riba, its prohibition & classification.pdf

Riba, Its Prohibition & Classification

Muhammad Saarim Ghazi

• Literal meaning of Riba:

Increase, Addition, Augmentation, Excess (Surat al-Rum verse 39)

• Technical meaning of Riba: (Riba al-Qur’an, Riba al-Nasiyyah, Riba al-Duyun)

“ Any Amount Over and Above the principal amount stipulated in Loan Transaction/ Any Increase or Decrease to due time in principal amount in Loan transaction”.

• Every loan that derives a benefit is riba. (Al-Suyuti,Al Jame al-Saghir V.2 P.94)

• Any amount, big or small, over the principal, in a contract of loan or debt is “Riba” prohibited by the Holy Qur’an, regardless of whether the loan is taken for the purpose of consumption or for some production activity and whether it is simple or compound. (Surat al-Nisa verse 161, Surat Ale-Imran verse 130, Surat al-Baqarah verse 275-281)

Definition & Meanings

Riba (Interest, Usury, Sood)

• Riba al- Hadith, Riba al Buyu: (Riba al-Fadl plus Riba al-Nasa)

Riba al-Fadl: Riba by way of excess: An unequal exchange of two things of the same kind such as exchange of wheat against wheat.

Riba al-Nasa: Riba of delay: When articles of the same genera or different genera, whether measured or weighted, are exchanged with deferment on one side, whether or not there is real excess in favor of either side. Gold, Silver, Barley, Wheat, Dates, Salt.

In Nutshell,

1. A transaction of money for money (Bai al-Sarf’)of the same denomination where the quantity on both sides is not equal, either in a spot transaction or in a transaction based on deferred payment.

2. A barter transaction between two weighable or measurable commodities of the same kind, where the quantity on both sides is not equal, or where the delivery from any one side is deferred.

3. A barter transaction between two different weighable or measurable commodities where delivery from one side is deferred.

• Repaying a loan in excess of the principal without it being a pre-condition is

commendable & considered to be “a gracious act” compatible with the Sunnah.

• Jabir Ibn Abdullah, a renowned companion of the Prophet Muhammad (pbuh), says that the Prophet owed him a debt. “He paid it to me and gave me more than the principal”.

• Similarly, in a case involving a borrowed camel, the Prophet ordered the payment of a better camel in repayment of the debt, as a camel of the age of the borrowed one was not available at the time of repayment.

• However, the “gracious repayment” (overpayment) of a loan or debt is a matter of individual discretion and cannot be adopted as a system, because a requirement to repay any excess as gift would mean that the loan would necessarily yield a profit.

• Gracious payment must not be a pre-condition; neither explicit nor implicit and it is allowed when it must not be the Urf.

Gracious Payment of Loans/Debts


(Ruling of OIC Fiqh Academy)

• If the earlier payment is not conditional with discount it is permissible and the creditor give a rebate voluntarily himself then it is permissible.

• Rebate cannot be stipulated in the arrangement.

• Debtor (customer/client) cannot claim it as his/her right.

(OIC Resolution No.66, VIth Session Journal no.7 V.2 P.217)

Early Payment Rebate


First Revelation: Surah-Ar-Rum, Verse 39

Revelations in Holy Qur’an Regarding Riba

"And whatever riba you give so that it may increase in the wealth of the people, it does not increase with Allah."

Notes • Surah Ar-Rum which was undisputedly revealed in Makkah. • This verse is not of prohibitive nature. It simply says that the riba does not increase

with Allah i.e. it carries no reward in the Hereafter. • Ibn Jarir Al-Tabari (D310 AH), the most famous exegete of the Holy Qur'an, reports

from Ibn Abbas, Radi-Allahu anhu, and several Tabi'in like Saeed Ibn Jubair, Mujahid, Tawoos, Qatadah, Zahhak, and Ibrahim Al-Nakha'i that the word riba in this verse means a gift offered by someone to a person with the intention that the latter will give him in return a greater gift. However, some commentators of the Holy Qur'an have taken this word to mean usury. This view is attributed to Hasan Al-Basri as reported by Ibn Al-Jawzi.

