Riba, Its islamic Rationale

and Implications

Definition of riba
unjustified increment in borrowing or lending
money, paid in kind or in money above the
amount of loan, as a condition imposed by
the lender or voluntarily by the borrower.
Riba defined in this way is called in Fiqh riba
al-duyun (debt usury).
The word riba has been used in the Holy
Quran on several occasions.Riba has been
extracted from Raba. It means addition,
increase . So, riba literally means to
increase, to grow to rise, to add, to swell.

Introduction
Islam is a complete code of life which offers
its own social, political and economic systems
to guide human behavior in all spheres of life.
Exploitation and any source of unjustified
enrichment in Islam is prohibited.
The Holy Quran has emphatically instructed
Muslims not to acquire each others property
wrongfully.
The goals of socio-economic justice and
equitable distribution of income and wealth
are integral parts of the moral philosophy of
Islam.

Types of riba
Muslim jurists have classified riba in two types:
1. riba al-nasiah;
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)
2. riba al-fadl;
Riba al-fadl is the excess over and above the
loan paid in kind. It lies in the payment of an
addition by the debtor to the creditor in
exchange of commodities of the same kind.

 During the dark ages, only the first form (Riba An

Nasiyah) was considered to be Riba. However the Holy
Prophet also classified the second form (Riba Al Fadl) as
Riba.
The meaning of Riba has been clarified in the following
verses of 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

Conti
It is related that Abu Said al-Khurdi said:
the Prophet Muhammad (S.A.W.W) has said
that gold in return for gold, silver for silver,
wheat for wheat, barley for barley, dates for
dates and salt for salt, can be traded if and
only if they are in the same quantity and
that is should be hand to hand.
To sum up, riba al-nasiah and riba al-fadl
are both covered by the verse, Allah has
allowed trade and prohibited riba (2:275),
while riba-al nasiah relates to loans and riba
al-fadl relates to trade.

PROHIBITION OF RIBA (INTEREST) IN

ISLAM
Riba is prohibited in Islam as it appears
explicitly in the Holy Quran. Islam is opposed to
exploitation in every form and stands for fair
and equitable dealings among all men.
The modern banking system is organized on the
basis of a fixed payment called interest.
That is why the practices of the modern banking
system are in conflict with the principles of
Islam which strictly prohibit riba.
Islam is opposed to exploitation in every form
and stands for fair and equitable dealings
among all men.

In the Quran Allah(swt) says:

That which ye lay out for increase through the
property of (other) people, will have no
increase with Allah: But that which ye lay out
for charity, seeking the countenance of Allah
(will increase): it is these who will get a
recompense multiplied. (30:39)
That they took riba (usury), through they were
forbidden and that they devoured mens
substance wrongfully We have prepared for
those among men who reject faith a grievous
punishment. (4:161)
O ye who believe! Devour not usury doubled
and multiplied; but fear Allah, that ye may
(really) prosper. (3:140)

Rationale for prohibition of

riba

The reasons for its prohibition can be best

understood only in terminology and precepts
which can be comprehended easily by the people
of a particular period of time.
More just on fairer application of this approach of
the Quran with respect to the reasons if applied
to the economic spheres, is the demand for
social justice.
In the case of the prohibition of wine and
gambling, it was mentioned that In them is
great sin and some profit for men, but their sin is
greater than their profit.

Difference between riba(interest)

and trade
The Quran says: Allah has permitted trade
and prohibited interest. The implication of
this is that the principle of interest is quite
opposite to that of business.
This shows Islam does not consider lending
on interest as a business in the real sense.
In the pre-Islamic Arabian society, interest
or riba was considered similar to trade.
But the Quran has enunciated that trade
and interest are not the same .

Four characteristics define the

prohibition of riba
At least four characteristics define the
prohibited interest rate.
It is positive and fixed ex-ante,
It is tied to the time period,
Its payment is guaranteed regardless
of the outcome or the purposes for
which the principal was borrowed,
The states apparatus sanctions and
enforces its collection.

Fiqh rules regarding riba

To emphasize interest or riba prohibition, reference
should be made to three Fiqh rules:
a) A benefit gained from a loan is riba. A rule which
is based on the ethics of Qard Al-Hassan
(Benevolent or good loan) in Quran and on Hadith of
the Prophet (p.b.u.h.) "the only reward for a loan is
the thanks giving and the repayment".
b) Which means that the capital owner has to
choose either a "return" on his capital by sharing
with its user in profit, or a "guarantee" to repay his
capital intact.
A "return" and "guarantee" on capital can not be
combined together in one deal.

Conti,,,
c) Which means that the capital owner
will be entitled to "Profit" only if he is
ready to accept "loss" if this happened.
These rules are the basis of all profit
and loss sharing financing methods in
Islam, and they leave no doubt that
interest paid to bank depositors above
their money, or interest paid by
borrowers from banks for the use of
banks' money is riba.

Economic rationale behind the

prohibition of riba
Saving and investment
Saving and investment are tow of the most
important determinants of economic growth and
development.
The classical belief that saving is determined by
the interest rate is refuted by Keynesians.Interest
rate, in fact, limits investments.
Interest is also considered as a cost of production
and hence the price of the product is adjusted to
it so that consumers are affected because of the
higher prices of goods and services.

Unemployment and inflation

It is true that interest rate causes
unemployment and inflation in several
ways.
When interest rate is high it makes cost of
production also high, causing a decline in
investment and in some cases closure of
production units, resulting in retrenchment
of workers by employers to reduce cost.

 On the consumer side, low interest

rate encourages borrowing for
consumption which usually increases
the demand for goods and services,
hence resulting in demand pull
inflation.
It was believed by most economists
until the early 1970s that there is a
trade-off between unemployment
and inflation.

Interest and entrepreneurship

According to Schumpeter, economic
growth is determined by the dynamic
function of entrepreneurship and this
dynamic function is an innovation which
leads to technological changes.
Large industrial firms and big landholders
can afford to experiment with new
techniques of production

Interest and stability

It may, in fact, be asserted that interest is one
of the most destabilising factors in the capitalist
economy.
The high degree of interest rate volatility has
injected great uncertainty into the investment
market which has had the effect of driving
borrowers and lenders alike form the longer end
of the debt market into the shorted end, thus
fundamentally altering the investment decisions
of businessmen.