ھُ)ﻢ ْ ﺳ َﻮ َاء ٌ ( ر«َو َاهُ ﻣ ُ ﺴ ْ ﻠِﻢ‬: َ ‫ و َ ﻗَﺎل‬،ِ‫اﻟﺮ ﱢ ﺑَﺎ و َ ﻣ ُﻮ َ ﻛِﻠَﮫُ و َ ﻛ َﺎﺗِﺒَﮫُ و َ ﺷ َﺎھِﺪ َ ﯾْﮫ‬

From Jabir : The Prophet ‫ ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬cursed the

receiver and the payer of interest, the one who records
it and the two witnesses to the transaction and said:
"They are all alike [in guilt]." (Muslim, Tirmidhi and
Musnad Ahmad)
 PROHIBITION OF RIBA IN ISLAM
Evidence from Hadith(continued…)

ِ ‫ ﺻ َ ﻠﱠﻰﷲ ﱠ ُ ﻋ َ ﻠَﯿْﮫ‬- ِ ‫ ﻗَﺎل َ ر َ ﺳ ُﻮل ُﷲ ﱠ‬: َ ‫ﯿﻞﻟِْﻤ َﻼ َ ﺋِﻜ َ ﺔِ ﻗَﺎل‬ ‫ﻋ َﻦ ْ ﻋ َ ﺒْﺪ ِﷲ ﱠ ِ ﺑْﻦ ِ ﺣ َ ﻨْﻈَﻠَﺔَﻏ َﺴ ِ ا‬
ُ‫ " د»ِر ْ ھَﻢ ُ ر ِﺑًﺎ ﯾَﺄْﻛ ُ ﻠُﮫُاﻟﺮ ﱠﺟ ُ ﻞ ُو َ ھُﻮ َ ﯾَﻌ ْ ﻠَﻢ ُ أَﺷ َ ﺪ ﱡﻣ ِﻦ ْ ﺳ ِ ﺘﱠو َﺔٍﺛَﻼ َ ﺛِﯿﻦ َ ز ِﻧْﯿَﺔً« "ر َ و َ اه‬: َ ‫و َ ﺳ َ ﻠﱠﻢ‬
. ‫أَﺣ ْ ﻤ َ ﺪ ُو َاﻟﺪ ﱠار َ ﻗُﻄْﻨِﻲ ﱡ‬
ُ‫ " ﻣ»َﻦ ْ ﻧَﺒَﺖ َﻟَﺤ ْ ﻤ ُ ﮫ‬: َ ‫اﻹ ْ ِ ﯾﻤ َﺎن ِ ﻋ َﻦ ِ اﺑْﻦ ِ ﻋ َ ﺒﱠﺎسٍو َ ز َاد َ و َ ﻗَﺎل‬ ِ‫و َ ر َو َ ىاﻟْﺒَﯿْﮭَﻘِﻲ ﱡ ﻓِﻲ ﺷ ُ ﻌَﺐ‬
“ «ِ‫ﻣ ِﻦ َاﻟﺴ ﱡﺤ ْ ﺖِ ﻓَﺎﻟﻨﱠﺎر ُ أَو ْ ﻟَﻰ ﺑِﮫ‬

From 'AbdALLAH ibn Hanzalah : The Prophet ‫ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬, said:
"A dirham of riba which a man receives knowingly is worse than
committing adultery thirtysix times" (Mishkat al-Masabih, Kitab
al-Buyu', Bab alriba, on the authority of Ahmad and Daraqutni)

Bayhaqi has also reported the above hadith in Shu'ab al-iman with
the addition that "Hell befits him whose flesh has been nourished
by the unlawful."
 CLASSIFICATION OF RIBA


 Riba-un-Nasiyah or Riba-al-Jahiliya or Riba al-Quran
‘Riba An Nasiyah’ is defined as excess, which results from
predetermined interest (sood) which a lender receives over and above
the principle (Ras ul Maal)’

 Riba-al-Fadl or Riba-al-Bai or Riba al-Hadith

‘Riba-al-Fadl is an excess which is taken in exchange of specific
homogenous commodities and encountered in their hand-to-hand
purchase & sale’
CLASSIFICATION OF RIBA (continued…)

Riba-un-Nasiyah or Riba-al-Jahiliya or Riba al-Quran
“O those who believe, fear ALLAH and give up what still remains of the
riba if you are believers. But if you do not do so, then be warned of war
from ALLAH and His Messenger. If you repent even now, you have the
right of the return of your capital; neither will you do wrong nor will you
be wronged.” Al Baqarah 2:278-9

 real and primary form of riba

 premium paid to the lender in return for ones 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 (continued…)

