An assignment on Riba and Islami Banking

Submitted To

Mosa. Zakiya Akhter Khanam

FAVP & FM, IBTRA
Coordinator, Internship Program(161th Batch)
Islami Bank Training and Research Academy, Dhaka

Submitted By

Md Mohiuddin
IBTRA Id No. 161148
Session: 2019-20
Roll: 1908011
Department of Public Administration
Islamic University, Kushtia
 Riba and Islami Banking
Abstract

The basic objective of Islami banking is to provide financial facilities by developing financial
instruments that conform with the Islamic rules and norms, the Shari`ah. The primary goal of Islami
banking is not to maximise the profit as the interest-based banking system does, but rather to render
socio-economic benefits to the society. Islami banking conforms to philosophical underpinning of
Islam. Since Allah is the creator and ultimate owner of the universe, institutions or human beings
have a vicegerency role to play in society. Therefore, banking institutions have to integrate moral
values with economic action. Money and other resources are thus social tools to achieve optimum
social good and welfare. The objectives of Islami banking are to promote, foster and develop the
application of Islamic principles, law and tradition to the transaction of financial, banking and
related business affairs services and to promote products based on Islamic principles. Islamic banks’
relationship with their clients is not that of a lender and borrower but that of a business partner. This
paper is an attempt to analyze the characterstics of riba and how it fits within the realm of Islamic
Banking, as it is exemplified by the Prophet in his Sunnah and as it is described in the Holy Qur’an.
The authors, in a nut shell, stress on the point in this paper that any form of riba is strictly avoided in
the Islami Banking System. Eliminating riba in the banking system is an indispensable part of Islamic
business principles. Management and staff of this system are bound to conduct their business with
conformity to Islamic business principles in addition to the normal objective of profit maximisation.
These principles include honesty, justice and equity as ordained by Allah and practiced by Allah’s
Prophet.

Introduction

Islam is a complete code of life that is built upon the instructions given by the Allah
Almighty and practices of the holy prophet Muhammad (peace be upon him). The holy Quran
is the written instructions of Allah Almighty for humans. It covers all aspects of human life
and all types of activities including religious, social and economic that are performed for the
success in this life and in the life hereafter. There are clear instructions about Haalal and
Haraam. Islam is a universal faith that promotes brotherhood, social equality and fairness in
economic activities for the welfare of the mankind. Riba, interest, or usury is strictly
prohibited in Islam as dealing with Riba-based transactions means declaring war with Allah
Almighty and His Messenger (Muhammad, peace be upon him) Sura-e-Al-Bakara (2:279).
Islam is defined as total submission to Allah Almighty without any condition. It is a complete
code of life that consists upon the instructions of Allah Almighty and the practices of the
Holy Prophet Muhammad (Peace be upon him). Every-one in this world performs religious,
social and economic activities in one's life. But most of the times social and economic
activities are originated and linked with the religious activities. Islam provides a
comprehensive set of instructions to face any challenge. Economic activities reflect the
earning and spending pattern of people, which is closely associated with religion in the form
of being permissible (Halaal) or forbidden (Haraam). The most important feature of Islamic
banking is the sharing of risk among the investors, the bank and the borrowers. Islamic
banking focuses on fairness and freedom as a centrally controlled and individually managed
system according to the instructions of Allah Almighty. Interest by definition is an additional
amount paid or received on the principal amount according to an agreement due to a time
period attached thereof. Even a single additional penny on the principal amount or any other
benefit attached with this transaction is considered as Riba (Rehman, 1993).

Meaning of Riba

Riba is an Arabic word, derived from the verb raba that literally means ‘to grow’ or ‘expand’
or ‘increase’ or ‘inflate’ or ‘excess’. The same literary meaning has occurred in many places
of alQur’an as well. It is, however, not every growth or increase, which falls in the category
of riba prohibited in Islam.

It is generally translated into English as “usury” or “interest”, but in fact it has a much
broader sense in the Shari`ah. Riba in the Shari`ah, 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.