• It is emphasized that Riba does not carry a reward from Allah in the Hereafter. • Although this verse does not contain a prohibition against Riba. However, it may be

taken as a subtle indication to the fact that the practice is not favored by Allah.

Second Revelation Surah An-Nisa’a, Verse161


" O ye who believe! Devour not riba, doubled and multiplied; but fear Allah; that ye may (really) prosper”.”

Notes • Revealed in 4th Hijra • While listing the evil deeds of Jews, Muslims have been informed

about the practice of taking Riba by Jews. • It simply mentions that riba was prohibited for the Jews but they did

not comply with the prohibition in their practical lives. • But it cannot be taken as a direct and explicit prohibition of riba for

the Muslims. • The inference, though, would be that it was a sinful act for the

Muslims also, otherwise they had no occasion to blame the Jews for the practice.

Third Revelation Surah Ale-Imran, Verse 130


"And because of their charging Riba while they were prohibited from it.”

Notes • Revealed in 2nd Hijra • Riba/Interest has been abolished in it. The prohibition of Riba is laid

down. • This verse contains a clear prohibition for the Muslims and it can

safely be said that it is the first verse of the Holy Qur'an through which the practice of riba was forbidden for the Muslims in express terms.

Fourth Revelation Surah Al-Baqarah, Verse 275-281


"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.

Allah destroys riba and nourishes charities. And Allah does not like any sinful disbeliever. 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.

O those who believe, fear Allah and give up what still remains of the riba if you are believers. 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. 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. 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”

Notes

• The fourth set of verses is contained in Surah Al-Baqarah where the severity of the prohibition of riba has been elaborated in detail.

Prophet (peace be upon him) said

Ahadith about Riba

• The Messenger of Allah cursed the one who accepted riba, the one who paid it, the one who recorded it, and the two witnesses to it.” He said: “They are all alike.” (Sahih Muslim)

• ‘Aun ibn Hanifa reported from his father that the Prophet (peace be upon him)

had condemned both the receiver of interest and its payer. (Sahih Bukhari)

• During the Israa’ (the ascension), the Prophet (peace be upon him) passed by a group of people, whose stomachs were like that of houses. In these houses were snakes that could be seen from the outside. So the prophet asked Jibreel (Angel Gabriel) about them at which he said: “They are the ones who deal with riba.” (Musnad Ahmad)

• “Avoid the seven sins that doom a person to Hell.” They said, “O Messenger of Allah, what are they?” He said:

“Associating others in worship with Allah (shirk); witchcraft; killing a soul whom Allah has forbidden killing, unless that is done lawfully; consuming riba; consuming the property of orphans; running away from the battlefield; slandering innocent chaste believing women.”(Sahih Bukhari & Sahih Muslim)

Source: Islamic Law of Contracts and Business Transactions; Dr. Muhammad Tahir Mansoori

(Practiced by the Arabs in the Pre-Islamic Period)

Different Forms of Riba

First Form

The Arabs in the pre-Islamic period advanced loan by stipulating excess over and above the principal sum of loan contract. Thus, the increase was stipulated in the beginning of the contract i.e. at the time of advancing a loan.

Second Form

They used to advance loan on the condition that they would take a fixed amount each month, while the principle amount still remained. Thereafter, when it was time for the repayment of the debt, they demanded the principal from the debtor. If he was unable to pay, they increased the term and payable amount.

Third Form

They used to sell a commodity on deferred payment basis, when the time of payment approached, the seller used to increase the amount due and give him more time. Allama Suyuti explains this practice in the following words:”They used to purchase a commodity on the basis of deferred payment, then on the maturity the seller used to increase the amount due in lieu of further delay:. Thus, the increase of amount was not stipulated at the time of concluding contract of debt, but at the time of maturity of contracts.