 Riba-al-Fadl or Riba-al-Bai or Riba al-Hadith


ُ ‫ " ا»ﻫ َﺐ‬: - ِ ‫َ ر َﺳ ُﻮل ُ ا‬: َ‫ﻗﻗَﺎ َلﺎل‬- - ْ ‫ﻋ َﻦ‬
ِ
. ٌ ِ ‫ ُ ﻣ ُﺴ ْ ﲅ‬."‫و َاﻟ ْﻤ ُﻌ ْﻄ ِﻲ ﻓ ِﻪ ِ ﺳ َ ﻮ َارءٌ«َو َ اﻩ‬
The Prophet ‫ ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬said, "Sell gold in exchange of
equivalent gold, sell silver in exchange of equivalent silver, sell
wheat in exchange of equivalent wheat, sell barley in exchange of
equivalent barley, sell date in exchange of equivalent date, sell salt
in exchange of equivalent salt, 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 and sell barley for date anyway
you please on the condition it is hand-to-hand.”
 Six commodities in fiqh terminology are called “Amwal-e-
Ribawiya”
 Medium of
Loan Exchange
Factor

Riba

Quantity
Factor Amwal-e-
Ribawiah
 Classification of Amwal-e-Ribawiya


 Imam Abu Hanifa includes all commodities having characteristics of weight
or volume and are being exchanged

 Imam Shafi includes all commodities that are edible or can be used as a
medium of exchange(currency)

 Imam Maalik includes all commodities that are edible and can be preserved

 Imam Ahmad Bin Hanbal includes:

 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
 Abu Hanifa Imam Shafi Imam Maalik

Medium of
Gold Weight Preserved
Exchange

Medium of
Silver Weight Preserved
Exchange

Dates Volume Edible Edible

Wheat Volume Edible Edible

Salt Volume Edible Edible

Barley Volume Edible Edible

 Money and its
Food
Equivalents

1EQ:Equal Quantity
Barley Salt Wheat Dates Silver Gold
PD: Prompt Delivery

√ √ √ √ PD EQ1, PD1 Gold

Money and
its
√ √ √ √ EQ, PD PD Silver Equivalents

PD PD PD EQ, PD √ √ Dates

PD PD EQ, PD PD √ √ Wheat
Food
PD EQ, PD PD PD √ √ Salt

EQ, PD PD PD PD √ √ Barley
Nature of Money in Conventional Economy


 One of the presumptions of the theory of interest is that money is
treated as a commodity

 Merchant can sell a commodity for a price higher than its cost,
likewise, one can also sell money for a higher price than its face value
(buy-sell situation)

 One can lease his property and charge a rent against it, likewise, one
can also lend money and claim interest thereupon (rent situation)

Islamic rejects this assumption and treats money as a medium of exchange

 Difference between Money and Goods/Services
Money Goods/Services
Money is treated as a commodity in an Goods/services as truly qualify to be
economy categorized as commodities

Money has no intrinsic utility cannot be Goods/Services has intrinsic utility can
utilized in direct fulfillment of human be utilized directly without exchanging
needs and can only be used for acquiring it for some other thing
some goods & services

Money has no quality except as a A commodity can be of different

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

Money cannot be pin-pointed in a Commodity sold or purchased are

transaction of exchange identified to a particular unit

Time value is the basis for charging Profit on trade of goods or charging on
interest on capital providing service is the basis for
earning profit.
 Scope of Prohibition of Riba:
Personal & Commercial Loan

Riba encompasses both types of loan:

 Sarfi Sood (Usury): interest paid on loan taken for personal

need and expenses

 Tijarti Sood(Commercial interest): interest paid on loan

taken for productive and profitable purpose

Prohibition of riba in Islam encompasses

both these types
Misconception 1 “Riba, as practiced during the
days of Prophet ‫ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬, was only Usury”

 This claim is groundless, since Islam when prohibiting
something does not only prohibit one form of it that is
prevalent, but all forms that might erupt in future. The
changed state does not change the ruling for e.g. Quran
has prohibited the following:

 Liquor (Khamar)
 Pork (Khinzeer)
 Corruption/Immorality (Al Fahsha)

Although a lot of sophisticated ways have been developed of

these evils from the time of Quranic revelations prohibit them
and the ruling stands forever
 Misconception 2 “Commercial interest is different
from Personal Loan ”

 Syedna Abu Hurairah narrated that the Prophet ‫ ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬said, “He
who does not abandon Mokhabara, will be caught in a war against ALLAH &
His Prophet ‫”ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬

