Global عربي
KSA عربي
Global عربي
Islam is not just a religion, but a complete way of life. In every aspect of a person's life, the creator has ordained rulings that govern him.
From his Aqa’id (beliefs), to his Ibadat (religious worship). Likewise the creator has ordained law pertaining to Muamalat, which are the interpersonal relations,monetary or otherwise.
One of these laws is the prohibition of Riba or Usury. In this article we will discuss the definition, its rulings in Islam and the various differences between Riba and trade.
Riba comes from the Arabic verb ‘raba’ which means to increase, increase or add’ ( El-Gamal 2006). In the eyes of the Sharia, riba or interest is defined as any excess that must be paid by the debtor to the creditor with the principal amount as a condition of a loan (Desai I.E, 2015).
In a hadith mentioned in Musannaf Ibn Abi Shaibah, the Prophet (PBUH) said,” Every loan that draws benefit is one of the forms of Riba.” (V6, Pg 180, Hadith 21078)
In Pre-Islamic Arabia a type of Riba was practiced among the pagan Arabs, it is mentioned in the Tafsir of al-Tabari who on the authority of Mujahid said that : In the days of Jahiliyya, a person used to owe a debt to his creditor then he would say to his creditor, “I offer you such and such amount and you give me more time to pay.” (V6, Pg 8).
Islamically, Riba is then categorized into two groups:
- The first is Riba Arising from debt, known as Riba Nasiah or “Jahiliyah”.
- The second is interest or Riba which arises from a sale, known as Riba al-Fadl or Bai. (Imran. M, 2021)
This is the type of riba that is commonly known in conventional finance and banking. It is the interest charge against the duration of the loan.
For example if someone borrows 1000 dollars for a period of one year at an interest of 5%, then at the end of the duration, he will have to pay an extra 50 dollars on top of the principle that he borrowed.
This type of Riba traces back its source to a Hadith narrated by Ubaid ibn Al-Samit,
The Prophet said,
“Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to hand.” (Muslim, Kitab Al Musaqaat, No 1587).
This Hadith identifies that Riba can also exist in some sales transactions if the exchange involves items of asymmetric proportion. For example, a spot exchange of 1kg of barley for 3kg of barley is not valid, due to the excess barley getting charged. This is referred to as Riba Al-Fadl or Al-Bai.
Read more about: What Is Commodity Riba - What Are The 6 Ribawi Items?
The prohibition of Riba is mentioned in the Quran and hadith, on several occasions.
Allah mentions in Surah Rum:
“That which you lay out for increase through the property of (other) people, will have no increase with Allah; but that which you lay out for charity seeking the countenance of Allah (will increase); it is these who will get a recompense multiplied” (30:49)
Likewise, its mentioned in An-Nisaa:
“taking interest despite its prohibition, and consuming people’s wealth unjustly. We have prepared for the disbelievers among them a painful punishment.” (4:161)
The third verse is in Ali Imran:
“O you who believe! Devour not usury doubled and multiplied; but fear Allah; that you may (really) prosper” (3:130)
Finally Allah reveals in Surah Baqarah:
"Those who devour usury will not stand except as stands one whom the evil one b-v his touch has driven to madness. That is because they say: 'Trade is like usury, but Allah has permitted trade and forbidden usury. Those who, after receiving direction from their Lord, desist, shall be pardoned for the past," their case is for Allah (to judge); but those who repeat (the offence) are companions" of the fire: they will abide therein (forever). Allah will deprive usury of all blessings, but will give increase for deeds of charity: for He loves not creatures ungrateful and wicked. Those who believe, and do establish regular prayers and regular charity, will have their reward with their Lord: on them shall be no fear, nor shall they grieve. O you who believe! Fear Allah and give lip what remains of your demand for usury if you are indeed believers', If you do if not, take notice of war from Allah and His Messenger: but if you turn back, you shall have your capital sums: deal not unjustly, and you shall not be dealt with unjustly. If the debtor is in difficulty, grant him time till it is easy for him to repay. But if you remit it by way of charity, that is' best for you if you only knew. And fear the Day when you shall be brought back to Allah. Then shall every soul be paid what it earned, and none shall be dealt with unjustly.” (2:275-281)
All these verses outline the prohibition of Riba at different stages, but ultimately identify its evil and its prohibition.
