ASSIGMENT NO 1

NAME : MUHAMMAD BILAL

ID : 20329

1. Explain the concept of Riba in the context of Islamic finance. Differentiate between Riba
Al-Fadl and Riba An-Nasia with appropriate examples.

The word RIBA means excess, increase, or addition. From a Shariah point of view, it can
be interpreted as: an excess compensation or unjustified return in a lending, borrowing,
or sale transaction. The most common example is taking a loan from a conventional
bank: the bank gives a loan, and the borrower repays the money at a later date with a
percentage increase over the original amount

There are two types of RIBA:

 RIBA in loan contract (Riba al-Nasiyah)

 RIBA in sale or exchange contract (Riba al-Fadl)‍

Riba in loan contract (RIBA al-Nasiyah)

This is the commonly understood type of RIBA. It's an increase in payment from a
borrower to a lender over the original loan amount charged by the lender due to delay
in time of payment. Note that this type of RIBA only applies to a loan, not a credit sale
(more on this later).

It does not matter whether the increase over the loan amount is fixed at the beginning
of the contract, or at the end of the contract if the borrower didn't pay (in the case of
default.

Optional Gift in Repayment Allowed

What if a borrower repays the money, but wants to thank the lender by offering some
gift? Is this allowed? Yes!

The key difference here is that an optional gift or increase paid by the borrower must
not be pre-agreed and must not be stipulated by the lender. Something coming out of
the good will of the borrower to show their gratitude is allowed, and is even recorded in
a hadith:
 Narrated Jabir bin Abdullah: "I went to the Prophet while he was in the Mosque. After
the Prophet told me to pray two Rakat, he repayed the debt he owed me and gave me
an extra amount." [Sahih Bukhari]

Commonplace Examples of Riba al-Quran

Here's a short list of just a few examples you may have heard of. All of these types of
products and contracts include RIBA and are classified as haram or not Permissable for
Islamic finance:

 Credit cards (note: debit cards are OK)

 Home mortgage
 Car/automotive loan
 Personal loan from a conventional bank
 Bank certificate of deposit ("CD")
 Capital market bonds
 Government savings bonds

Riba in sale contract (Riba al-Fadl)

 This one is not as obvious as Riba in a loan. It can happen in a

sale or exchange transaction of a commodity. Note that this
type of Riba only applies to commodities; things like: dates,
barley, rice, wheat, oil, sugar, cotton, etc...

 If two people exchange the same commodity but in unequal

amounts, the extra would be Riba. This type of Riba is also
called Riba al-Hadith in the literature of scholars because, it is
not directly mentioned by the Quran. The Prophet (‫ )ﷺ‬has
classified it as Riba in a following hadith

 “Gold for gold, silver for silver, wheat for wheat, barley for
barley, date for date, salt for salt, must be equal on both sides
 and hand to hand, whoever pays more or demands more (on
either side) indulges in Riba” [Sahih Muslim]

Example 1: Trading Wheat for Wheat

If wheat is exchanged for wheat, then both rules are applied
meaning:
 The amount of wheat must be equal in quantity
 The wheat must be exchanged at the same time (on the spot)
Example 2: Trading Wheat for Barley
If wheat is exchanged for barley, then only one rule applies:
 The amounts of wheat and barley can be different; since the
commodities are of a different type, the rule of similar quantity
does not apply
 The wheat and barley must be exchanged at the same time (on
the spot)

2. Critically analyze why Riba is considered Haram in Islam from both a spiritual and socio-
economic perspective. Reference at least three primary sources (Quran, Hadith, and
scholarly interpretations)

The most famous and unique principle of the Islamic financial system is the prohibition
of Riba. The word Riba is most commonly understood as charging or promising a fixed rate of
return.

For example: credit cards and conventional bank loans include Riba in the a form of periodic
compounding interest charged on the outstanding debt amount Riba is widespread and
common in the modern conventional financial system. The entire conventional global financial
system is based on it. But just because it’s common, does that make it the best way of doing
things?