Consumption Loans vs. Production Loans

Some Misconceptions about Riba

In the 17th century, two new technical terms of interest emerged after the establishment of banking system, namely:

I. Commercial Interest (Tijarti Sood):Interest paid on loan taken for productive & profitable purposes.

II. Usury(Sarfi Sood)Interest paid on loan taken for personal need and expenses.

Misconception

Riba is restricted to consumption loans and does not include Productive/ Commercial loans. The Holy Qur'an had prohibited claiming any increase over and above the principal in the case of consumption loans only, where the borrowers used to be poor person's borrowing money to meet their day to day needs of food and clothes etc. While in case of productive & commercial loans there is no Zulm because in most cases the debtors are wealthy or at least economically well-off and the loans taken by them are generally used for generating profits. Therefore, any increase charged from them by the creditors cannot he term as Zulm (injustice) which was the basic cause of the prohibition of 'riba'.

Source: The Historic Judgment on Interest; Mufti Muhammad Taqi Usmani

Answer

• Firstly, The validity of a financial or commercial transaction does never depend on the financial position of the parties. It rather depends on the intrinsic nature of the transaction itself.

• Secondly, 'poverty' is a relative term which has different degrees. Once it is accepted that interest cannot be charged from the poor, while it is quite lawful to be charged from the rich, who will have the authority to determine the exact degree of poverty required for exempting a person from the charge of interest?

• Thirdly, Qur’an has prohibited riba in general terms, which include all the forms of riba.

• Fourthly, Zulm is the hikmat and not the illat (basic cause) of prohibition.

Consumption Loans vs. Production Loans


Definition of Simple Interest:

Interest calculated only on the initial investment.

Definition of Compound Interest:

Reinvestment of each interest payment on money invested, to earn more interest.

Misconception

• The prohibition of riba is applicable only to those interest transactions where the rate of interest is exorbitant or excessive.

• This argument is sought to be supported by the verse of Surah Al-i-'Imran:

"O ye who believe! devour not Usury, doubled and multiplied; but fear Allah; that ye may

(really) prosper."

[Al-i-'Imran 3:130]

Simple & Compound Interest


• No verse can be interpreted in isolation from the other relevant material available in other parts of the Holy Qur'an.

"O those who believe fear Allah and give up whatever remains of riba, if you are believers." [AlBaqarah 2:278]

• The point is further clarified in express terms by the following sentence:

• Unlike the text of a statute book, the Holy Qur'an contains some words or expressions used either for emphasis or for explaining the evil results of a particular act.

"Do not sell my verses for a little price." [Al-Baqarah 2:41]

Simple & Compound Interest


“Money should be treated as a commodity. So, just as a merchant can sell his commodity for a higher price than his cost, he can also sell his money for a higher price than its face value: therefore he can lend his money and can claim interest

thereupon”.

Difference between Money and Commodity

• Money has no intrinsic utility. It can not be utilized in direct fulfillment of human needs it can only be used for acquiring some goods or services.

• The commodities can be of different qualities while money has no quality except that it is a measure of value or a medium of exchange.

• In commodities, the transactions of sale and purchase are effected on an identified particular commodity. Money, on contrary, cannot be pin-pointed in a transaction of exchange.

Injunctions for Money

• Money (of same denomination) is not held to be the subject-matter of trade, like other commodities. Its use has been restricted to its basic purpose i.e. to act as a medium of exchange and a measure of value.

• If for exceptional reasons, money has to be exchanged for money or it is borrowed, the payment on both sides must be equal, so that it is not used for the purpose it is not meant for i.e. trade in money itself.

Misconception about the Nature of Money


• The origination of term interest dates back to 17th century with the emergence of banking system at a global level.

• “Interest means giving and/or taking of any excess amount in the exchange of a loan or on debt”.

• Hence, it carries the same meanings/ value as that of Riba as defined earlier.

Is there any Difference between Interest & Riba?


Riba al Fadl

Some Other Forms of Riba

• Riba by way of Excess

• “It is an unequal exchange of two things of the same kind such as exchange of wheat with wheat”.