 Mokhabara : an agreement between the landlord and cultivator;

 landlord gives his land to cultivator for cultivation purposes
 on pre-agreed amounts of the crop
 irrespective whether the production is low or high

 Prophet ‫ ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬had called Mokhabara a form of riba

 For same investment, Quran has not only prohibited:

 one party faces a loss and the other gets profit
 one party getting confirmed profit and the other party unconfirmed
profit (Mokhabara)
Misconception 3 “Commercial interest did not
exist in the days of Prophet ‫” ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬

 The tribe of Umro bin Aamir used to take interest from the
tribe of Mughairah; the two tribes of Arabia have been
pointed out who actually operated as trading companies

 History of the city of Ta’if , their main exports being liquor,

raisins, currants, wheat, wood and their major industry
being leather and dyeing.

 The tribe of ‘Saqeef’’ (Jewish tribe) advanced cash on

interest, not only to the natives of Ta’if, but to the tribe of
Mughairah, Makkah
Misconception 3 “Commercial interest did not exist
in days of Prophet ‫( ” ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬continued…)

 This advancement in terms of cash and commodities
between wealthy tribes of Taif and Makkah was only for
their commercial purposes

 Interest was received on cash as well as on commodities

 At the time of signing the peace treaty with the people of

Ta’if, the Prophet ‫ ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬imposed conditions:
 Total elimination of interest based transactions
 Giving up of interest owed to and from them
Misconception 3 “Commercial interest did not exist
in days of Prophet ‫( ” ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬continued…)

 Two profitable trips by tribe of Quraish of Makkah: Yemen and Syria

 With business & trade becoming livelihood of Makkah, investment

in terms of cash for commercial purposes and charged interest

 Qura’n rendered interest haram (illegal) that the transaction of

interest based loans is a type of trade in which the return on capital
can be earned as in the case of rent received from assets

 They could not differentiate between excess in shape of profit during

a trade and excess in the shape of interest at the time of repayment of
loan
 Misconception 4 “Quran has prohibited wrongful
devouring but mutual consent allowed”


“O believers do not devour one another’s possession wrongfully; rather
than that, let there be trading by mutual consent” (Al Nisa:29)

 Mutual consent is not the criteria to render anything prohibited or not in

Islam

 Adultery, gambling etc. be allowed if the condition of mutual consent is

fulfilled?

 To quote the words of Quran “except the legitimate business…….”

 Misconception 5 “Time Value of Money”


 Islam does not permit the reward for time on basis of money but allows
reward for efforts and risk-taking activity in business

 Money in Islam is just a medium of exchange;

 It cannot earn more money by itself without putting it into real
productive actions such as sale, lease, investment
 Lending does not constitute, by itself, a productive economic activity.
But, investment is an economic activity that needed to be
compensated for any profit or loss received during the time

 Investment is different from pure riba-based risk-free debt;

 A seller in a trade, whether on spot or deferred payment basis, is free
to charge any price and profit that accrues to one is legitimate. There
is a possibility that his “spot” price may be lower than his “deferred”
price
 Misconception 5 “ Time Value of Money”
(continued…)

 Such price differential is obviously due to deferment and is recognized as
the time value of money

 Such time value of money in sales agreement is acceptable in the Islamic

framework

 What is not permissible is the time value of money in the context of debt.

 However, when the buyer in a deferred-payment sale decides to defer his

payment beyond the due date for payment, neither he nor the seller is
allowed to increase the price

 Price is now in the nature of debt. A higher debt replacing a lower debt
results in riba on the old debt.
 Misconception 5 “ Time Value of Money”
(continued…)

 Time value of money is recognized by Shariah but only on sales contracts
not in debt contracts
 Spot or deferred payment may be different in sales contract

 Such price differential is obviously due to deferment and is recognized

as the time value of money

 Nevertheless, if payments deferred beyond some due date, neither he

nor the seller is allowed to increase the price

 Shari’a applies Islamic time value of money in such a way that exists in
mudharaba contacts;
 Rabbul-mal has the right to a share of the venture’s profits because he
has given up current consumption or the ability to invest the funds
elsewhere ( but at the same time rabbul-mal may suffer loss too)
 Misconception 6 “Inflation”


Does interest rates cause inflation? Several studies illustrate that interest
is one of the causes of inflation

If surplus on loan amount is only attributable to actual value loss due to

inflation, there will be no commercial incentives to banks

 Solution 1: However, one solution to protect the purchasing power of

money lent, the lender and borrowers can agree that the loan can be
denominated in terms of some relatively stable commodities such as gold or
diamond, or a strong currency

