Overview

Definition of Riba Classification of Riba Laws governing types of Riba Riba and present day arguments Nature of Money in Islam Difference between money and Commodity

Definition of 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. As per hadith Every loan that draws interest is riba The prohibition of interest is not limited to Islam but it is shared by Judaism and Christianity

Why prohibition of Riba?

Creates imbalance in the society, where money is earned on money without the risk of return.

Banks tend to cater loans only to the rich and entire capital is utilized for the benefit of the few. Community as a whole does not benefit.

Classification of Riba
Riba un Nasiyah or Riba al Jahilia refers to loan transactions Riba al Fadl or Riba al Bai refers to sale transactions

Classification of Riba

Riba un Nasiyah or Riba al Jahilia

The kind of loan where specified repayment period and an amount in excess of capital is predetermined Premium paid to the lender in return for his waiting or taking of every excess amount in exchange of a loan at an agreed rate irrespective of whether it is low or high All loans that draw interest

Classification of Riba

Riba al Fadl or Riba al Bai

Excess which is taken in exchange of specific homogenous commodities and encountered in their hand to hand purchase & sale as explained in the famous hadith Hadith prohibiting Riba al Fadl specifies:
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

Iman Abu Hanifa on Riba al Fadl

Commodities must have two common characteristics
Weight Volume

Includes all commodities having equal weight or volume and are being exchanges

Classification of Riba

Iman Shafi on Riba al Fadl

Commodities must have two common characteristics
Medium of Exchange Edible

Therefore, the law applies on everything edible or having natural ability of becoming a medium of exchange (currency)

Classification of Riba

Iman Maalik on Riba al Fadl

Commodities must have two common characteristics
Preservable Edible

Therefore, the law applies on everything edible or can be preserved

Classification of Riba

Iman Ahmad Bin Hanbal on Riba al Fadl

Three citations have been related to him:
First conforms to Iman Abu Hanifa Second conforms to Imam Shaafi Third citation includes three characteristics at the same time namely edible, weight, 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 homogenous nature A sale of unequal goods having weight and homogenous nature

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

Conditions of Exchange
Any difference in value/quality should be ignored and commodities should be exchanged in equal amount Instead of direct exchange of commodities of the same kind, a person should sell his commodity against cash at the market value and buy the commodity against cash

The laws of Riba Al Fadl

Second Law
Exchange of a product with its raw material is allowed under certain conditions

Conditions of Exchange
If the characteristics of the commodity has been totally altered by the industry, then different amounts can be exchanged If little alteration has been done then the exchange should be either in equal weights or sold against cash

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.

Conditions of Exchange
General conditions of sale contract are filled

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.

Conditions of Exchange
General conditions of sale contract are filled

The Types of Riba

Tijarti Sood (Commercial Interest)

Interest paid on loan taken for productive and profitable purposes.

Sarfi Sood (Usury)

Interest paid on loan taken for personal need and expenses

Riba: Present day arguments

There are two schools of thought on Tijarti Sood (Commercial Interest) and Sarfi Sood (Usury) First School of thought:

Riba as practiced during the days of the Prophet (SAW) was Usury Commercial Interest did not exist during the days of the Prophet (SAW)

Riba: Present day arguments

Riba as practiced during the days of the Prophet (SAW) was Usury

Counter argument: Islam when prohibiting something does not only prohibit the prevalent form but all forms that might erupt in future. E.g Liquor, Pork, Corruption

Commercial Interest did not exist during the days of the Prophet (SAW)

Counter argument: The claim is incorrect as both forms existed in pre-islamic days.

Riba: Present day arguments

Second School of thought:

In present day banking no one being exploited or faces injustice, it cannot be called Riba There is a Quranic verse O believers do not devour one anothers possessions wrongfully; rather than that let there be trading by mutual consent. Wrongful devouring only arise if the consent of one or more parties is not present but in commercial interest the mutual consent is present of both parties, so its not Riba.

Riba: Present day arguments

In present day banking no one being exploited or faces injustice, it cannot be called Riba

Counterargument: Islam prohibits one party getting confirmed profit and other party getting unconfirmed profit from the same investment

There is a Quranic verse O believers do not devour one anothers possessions wrongfully; rather than that let there be trading by mutual consent. Wrongful devouring only arise if the consent of one or more parties is not present but in commercial interest the mutual consent is present of both parties, so its not Riba.

Counterargument: Mutual consent does not render a transaction lawful

Nature of Money in Islam

One of the incorrect assumptions on which all theories of interest are based is that money has been treated as a commodity. It is hence argued that just as a merchant can sell his commodity for a higher price than the cost, one can also sell money at a higher price i.e. interest Money is treated differently from commodity as they have different characteristics

Difference between Money and Commodity

Money has no intrinsic utility. It cannot be utilized directly for fulfillment of human needs The money has no quality except that its a measure of value or a medium of exchange All units of money are the same denomination and are 100% equal to each other A commodity has intrinsic utility and can be utilized directly without exchanging it with for some other things A commodity can be of different qualities

In commodities, the transaction of sale and purchase are affected on identifies commodity

Opinion on Money `

Post great Depression Economic Crisis Committee discussing the pitfalls stated:
In order to ensure money performs its true function of operating as a means of exchange and distribution, it is desirable that it should ceased to be traded as a commodity

Opinion on Money `

Prof. John Gray of Oxford University stated:

Most significantly perhaps transaction on foreign exchange market share have now reached the astonishing sum of $1.2 trillion a dayover 50 times the level of world trade. 95% of these transactions are speculative

Opinion on Money `

James Robertson in his work Transforming Economic Lives stated:

Todays Money and finance system if unfair, it results in a massive world wide diversion of effort away from providing useful goods and services. At least 95% of the billions of dollars transferred daily around the world are unlinked to transactions in real economy

Opinion on Money `

Richard Thomson in his Apocalypse Roulette stated:

Financial Derivatives have grown to $64 trillion industry by 1996. How do you imagine a number that big? You could say that if you laid all those dollar bills end to end. They would stretch from here to the sun sixty six times or to the moon 25, 900 times