● Interest in the modern financial world is

commonplace.
● It is a staple feature of capitalist system that values
profits above everything else, via competition
rather than co-operation.
● Despite the amount of wealth that the Western
economic system has created, there are major
concerns over the huge disparities that have
developed between rich and poor.
Riba has been extracted from Raba. It means addition,
increase. So, riba literally means to increase, to grow
to rise, to add, to swell. It is, however, not every
increase or growth which has been prohibited by
Islam
❖ In the Shari’ah, “riba” technically refers to the premium that
must be paid by the borrower to the lender along with the
principal amount as a condition for the loan or for an extension
in its maturity.
❖ In this sense riba has the same meaning as interest in
accordance with the consensus of all jurists without any
exception.
❖ So the Qur’aan and the Hadith do not make any such difference
between usury and interest. Interest and usury both are taken as
synonymous for the Arabic word riba.
❖ In several verses of the Qur’aan, Allaah has mentioned the
consequences of riba.

❖ The Qur’an did not declare the prohibition of riba in the early
stage of revelation, rather we find that the complete prohibition
of interest came sequentially.
 The
Avoidance of Riba
❖Literally: excess, expand, increase, growth Any
unjustified excess above and over the capital,
whether in loans (between creditor and debtor)
or in trade (with similar commodities)
❖ Any contractual surplus payable on principal of a
debt
❖The debt may arise from a loan or an interior
transaction
❖The mode of payment does not matter
 Al Rum 30:39

“and that which you give in gift (to others), in order

that it may increase (your wealth by expecting to
get a better one in return) from other people’s
property, has no increase with Allah…”
 4:160-161

“… and their taking of Riba though they were

forbidden from taking it and their devouring of
men’s substance wrongfully…. and we have
prepared... a painful torment.”
 3:130

“O you who believe, Eat not Riba doubled

or multiplied, but fear Allah that you may
be successful.”
 2:275
“those who eat riba will not stand (on the Day of
Resurrection) except like the standing of a person
beaten by Shaitan leading him to insanity. That is
because they say: trading is only like Riba,” whereas
Allah has permitted trading and forbidden Riba. So
whosoever receives an admonition from his Lord and
stops eating Riba, shall not be punished for the passt;
his case is for Allah (to judge); but whoever returns (to
riba), such are the dwellers of the Fire – they will abide
therein forever.
 2:267-278

❖Allah will destroy riba and will give increase for

sadaqat (deeds of charity, alms).
❖O you who believe, be afraid of Allah and give up
what remains (due to you) from Riba (from now
onward), if you are really believers
 2:279

And if you do not do it, then take a notice of war from

Allah and hiss Messenger but if you repent, you
shall have your capital sums. Deal not unjustly (by
asking more than our capital sums), and you shall
not be dealt with unjustly (by receiving less than
your capital sums).
 2:280-281

❖And if the debtor is in a hard time (has no money),

then grant him time till it is easy for him to repay;
but if you remit it by way of charity, that is better
for you if you did but know.
❖And be afraid of the Day when you shall be
brought back to Allah. Then every person shall be
paid what he earned, and they shall not be dealt
with unjustly.
 CONT’D…

❖AThere are also a number of narrations from the

Sunnah on the prohibition of riba
❖Some of the narrations give general prohibitions
of riba, e.g.: “The Prophet of Allah s.a.w. cursed
the receiver and the payer of riba, the one who
records it and the two witnesses to the
transaction and said: they are alike (in guilt)”.
 CONT’D…

Abu Hurayrah (ra) narrated that the Prophet (saw) said:

“”God would not allow four persons to enter paradise or
to taste its blessings: he who drinks wine, he who takes
riba, he who usurps an orphan’s property without right
and he who is undutiful to his parents.”
 MODERN IF: RIBA

Application

Currency Ribā buyu’

Same currency: Same type:
• equality • equality
• On spot • On spot
Different currencies: Different type
• on spot • on spot
 CONT’D…

❖In contemporary finance, riba can occur in:

- All interest-based lending activities (e.g. all
conventional bonds)
- Fixed return on deposits in conventional banking
(e.g. designated accounts for receivables of the
bonds)
- In the secondary trading of debt securities – if the
transaction is not spot & if there is discounting
(according to global Shari`ah standard)

❖ Thus, to be Shari`ah compliant, all contracts in

Islamic finance cannot be involved in any of the
usurious activities mentioned above
 Division of Riba

Riba’ al-Duyun (RIba’ Riba’ al-buyu’ (Riba in

in Loan Contract) exchange contracts )
 Types of Riba

● Under Islamic law, riba can occur in two main

situations, i.e.
- riba al duyun (loan): the riba or excess which
occurs in debt and loan transactions because of
extension/delay in repayment