Various Hadith have been narrated by the companions outlining the prohibition of Riba Al-Fadl as well as Riba Al-Nasiah.
"From Jabir: The Prophet, may peace be on him, cursed 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 1587).
In Bukhari it is narrated by usamah bin Zaid: The Prophet said: "There is no riba except in Nasiyah [Deferment]." (Bukhari,2178).
Also the hadith mentioned before about payment of gold exchange with gold should be done hand to hand (Muslim 1598).
There are a lot of misconceptions among people that since trade and interest have the same result (profit on sale) therefore they are both the same. But nothing could be further from the truth.
Allah explicitly tells us: “ but Allah has permitted trade and forbidden usury.”
This difference also comes forth in the mechanism of how both of them work. As Abu al A’la al Mawdudi explains:
“In trade the purchaser and vendor exchange on the basis of equality, for the purchaser derives profit from that which he has purchased from the vendor, while the latter gets profit in consideration of the labour and time which he spends in procuring that commodity for the purchaser. In interest-transactions there is no division of profits between the two parties on the basis of equality. The creditor gets for himself a definite amount of money for his loan, but all the debtor gets is certainly the time to use the money, whilst time does not necessarily procure him profit.”
In today’s day and age, there are many products in conventional finance that either have Riba or elements of riba. Products like credit cards, home mortgages,capital market bonds and personal loans all fall under the category of Riba and are strictly prohibited. All of these products give loans on interest.
- Credit cards allow for a customer to borrow funds from the bank to pay for goods and services, while imposing a condition of paying back those funds along with interest, plus any applicable interest either by the billing date or over time.
- Home mortgages are loans used to purchase a home or land, on condition that the borrower pays the lender over time. The payments are divided into principal and interest (Investopedia).
All of these products that banks offer have riba in them and are completely prohibited under Islamic law.
Read more about: Are Credit Cards Inherently Haram?
So then what can one do to avoid this Riba? Well, the alternative provided by the Shariah is Islamic Finance. Islamic Finance is an asset-backed, ethical and Riba free way of financing.
It provides alternative solutions to business and banking without having to deal with any interest based loans.
At its core Islamic Finance is represented by four principles: It is interest free, meaning the profit is earned from going into business with the client rather than changing a percentage of interest.
All investments have to be made through Halal industries, so businesses like alcohol and tobacco are prohibited.
The partnership between client and bank is one of risk sharing. So the profit will be shared and in case of a loss, it will be borne by both parties. And finally, the transactions have to be backed by a real asset, thus ensuring that the product and its valuation stay in line with the real economy, and not just mere speculation (Imran. M, 2021)
Read more about: Al Qard al Hasan (benevolent loan)- All You Need to Know
Islamic Finance provides many alternative products for its clients that are based on interest free, and risk sharing. Among those is Murabaha, which is a cost plus sale. The client approaches the bank to buy an asset.
The bank buys it on his behalf and sells it to the client for a mark-up. Another product is Mudharabah, which refers to a special kind of partnership where one partner invests money into an enterprise, while the other is responsible for the work and management. Many banks offer leasing products like Ijarah, in which one person transfers the usufruct of an asset to the lessee in exchange for a rent claimed by him.
These are the various alternative financing products used by Islamic Banks to ensure that transactions are ethical and free of any Riba. They are based on risk sharing and asset backed finance which are connected to the real economy and not based on speculation.
Read more about: Riba-Free loan in the UAE
Al-Quran (2:275-281)
Al-Quran (4:161), (30:49), (3:130)
Sahih Al-Bukhari (2178)
Sahih Muslim, Kitab Al-Musaqaat, 1587, pg 1211
Abu al A’la al Mawdudi, “The Meaning of the Quran”, Vol. I, p.p. 201
Desai I.E (2015). Your Guide to Islamic Finance.
El-Gamal, M. A. (2006). Islamic Finance: Law, Economics, and Practice. Cambridge: Cambridge University Press.
https://doi.org/10.1017/CBO9780511753756
Imran. M (2021). Islamic Finance 101: Learning Through Stories. Liberty Publishing.
Musannaf Ibn Abi Shaibah. Maktab Rehmania
Tafsir Al-tabari. Dar al-Ma'arif
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