 Solution 2: To overcome the decline of the value of money is the Islamic

way of profit-and-loss sharing partnership, so both parties share the risk.
 Misconception 6 “ Inflation” (continued…)


 Few argue to associate the repayment of loan to indexation

 Indexation is a technique to adjust income payments by means of a price

index, in order to maintain the purchasing power of the public after inflation

 Shariah justifies indexation for wages to face the inflationary rise in prices

 Majority of scholars oppose indexation of financial assets;

 Islam considers only the original amount lent should be repaid
 The presence of inflation will result in the decline in the purchasing
power of lender’s money whether it is given to the borrower or not
 The factors that lead to inflation are beyond the borrower’s control, so
why the borrower should be held responsible
 Even if indexation is allowed there is no perfect index to fully and
fairly capture the loss of the value.
Misconception 7 “If Interest is not excessive then
its not Riba”

In Quran, interest with high rates is only not permissible;
“O those who believe do not eat up riba doubled and redoubled”
Surat Aal-Imran (3:130)

 Verses of the Qur’an on the same subject matter must be studied in

relation to each other;
“O those who believe fear ALLAH and give up whatever remains of
riba, if you are believers” Al-Baqarah (2:278)

 Every amount, regardless of magnitude, over and above principal is riba

 Misconception 8 “No difference between
Interest and Profit”

Bank interest resembles profit in murabaha

 ALLAH TAALHA states in the Qur’an that some people might raise
the issue of the apparent similarity of profits from trade and profits
from riba; however, only profits from trade are allowed

 Generally, trade means exchange of any goods for money. You can buy
or sell goods for money at any price
 Misconception 8 “No difference between
Interest and Profit” (continued…)

 Murabaha is a particular kind of sale where the seller expressly mentions
the cost of the commodity purchased, and sells it to another person by
adding some profit thereonnallowing one to pay you for it over time

 In riba, you lend someone some money and require that person to pay
back a greater value of money than what is borrowed

 Murabaha prevents you from being caught in a spiral of debt, as the

amount that you pay fixed before hand. You cannot get a situation where
you have large debts that you cannot pay off and which rise every year
due to interest

 Several types of risks are associated with trade while charging riba
(interest) is risk free; there are other legal means to avoid risk of default
 Misconception 9 “Riba is only relevant to
consumption loans, not commercial loans”

 First, the prohibition of riba concerns the unjustified excess, not the use of
funds

 The Qur’anic prohibition of riba includes all forms of it without any

specifications of whether it is for consumption or production and
regardless of the financial status of a party

 Since riba is equal to interest, it makes no difference whether the loan is

for consumption or business purposes

 Lending in Islam is considered as "a benevolent act with a view to

helping someone in need;
 If someone needs capital for commercial purposes, then capital
should be given in a risk-sharing basis
 if someone needs funds to overcome some short term need, then such
need should not be exploited and the borrower should not be put
under undue burden
 Misconception 10 “If it is not excessive;
doubled and redoubled, then it is not Riba”


” 
Verse of the Quran; “O those who believe fear ALLAH and give up
whatever remains of riba, if you are believers” Al-Baqarah (2:278)

 Every amount, regardless of magnitude, over and above principal is riba

 Verse of the Quran; states “Do not sell My verses for a little price” Surat
Al-Baqarah (2:41)

 Does this imply that one can sell verses for a high price?

 The expression “doubled” only meant to show how bad the practice of
riba, and emphasize the added severity of the sin due to its excessiveness
Misconception 11 “Riba is Allowed under
Dharura (Necessity)”

In order to survive economically it is necessary to adopt riba based
economic system; otherwise, we cannot survive in this world

 Dharura is applied only to life-threatening circumstances

 To identify dharura that necessitate riba the individual debtor

must answer the following two questions with absolute sincerity;
 Is the purpose of the riba-based loan to protect an absolute
necessity?
 Have all other permissible alternatives been exhausted?
 Misconception 11 “Riba is Allowed under
Dharura (Necessity)” (continued…)

 Is the purpose of the riba-based loan to protect an absolute necessity?
 At the institutional level, removal of riba from the economy does
not imply that financial institutions will have to give charitable
(interest-free) loans
 Islam provides means of financial intermediation in the form of
profit and loss sharing (absolute necessity absent)

 Have all other permissible alternatives been exhausted?