- riba al buyu` (exchange): the riba or excess

which occurs in trading transactions involving the
exchange of riba-bearing commodities without
observing the required rules
Riba al duyun (loan):
● The debtor borrowed money to be paid in certain time, and the
amount is more than the amount borrowed

● A creditor gives a periodic loan and takes monthly interest. The

capital sum lasts until the expiration of the period. Upon expiry,
if the debtor cannot pay, the period to pay back the capital will
be extended and interest will be charged

● Arising out of exchange contract, a buyer must pay a

consideration. If he failed to settle on time, the period will be
extended by increasing the amount (principle + interest).
Riba al buyu` (exchange):
● Mainly based on the saying of the Prophet:
“Gold for gold, silver for silver, wheat for wheat, barley for barley,
dates for dates, and salt for salt; like for like, hand to hand, in equal
amounts; and any increase is riba’”.
● These commodities can be classified under
two main categories which make the illah (ratio
decidendi or "the rationale for the decision") for their
prohibition:
1- medium of exchange (currency): Gold and Silver
2- Staple foods: Wheat, barley, dates and salt
● Any other items, even though not mentioned in the hadith but
serve the same purpose will be considered as having the same
illah by way of qiyas (analogy)
 Riba in modern financial transactions

● Riba’ al-duyun in loans and certain controversial contracts

(bay’ al-’inah, bay’ al-dayn, etc)

● Riba’ al-buyu’ mainly in bay’ al-sarf (exchange of currencies)

 The avoidance of Gharar

Meaning of gharar:

- Literally: risk, uncertainty, hazard

- The sale of probable item whose existence or

characteristics are not certain, due to the risky nature
which makes the trade
similar to gambling
 Examples of this kind of sale in Hadith

● Sale of fish in the sea, birds in the sky

● Sale of unborn calf in its mother’s womb
● Sale of runaway animal, slave
- Involve item which may or may not exist
● However, the Prophet did not lay down the principles
(qawa’id) for the prohibition of gharar.
● Examples given in the hadith were some of the
manifestations of the doctrine, but not principles.
● This has led to the dispute among jurists on the area
and coverage of gharar.
 Gharar

● Meaning: has a range of negative connotations, such as,

uncertainty, deception, risk, hazard, ignorance etc.

● If there is gharar, the contracting party/ies do not really

understand the attributes / consequence of the contract

● Under Islamic law, gharar is prohibited because its existence in

the contract may deny the parties of equal bargaining power
and they cannot make informed decisions; or if there is risks on
deliverability of the object of the contract
 Prohibition of Gharar in the Sunnah
● The sunnah uses the word gharar and its derivatives much
more extensively than the Qur`an in the sense that several new
meanings are added

● In relation to commercial transactions, the Prophet s.a.w. in

many of his sayings directly prohibited the sale involving
gharar (uncertainty) and jahalah (ignorance)

● Thus, the prohibition of gharar is made conclusive by the

sunnah / hadith of the Prophet s.a.w.

● Examples: the prohibition of gharar sale (i.e., the sale contract

affected by gharar), the prohibition of the sale of fish in the sea,
bird in the air, unborn animals, lost items, etc.
 CONT’D…
● In Islamic law, gharar can be of two degrees:
- Excessive or major (gharar fahish)
- Minor and tolerable (gharar yasir)

● Only major /excessive gharar will affect the validity of

contracts, where it will render the contract void / voidable,
depending on the degree of uncertainty

● Gharar affects trading and exchange contracts (mu`awadat);

not charitable and unilateral contracts

● In banking & finance – gharar can be triggered e.g. – in the sale

contract to create the indebtedness if the asset used is
uncertain / vaguely identified; the trading of a securitised debt
which is unconfirmed / not established, sale of insurance policy
 Application of gharar
● Broadly speaking, gharar will affect the validity of contract if it
occurs in these areas:

- gharar in kind / type / attribute / quantity of the object

- gharar due to delivery time

- gharar due to the price/ mode of payment

- doubt over the ability to deliver

 The Benchmark
Gharar which is excessive (gharar fahish) occurs in exchange
contracts (‘uqud al- mu’awadat)

● To prevent gharar, the parties to contract must have adequate

knowledge and information on the subject matter:

i- Their existence and deliverability

ii- Its quality, quantity and attributes are known

iii- Time –frame for payment and delivery

 Tolerable Gharar
However, gharar is tolerable if:

- i) it is trivial (gharar yasir)

- ii) It occurs in other than exchange contracts, such as in gratuitous

contracts.