Definition of Riba

In fiqh terminology, riba means an increase in one of two homogeneous equivalents being
exchanged without this increase being accompanied by a return. The term riba is, however,
used in the Shari`ah in two senses. The first is riba al-nasi’ah and the second is riba al-fadl.
Some Muslim scholars attempt to define riba which seems to be closer to the sense implied in
the verses of the Qur’an and Hadith related to it. They define riba as an increase or excess
which, in an exchange or sale of a commodity, accrues to the owner (lender) without giving
in return any equivalent counter-value or recompense to the other party.

In the pre-Islamic and early Islamic era, riba signified the increase of money in consideration
for an extension of the term of maturity of a loan. The pre-islamic and early Islamic Arabs
used to pay the money on loans and received a certain sum leaving the principal sum
untouched. When the maturity date expired, they would claim the principal sum from the
debtor; if it was not possible for the debtor to repay, they would increase the principal sum
and extend the term.

Prohibition of interest in the Holy Quran

Riba is prohibited step by step by Allah Almighty by conveying its pros and cons in the
Sura-ar-Rome (30:39) and finally declared Haraam in the Sura-Al-Bakara (2:275). The
following verses of the Holy Quran clearly reflect the instructions regarding Riba.
“That which ye given in Riba in order that it may increase on (other) people's property hath
no increase with Allah; but that which ye give in charity; seeking Allah's countenance, hath
increase manifold” (30:39)
This is the first stage, to convey the pros and cons of Riba. In this verse, Allah Almighty
disclosed the pros and cons of Riba and ordered to spread charity. People only consider
extrinsic characteristics of Riba to increase their capital manifold and ignores the intrinsic
fatal outcome of Riba. It is strongly recommended that Muslims must frequently distribute
charity, Zakat and donations among deserving people for sake of increase in your income and
success in this life and in the life hereafter. “That they took Riba, though they were forbidden;
and that they devoured men's substance wrongfully. We have prepared for those among them
who reject faith, a grievous punishment” (4:161).

This holy verse shows the historical perspectives of Riba. There is always a segment of
people even in the previous nations of the world, who practices Riba-based activities and eat
the property of others in an unlawful and unethical manner. These people are warned for
exemplary trial and bad consequences of their deeds.
“O ye who believe! Devour not Riba, doubled and multiplied; but fear Allah; that ye may
(really) prosper”. “Fear the fire, which is prepared for those who reject faith”. And obey
Allah and the Messenger; that ye may obtain mercy” (3:130-2).

This holy verse makes a strong foundation for the prohibition of Riba by declaring it as
unwanted activity. The people are ordered to stop eating the earnings from Riba and follow
the instructions of Allah Almighty. It rejects manifold increase in the Riba and warns the
people. It also inspires the human being to be obedient to Allah Almighty for ultimate
success.
“Those who devour Riba will not stand except as stands one whom the evil one by his touch
hath driven to madness. That is because they say: „Trade is like Riba'. But Allah hath
permitted trade and forbidden Riba. 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)” (2:275).

These verses show the final prohibition of Riba by the Creator of this universe. The persons
who eat Riba are like those that are touched by Satan and became unsound in mind. They
foolishly argue that trade is like Riba. But trade is declared Halaal and Riba is haram by
Allah Almighty.
“Allah will deprive Riba of all blessing, but will give increase for deeds of charity; for He
loved not creatures ungrateful and wicked” (2:276).

Allah Almighty does not bestow blessings upon Ribabased activities and orders to stop them,
as He dislikes the violent. But there are uncountable blessings attached with the deeds of
charity and sadaqaat. “O ye who believe! Fear Allah and give up what remains of your
demand for Riba, if ye are indeed believers” (2:278). “If you do it not, take notice of war
from Allah and His Messenger. But if ye turn back, ye shall have your capital sums. Deal not
unjustly, and ye shall not be dealt with unjustly” (2:279).