From an economic perspective, Riba can lead to inflation, as the interest charged on loans
increases the cost of goods and services. Additionally, it can create a debt trap for individuals
and businesses, as the interest payments can quickly become unmanageable

Hated by Religions
Some of the oldest warnings against Riba are found in the Vedic texts of India dating back to
between 1,400 and 2,000 BC. The narrative poem “Divine Comedy” by Dante imagines an
afterlife where those who charged Riba are imprisoned in a sandy desert full of burning fire in
the seventh circle of hell .In fact classical Judaism, Christianity, and Islam alike have all
unanimously agreed on the prohibition of charging interest

 The Prophet Muhammad ‫ ﷺ‬cursed 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]." [Sahih Muslim]

 The Prophet Muhammad ‫ ﷺ‬prohibited Riba explicitly in his last hajj (pilgrimage to
Mecca) which was the most attended gathering of his companions. Jabir ibn 'Abdallah,
giving a report on the Prophet Muhammad ‫ 'ﷺ‬last hajj, said: The Prophet Muhammad
‫ ﷺ‬addressed the people and said "All of the Riba of Jahiliyyah (the days predating
Islam) is annulled. The first Riba that I annul is our Riba, that accruing to 'Abbas ibn 'Abd
al-Muttalib [the Prophet Muhammad ‫'ﷺ‬s uncle]; it is being cancelled completely."
[Sahih Muslim]

 From 'Abdallah ibn Hanzalah: The Prophet Muhammad ‫ ﷺ‬said: "A dirham of Riba which
a man receives knowingly is worse than committing adultery thirty-six times." [Mishkat
al-Masabih]

Discuss the ethical implications of Riba on society. Address how the prohibition of Riba aims to
create a balanced, fair financial system, and the potential consequences on social inequality if
Riba were allowed.

Riba is forbidden under Sharia law (Islamic religious law) because it is thought to be
exploitative. Though Muslims agree that Riba is prohibited, there is much debate over what
constitutes Riba, whether it is against Sharia law or only discouraged, and whether or not it
should be punished.

The Holy Quran, being the divine scripture of Islam, contains numerous verses that explicitly
prohibit Riba'. These verses serve as a powerful reminder for Muslims to abstain from engaging
in any form of interest-based transactions.
Ethical Implications of Riba on Society

Riba, commonly translated as usury or interest, is a concept strictly prohibited in Islamic

finance. The prohibition of Riba is based on the belief that money should be used as a medium
of exchange rather than as a means of making profit through exploitation. From an ethical
perspective, the prohibition of Riba seeks to promote fairness, justice.

Social Inequality and Financial Exploitation

Allowing Riba to operate freely within a society can exacerbate social inequality. Wealth tends
to accumulate in the hands of those who already have capital, while those in need of borrowing
are penalized through high interest rates. In such a system, the wealthy grow richer simply by
lending money, while the poor may struggle to break free from debt cycles

This creates a two-tier society, where the rich become wealthier through passive income from
interest, while the poor remain trapped in debt, struggling to meet basic needs. The wealth gap
widens, leading to economic polarization and a lack of social mobility. This is contrary to ethical
ideals of fairness and justice, as those who are already disadvantaged are disproportionately
affected by the system

Contemporary Issue Analysis: Examine a real-world case where a country or bank attempted to
implement Islamic banking principles and the challenges faced in eliminating Riba from their financial
system. What alternative solutions were proposed?

Really challenging issue at all because no one give you much and enough money for that kind of
implementation , Despite the success in developing the Islamic finance sector, Malaysia has
faced several challenges in eliminating Riba from its financial system. These challenges include

While Malaysia has made significant progress in implementing Islamic banking principles and
reducing the role of Riba in its financial system, the country continues to face challenges related
to dual banking, regulatory inconsistency, and public understanding. Alternative solutions
such as enhanced Shariah governance, the rise of Islamic FinTech, global standardization of
Islamic finance, and educational initiatives may help address these issues and move toward a
more fully Riba-free financial system

The broader Malaysian economy also presents challenges. Riba is entrenched in the global
financial system, with Malaysia heavily involved in international trade and investment. Many of
Malaysia’s economic transactions and foreign investments are influenced by interest-based
finance, and this global linkage complicates efforts to remove Riba entirely from the domestic
system.

For instance, while the Malaysian government has issued Sukuk as an alternative to interest-
bearing government bonds, there are still some government-related enterprises that issue
debt instruments based on conventional interest rates, thereby perpetuating the practice of
Riba in certain sector

This topic is very sensitive so couldn’t be able to suggest alternatives because all are about
shariah law and under the supervision of shariah board. Since many years scholars and grand
muftis are working on RIBA free banking and I hope they will get success on that , topic is very
vary and I belive don’t do supposed things on this matter.