 Islam regards giving a benevolent loan is highly commendable
(alternative is present)
 However, the taking of a loan is discouraged and limited to
cases of absolute necessity.
 Misconception 12 “Interest represents an
opportunity cost which cannot be denied”

According to this argument, the lender could use his money to
consume goods or services or could benefit from investing this
amount today. The postponement of consumption or investment
involves sacrifice and hence, deserves compensation

 The notion of interest as a reward for deferring consumption is

rejected in Islam considering material aspects as well as non-
material dimensions

 Saving by itself should not be rewarded by an increase in capital;

the ability to save is a reward by itself

 There may be some alternative uses to the loaned fund but there is
no guarantee that these uses would guarantee a return
Misconception 13 “Interest as a compensation
for risk element”

Lender faces different economic risks including the default of the
borrower, unanticipated changes in economic circumstances such as
rapidly rising inflation; taking all these risks one should be compensated

 It is always true that lenders may face different types of risks whether
he lend his money or not

 Shariah-based contracts provide rules and regulations that protect

both lenders and borrowers in ways other than charging interest;
 Profit-and-loss sharing based instruments
 Sale based contract instruments
 Lease based contract instruments
Some examples of Riba
Some examples of Riba(continued…)
 Menace 1 “Riba is a cause of injustice and
exploitation”

 Riba is considered a form of injustice and exploitation, which
contradicts the core Islamic teachings of social justice

 It is unjust for lenders to guarantee return with no involvement in risk

 Because riba entails taking advantage of a man’s inferior economic

position it breeds hatred, jealousy and ill-will towards the rich

 This behavior kills the spirit of cooperation in the society and

discourages people from doing good to each other
 Menace 2 “Riba leads to the creation of
materialistic society”



In Islam, incurring debt is discouraged. The Prophet ‫ﺻﻠﯽ ﷲ ﻋﻠﯿہ وﺳﻠﻢ‬
(pbuh) refused to offer salat-ul janazah of a person who died indebted

 Lending is a charitable act while borrowing money should be limited

to cases of dire needs

 On the other hand, permitting riba enables lending to become a viable

business; banks exploits one’s inherent greed to spend beyond their
means by offering credit which will result in negative repercussions

 People have to work harder and harder for longer hours, and may
exercise unethical business practices in order to repay excessive bank
debt

 All this leads to less emphasis on the family, negative effect on social
relations amongst the people which leads to social ills
Menace 3 “Riba discourage productive work”



Interest-based financing results more wealth collected by lenders
without exerting much effort or contributing to productive activity

 Money by itself is not part of capital in economic definition and

hence, is not a productive resource and should not be rewarded

 Money functions as a medium of exchange or a store of value and can

only be used for acquiring goods or services

 Managerial and entrepreneurial skills along with the productive use

of money are the essential factors in converting it into capital

 The lenders of the money have no input in the conversion process

and thus, they do not deserve a reward

 Riba encourages the creation of wealth with no effort from its

provider at the cost of borrower, thus the value of work is reduced
Menace 4 “Riba impedes healthy economic
development”



Riba generates effects on production as security oriented rather than
growth oriented confined to creditworthiness, collateral with
profitability

 Banks are not willing to experiment new and unproven methods of

production, especially for small-scale enterprises and agriculture

 Lenders preferred to finance large-scale businesses, which results in

domination of big businesses over smaller entrepreneurs

 Riba discourages innovation since potential entrepreneurs without

security to pledge are denied credit
 Menace 5 “Riba increases the disparities
in income and wealth”
” 
 The rich (who are most likely to be the lender) take advantage of the
need of the poor (the borrower) for money by charging interest,
which adds to the burden of the borrower

 As a result, the rich becomes richer and the poor becomes poorer.
Thus, riba increase wealth inequality among the members of the
society

 Lacking collateral and established economic standing, poorer

segments of the economy are at an economic disadvantage when
competing for credit to finance economic activities

 As a result, wealth and income disparities increase among the

society members, which generate envy and hatred among the society
Menace 6 “ Riba discourages partnership”

 A loan provides a fixed return to the lender regardless of the
outcome of the borrower’s course of action

 From an Islamic point of view, it is much fairer to share in the

profits and the losses

 The supplier of capital has the right to a return, but this return
should be equivalent to the risk and effort involved in the project
for which the finances are supplied

 Therefore, Shari’a promotes profit and risk sharing

 Forms of Islamic Financial Institutions


 Full-fledged Islamic financial institutions (for example
Islamic, Meezan Bank Pakistan)

 Islamic windows in conventional financial institutions

(for example: HSBC, American Express Bank,
Commercial Bank of Saudi Arabia, Ahli United Bank
Kuwait, Riyad Bank;

 Islamic subsidiaries of conventional financial institutions

(Citibank subsidiary Citi Islamic Investment Bank
(Bahrain), UBS subsidiary Noriba Bank)