These verses are related to desired post prohibition behavior of believers. Believers of Allah
Almighty are required to waive the interest due to them by borrowers and recover only
principal amount. “If the debtor is in a difficulty, grant him time till it is easy for him to
repay. But if ye remit it by way of charity, that is best for you, if ye only knew” (2:280). “And
fear the Day when ye shall be brought back to Allah. Then shall every soul be paid what it
earned, and none shall be dealt with unjustly” (2:281). Finally, these verses are the best
examples to promote a sense of brotherhood and collective welfare through cooperation. This
is because in these verses we can clearly see that the values of tolerance, understanding and
empathy are being promoted. These verses also educate us to not to be too obsessed with the
accumulation of wealth. Indeed it reminds us that our life is just a journey to the eternity and
therefore what should matter most in our life is the accumulation of Allah‟s pleasure and not
the accumulation of wealth for the sake of wealth alone.

Prohibition of interest in the Sunnah

The Holy Prophet (Peace be upon him) gave us a complete code of life that covers all aspect
of human life (that is, religious, social, and economic activities). Islam as a religion of peace,
brotherhood and cooperation has its prime concern of being totally submissive to Allah. Islam
ensures complete success in this life and the hereafter by following the instructions of the
Holy Quran and Sunnah (practices of the holy Prophet MuhammadPeace be upon him). The
holy Quran has clearly declared an interest as Haraam and people are prohibited to practice it.
Similarly, the Holy Prophet Muhammad (Peace be upon him) discouraged interest based
activities and strictly prohibited to practice it. Prohibition of Riba is depicted from following
Hadith.

Abu Saad al Khudri (R.A) narrated that the Holy Prophet (Peace be upon him) said: “Gold
for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt,
like for like, payment being made hand by hand. If anyone gives more or asks for more, he
has dealt in Riba. The receiver and giver are equally guilty” (Muslim).

This hadith specifies the six commodities to be exchanged at equal and alike. Two of them
are represented as money commodity while others are staple food items. Abu Hurayrah (R.A)
narrated that the Holy Prophet (Peace be upon him), said: “There will certainly come a time
for mankind when everyone will take Riba and if he does not do so, its dust will reach him”
(Abu Daud). This hadith indicates the frequency and excess of Riba in the economy. It was
estimated that there will be a time when every transaction would involve the interest/Riba
directly or indirectly.

Jabir (R.A) narrated that the Holy Prophet (Peace be upon him), cursed the receiver and the
payer of Riba, the one who records it and who witnesses to the transaction and said: “They
are all alike (in guilt)” (Trimizi). This hadith reflects the badness of Riba and involvement of
different parties in Riba based transactions. The holy prophet Muhammad (peace be upon
him) cursed the four parties that is, receiver, payer, witness and the person who document it.
It shows that all the parties equally participated in sin.
Abu Hurayrah (R.A) narrated that the Holy Prophet (Peace be upon him), said: “Allah would
be justified in not allowing four persons to enter paradise or to taste its blessings; he who
drinks habitually, he who takes Riba, he who usurps an orphan's property without right, and
he who is undutiful to his parents” (Kitab al Buyua). Similarly, this hadith shows the
punishments for the bad deeds in this world including Riba. It reveals that receipt and
payment of Riba is an unwanted activity that may lead towards curse and punishment.

Modernists Versus Conservatives’ Views on Riba

The origin of one part of the controversy between the modernists and the conservatives’
views on riba dates back to early Islam, and it revolves around the question of what kind of
riba the Qur’an really prohibited. Was it riba al-nasi’ah, which involves lending and
borrowing, or riba al-fadl, which involves buying and selling? One view is that in the early
period of Islam, the Qur’anic injunctions against riba was understood to apply to loans in
money and food, and anything beyond that is accepted to be later development. Another
authoritative view is that riba al-fadl has its origin in the hadith, and concludes that no
attempt to define riba on the basis of the hadith has really been successful. A more recent
contribution claims that riba in both sales and loans existed before Islam, and al-Qur’an
clearly implies that. Furthermore, the hadith, and the juristic formulations, therefore, are
elaborations and extensions of the basic Qur’anic concept. It is also argued that riba al-fadl is
merely a consequence of riba al-nasi’ah, since money can always be transformed into
commodities. The controversy in its contemporary form turns on the definition of riba itself,
whether the riba merely attached to profits obtained through interest-bearing loans involving
exploitation of the economically weak by the strong and resourceful, or through all kinds of
loan irrespective of the purposes; whether the prohibition is the form of riba practised in the
pre-Islamic period; whether it prohibits usury but not interest or it prohibits the charging of
interest altogether; whether it relates to loans for consumption or investment in a business
venture; whether it prohibits nominal or real interest; whether the prohibition applies to
compound or simple interest; and whether the ban relates to the borrower as individual or
institution. According to the modernists’ trend towards riba, extra charges are permitted
where they are used:
1. For the purposes other than exploiting the weak people of the community by the strong;
2. For loans that are similar to what were practised in the pre-Islamic period;
3. For the present form of interest-based banking transactions but not for usurious
transactions transactions;
4. For business investment but not for consumption loans;
5. For the loss suffered by the creditor due to inflation;
6. For simple interest but not for compound interest; and
7. For institutional credit.