• Gold, Silver, Barley, Wheat, Dates, Salt

• The Holy Prophet, Sall-Allahu alayhi wa sallam, felt that, given the commercial atmosphere at that time, certain barter transactions might lead the people to indulge in Riba. The Arabs used certain commodities like wheat, barley, dates etc., as a medium of exchange to purchase other things. The Holy Prophet, Sall-Allahu alayhi wa sallam, treating these commodities as a medium of exchange like money, issued the following injunction:

• It means that if wheat is exchanged for wheat, the quantity on both sides must be equal to each other and if the quantity of any one side is more or less than the other, this transaction is also a Riba transaction, because in the tribal system of Arab these commodities were used as money, and the exchange of one kilogram of wheat for one and a half (1 1/2) kilogram of another wheat would stand for the exchange of one dirham for one and a half (1 1/2) dirham. However, this transaction was termed as riba by the Holy Prophet, Sall-Allahu alayhi wa sallam, and this meaning was not covered by the term 'riba al-Jahiliyya'. Therefore, it was called as 'riba al-fadl' or 'riba-al-sunnah'.

• Bay ‘al-‘Inah (Sale & Buy Back): where the financier sells his / her assets to a buyer at a fixed price which is payable by the buyer in the future. Subsequently, the buyer will sell the original assets back to the financier at a cash value lower that the future price that was established earlier. (Imam Shafi’i considers it permissible).

• Bay ‘al-‘Wafa: whereby the owner of a commodity, who is in need of money sells it, with a condition that he will have it back once he returns its price to the buyer. In other words, he who needs cash sells his commodity in cash, with the condition that whenever he returns the cash to the buyer, the latter returns to him his commodity (Wafa: Promise to return).

• Hatt wa ta’jjal (Discounting): Is it permissible to allow a debtor a rebate for his earlier payment? Majority of Muslim Jurists do not allow if the discount is held to be a condition for the earlier payment. However, if this is not taken to be a condition for earlier payment, and the creditor gives a rebate voluntarily on his own, it is permissible. Debtor (customer/client) cannot claim it as his/her right. (OIC Resolution No.66, VIth Session Journal no.7 V.2 P.217)

• Tawarruq (Monetisation): The process of purchasing a commodity for a deferred price determined through Musawama or Murabaha, and selling it to a third party for a spot price as to obtain cash. Arranged Tawarruq (Tawarruq al-Munazzam). Real Tawarruq.

Bay ‘al-‘Inah; Bay ‘al-‘Wafa; Hatt wa ta’jjal; Tawarruq

Some Other Forms of Riba

• 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. This technique was primarily aimed at restoring two functions of money which are affected by inflation, viz. store of value and standard of deferred payment.

Causes of Inflation;

1. Monetary expansion due to public expenditure often through deficit-financing (Govt. is responsible), bank finance (Banking Inst. are responsible), and foreign remittances which become inflationary if these are spent on consumption rather than on investment (Consumer is responsible),

2. Disequilibrium between demand for and supply of goods – Demand: increasing population or urbanization, Scarcity of supply – Actual (natural factor is responsible) or Contrived – due to time lag between adjustment of supply to the demand (cannot be put on anybody's shoulders)

3. Excessive wage increase (Trade Unions are responsible)or due to heavy indirect taxes imposed by the government (government is responsible) or due to exorbitant profits charged by the traders (trader is accountable).

4. Inflation sometimes occurs as a result of devaluation (international factor is responsible).

Rational Arguments Versus the Spirit of the Shari’ah

1. The phenomenon of world-wide inflation causing hazards in economic life of man was never experienced before – New Ijtihad is reqd – Ijtihad is done only where nass. does not exist. And because this problem is guided by nass (i.e., textual law), ijtihad is out of question.

2. The Prophet has said that no damage should be done nor any should be borne, Ia darar wa Ia dirar – damage should be redressed, al-darar yuzaI Indexation is a redress against this damage – examine the applicability of the Islamic law of indemnity in context of indexation. damage is caused either by government, or by the society itself, or by consumers, or by natural constraints or by trade unions or traders or by international factors. Example: r. In case trade unions are responsible for a cost-push inflation how a bank can be justified in making the entrepreneur indemnify the fall in value of its loan money? Will it not be a double punishment to the entrepreneur through paying higher wages to the labour and higher cost of loan to the bank?

The Issue of Indexation

Maxim:

Every loan that entails benefit is Riba

– Benefit that is Prefixed, Stipulated in the contract & payable as contractual obligation by the debtor.