-iii) It happens to the ancillary object (appendages) only (not the

principal and main subject matter of contract)

- iv) the economic need for the contract embodying the risk is
substantial
 Other things to be avoided
● Transactions involving the prohibited commodities, e.g., pork
and liquor

- Surah al Maidah (5:3)

- Surah al Maidah (5:90)

● Transactions involving gambling or maysir/qimar

- Surah al Maidah (5:90)
 The avoidance of transactions
involving maysir (Gambling)
● Involves the creation of risk for the sake of risk

● A combative relationship between two contracting parties,

each of whom undertakes the risk of loss and the loss of one
means gain for the other

● Apply to all games of pure chance

● No economic activities are gained in the practice. The gambler

will simply seek to amass wealth without efforts.

● Gambling is gharar in its worst scenario.

● Prohibited by al-Qur’an in Surah al-Maidah (5:90)

 Transactions involving prohibited
commodities
● It is also not allowed to conclude contract on illegal
commodities such as pork, liquor etc.

● Illegality of certain commodities has been spelt out clearly in

the texts of al-Qur’an and Sunnah of the Prophet.
● E.g. :

- Surah al-Maidah (5:3)

- Surah al-Maidah (5: 90)
 ‘Iwad

● “The Messenger of Allah (SAW) cursed the devourer of riba, his

constituent, the one who acts as a witness to it, and one who
acts as a notary to it.”. (Muslim)

● From an Islamic perspective, any profit in a commercial

transaction should correspond to a counter value.
 ‘Iwad
● 'iwad is a necessary condition to render a profit licit in a
transaction;

● 'iwad may have two forms:

- kasb (work /effort) and

- ghorm (risk)

● The right to earn profit goes with the risk of assuming loss.

● Revenue goes with liability

 In Islam, MONEY and COMMODITY
have different characteristics and uses
 MONEY COMMODITY
has no intrinsic utility has intrinsic utility
- cannot be utilized in direct - can be utilized directly without
fulfilment of human needs exchanging it for some other thing
- can only be used for acquiring
some goods & services ● A commodity can be of
different qualities

● Money has no quality except

as a measure of value and Commodity sold or purchased
medium of exchange are identified to a particular
- all same denomination money unit
equals 100% to each other

● Money cannot be pinpointed

in a transaction of exchange
 Islamic alternatives to interest Rates

● Trading as a way to avoid interest.

● Trading through various types of contracts such

as sale and purchase contracts, partnership
contracts, leasing and so on.
 The differences between interest and trade

Firstly:

● In trade the purchaser and the vendor exchange on the basis

of equality. For the purchaser derives profit from that which
he purchased from vendor, while the latter gets profits in
consideration of the labour and time.

● In interest the creditor get for himself a definite amount of

money for his loan but all that the debtor is certain of is the
time to use the money. During this time period it is not always
possible for debtor to make a profit.
Secondly:

● From the point of view of trade, the moment a commodity is

exchanged for its price, the transaction come to an end.

● But in the case of interest, the debtors actually spends the

amount borrowed from the creditor and has to return the
same amount with an addition by way of interest.
 The differences between profit &
interest #(1)

❖ The settlement of profit between the buyer and the seller is

made on equal terms. The buyer purchases the article he
needs and the seller gets profit for the time, labour and brains
he employs in providing that article to the buyers.

❖ In the case of interest, obviously the debtors cannot settle the

transaction on equal terms with the creditor because of his
weaker position.

❖ As far as the money lender is concerned, he gets that fixed

sum of interest which he considers as his profit.
❖ If the debtors spends the borrowed money in fulfilling his
personal needs, the time factor definitely does not bring any
profit at all.

❖ And if he invests that money in trade, commerce, industry,

agriculture, then there are equal chances of profit or loss.

❖ Thus lending money at interest might bring a guaranteed and

fixed profit to one party and loss to the other, or a guaranteed
and fixed profit to one party and an uncertain and indefinite
profit to the other.
 The differences between profit &
interest #(2)

❖ The trade charges his profit, however high it may be, once and
for all, but money lender goes on charging interest over and
over again and goes on increasing with the passage of time.

❖ The profit which the debtor make on money of the creditors,

however, large it may, has after all its own limits, but there is
no limit to the interest the creditor may charge on his money.

❖ He may, as something actually happens, receive all the

earning of the debtor, may even deprives him of all the means
of livelihood or of the articles of his personal use and still
might have the same amount of debt against him that was at
the time of borrowing.
 The differences between profit &
interest #(3)

❖ The transaction in trade comes to an end as soon as the article

and its price change hands. After this the buyer is not required
to return anything to the seller.

❖ As regards the rent of furniture, house, land, the lent thing is

not itself spent up but it returned to the owner after the term.

❖ But in the case of the principle the debtor has to spend it first
and the reproduce it and return it, to the creditor along with
the interest. Thus the debtor runs a double risk, he has to
reproduce the principle and also to produce its interest.