As opposed to this rather pragmatic viewpoint, the conservatives view forbids every form of
fixed and predetermined interest. They regard the levy of any fixed amount in excess of the
principal lent prohibited by al-Qur’an. According to this view, since interest, however
exorbitant or reasonable, is additional to the principal borrowed, it is a form of riba and
therefore does not comply with al-Qur’an. Thus, riba, is defined as any predetermined fixed
return for the use of money. Three main reasons are stated for strict condemnation of riba in
Islam:
1. Riba reinforces the tendency for wealth to accumulate in the hands of a few, and thereby
diminishes human beings concern their fellow men.
2. Islam does not allow gain from financial activity unless the beneficiary is also subject to
the risk of potential loss; the legal guarantee of at least nominal interest would be viewed as
guaranteed gain.
3. Islam regards the accumulation of wealth through interest or usury as selfish compared
with accumulation through hard work and personal activity. Several modernists and
conservatives’ views in regard to the riba along with their arguments are discussed below:

Riba is prohibited for exploitation and injustice

Modernists tend to emphasise the moral aspect of the prohibition of riba, and argue that the
rationale for this prohibition as formulated in al-Qur’an was injustice and hardship. They also
find some support for their views in the works of some early scholars like Imam Razi and Ibn
Qayyim for whom it appears that what is prohibited is the exploitation of the needy, rather
than the interest itself. Many writers of this trend attempt to differentiate between various
forms of interest practised under the conventional banking system, advocating the lawfulness
of some, while rejecting others.

As opposed to this view, it might be argued that the rationale for the prohibition of riba in
holy Qur’an is to establish an economic system from which all forms of injustice and
exploitation are eliminated, in particular, the injustice of the financiers being assured of a
positive return without putting any effort or sharing in the risk, while the entrepreneurs, in
spite of their management and hard work, is not assured of such a positive return. The
prohibition of riba is therefore a way to establish justice between the lenders and borrowers.

Principles of Islamic Banking and Finance:

Islam categorically prohibits its followers from dealings that involve riba. Yet Muslims need
banking services as much as anyone and for many purposes: to finance new business
ventures, to buy a house, to buy a car, to facilitate capital investment, to undertake trading
activities, and to offer a safe place for savings. Muslims are not averse to legitimate profit and
Islam encourages people to use money in Islamically legitimate ventures, not just to keep
their funds idle. Keeping this in view, the hallmark of Islamic banking is the prohibition of
riba or interest, and there is now a general consensus among Muslim economists that riba is
not restricted to usury but encompasses interest as well. The principles of Islamic banking
and finance enshrined from alQur’an and Prophetic Sunnah are quite simple and can be
summed up as follows:
Any predetermined payment over and above the actual amount of principal is
prohibited

Islam allows only one kind of loan and that is qard hassan (literally known as benevolent
loan), whereby the lender does not charge any interest or additional amount over the money
lent. Traditional Muslim jurists have construed this principle so strictly that, according to one
commentator "this prohibition applies to any advantage or benefits that the lender might
secure out of the qard or loan such as riding the borrower's mule, eating at his/her table, or
even taking advantage of the shade of his/her wall". The principle derived from the quotation
emphasises that associated or indirect benefits are prohibited.