– Gratuitous payments are allowed (“... the best person is he, who discharges his debt in the best manner” – Sunan Ibn Majah narrated by Abu Rafi’)

– Gifts to the creditor is allowed, if they are in habit of exchanging gifts, before the loan was contracted .

Some Applications of Maxims

– Lending & Selling

it is narrated that Holy Prophet (s.a.w.s) asked ‘Attab Ibn Asi’d (r.t.a), his representative to the people of Makkah, to stop the people from making a lending and selling contract simulteneously’ – Showkani, Nayl al-Awtar vol. 5, p.158)

– Benefit from Pledged Property

Maxims:

– To mortgage a house with the creditor & allow him to stay in it

– Selling an object to the prospective debtor at higher price and then lending him some money

Shari’ah Maxims on Riba

Source: Shari’ah Maxims - Modern Applications in Islamic Finance by Dr. Muhammad Tahir Mansoori

• Any amount, big or small, over the principal, in a contract of loan or debt is “Riba” prohibited by the Holy Qur’an, regardless of whether the loan is taken for the purpose of consumption or for some production activity.

• A transaction of money for money of the same denomination where the quality on both sides is not equal, either in a spot transaction or in a transaction based on deferred payment is Riba.

Conclusion

• Default in payment by a debtor who is capable of paying the debts is haram (prohibited).

• It is not permitted to stipulate any financial compensation, either in cash or in other consideration, as a penalty clause in respect of a delay by a debtor in setting his debt.

• It is not permitted to make a judicial demand on a debtor in default to pay financial compensation, in the form either of cash or of other consideration, for a delay in settling his debt.

• It is permitted to prescribe in contracts involving indebtedness (such as Murabaha) an obligation on the debtor, in the case of default in payment, to donate an amount or a percentage of the payment due on condition that this be donated to charitable courses under the supervision of the bank’s Shari’a supervisory board.

• The institution is entitled to include the name of a debtor in default in a list of undesirable customer (black list).

AAOIFI Shari'a Standard No.3: Default in Payment by a Debtor

Defaults in Repayment of Loans/Debts

• Stipulated increase or decrease in loan transaction is Riba.

• Every increase in debt contract is Riba.

• Guaranteeing the capital in Musharakah turns the contract in Interest bearing loan. Any profit will tantamount to Riba.

• Guaranteeing the capital in Mudarabah turns the contract in Interest bearing loan. Any profit will tantamount to Riba.

• Bai’ al Inah, Bai bil Wafa, Bai al-Tawarruq al-Munazzam are Riba.

• Deriving the benefit from pledge is Riba, even if buyer allows it.

• Discounting the financial papers is Riba al Fadl.

• Selling the share in secondary market of a company, who has only liquid assets is Riba.

• Charging fee in Guarantee contract will tantamount to Riba.

• For same species e.g. dollar to dollar or gold to gold (homogeneous currency) Exchange in absolute prices must be;

– Spot or instantaneous, and

– Equality in counter values

• For heterogeneous currencies (dollar to rupees or gold to silver) Exchange in absolute prices of heterogeneous currencies must be

– Spot or instantaneous

– Equality in counter-values is not the pre-requisite for permissibility.

• Forward and Future trading in Sarf contract is Riba. Even for hedging purposes

Practice

Reading List: • Islamic law of Contracts & Business Transactions by Dr. Muhammad

Tahir Mansoori: Chapter 9: Extrinsic Causes of Invalidity: Riba (Usury)

• The Historic Judgment on Interest by Mufti Muhammad Taqi Usmani: Point 16 – 35

• The Supreme Court’s Judgment on Riba by Mr. Justice (R) Khalil ur Rehman Khan: Chapter 4: Inflation and Indexation of Loans

• Shari’ah Maxims Modern Applications in Islamic Finance by Dr. Muhammad Tahir Mansoori: Chapter 12: Shari’ah Maxims on Riba

Muhammad Saarim Ghazi

Head Islamic Financial Services, Al - Hidayah Centre for Islamic Finance Member Working Group, IBEF Program, Institute of Policy Studies

Email: [email protected] Cell: +92 300 515 9750

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