The lender must share in the profits or losses arising out of the enterprise for which the
money was lent Islam encourages Muslims to invest their money and to become partners in
order to share profits and risks in the business instead of becoming creditors. As defined in
the Shari`ah, Islamic finance is based on the premise that the provider of capital and the user
of capital should equally share the risk of business ventures, whether those are industries,
farms, service companies or simple trade deals. Translated into banking terms, the depositor,
the bank and the borrower should all share the risks and the rewards of financing business
ventures. This is in sharp contrast to the interest-based commercial banking system, where all
the pressure is on the borrower: who must pay back the loan, with the agreed interest,
regardless of the success or failure of the bank financed venture. The principle, which thereby
emerges is that Islam encourages investments in order that the community may benefit.
However, it is not willing to allow a loophole to exist for those who do not wish to invest and
take risks but rather content with hoarding money or depositing money in a bank in return for
receiving an increase on these funds for no risk (other than the bank becoming insolvent).

Making money from money is not Islamically acceptable

As Islam views money as a medium of exchange; a way of defining the value of a thing; it
has no value in itself, and therefore should not be allowed to give rise to more money, via
fixed interest payments, simply by being put in a bank or lent to someone else. The human
effort, initiative, and risk involved in a productive venture are more important than the money
used to finance it. Muslim jurists consider money as potential capital when it is invested in
business. Accordingly, money advanced to a business as a loan is regarded as a debt of the
business and not capital and, as such, it is not entitled to any return (i.e. interest). Muslims are
encouraged to purchase and are discouraged from keeping money idle as such hoarding
money is regarded unacceptable. In Islam, money represents purchasing power, therefore,
cannot be used to make more purchasing power (money) without undergoing the intermediate
step of it being used for the purchase of goods and services.
Investments should only support practices or products that are not forbidden or even
discouraged by Islam

Investments, according to the rules set by the Shari`ah should not be made for the products
which are forbidden or even discouraged in Islam. Trade in alcohol, for example would not
be financed by an Islamic bank; a real-estate loan could not be made for the construction of a
casino; and the bank could not lend money to other banks at interest. In summary, Islamic
banking and finance stands for a system of equity-sharing and stake-taking. It operates on the
principle of variable return based on actual productivity and performance of the projects,
specific or general, individual or institutional, private or public. Economic cooperation may
assume as many forms as may be desired, but the principle remains one of equity and reward
sharing and not of simple loan-interest relationship as in the conventional banking system.

Islamic and Conventional Banking A Comparison

Conventional Banking System Islamic Banking System

Money is a product besides medium of Real Asset is a product. Money is just a
exchange and store of value medium of exchange

Time value is the basis for charging interest Profit on exchange of goods & services is the
on capital basis for earning profit

The expanded money in the money market Balance budget is the outcome of no expansion
without backing the real assets, results of money
deficit financing

Interest is charged even in case, the Loss is shared when the organization suffers
organization suffers losses. Thus no concept loss
of sharing loss

While disbursing cash finance, running The execution of agreements for the exchange
Marketingor working capital finance, no of goods & services is must, while disbursing
agreement for exchange of goods & services funds under Murabaha, Salam & Istisna
is made contracts

Due to non existence of goods & services Due to existence of goods & services no
behind the money while disbursing funds, expansion of money takes place and thus no
the expansion of money takes place, which inflation is created
creates inflation

Due to inflation the entrepreneur increases Due to control over inflation, no extra price is
prices of his goods & services, due to charged by the entrepreneur
incorporating inflationary effect into cost of
product

Banking in the form in which it exists today is comparatively of recent origin. Before the
advent of modern banking, direct finance, where the owner of capital deals directly with the
user of capital, was the customary mode of transference of funds from savers to investors.
With the progress of trade and industry and increased financing requirements of productive
enterprises, direct finance proved an inadequate mechanism for such transference and banks
emerged on the scene to undertake financial intermediation between savers and investors.
Furthermore, in modern times, they emerged as organisations that engage in any or all of the
various functions of banking, i.e., receiving, collecting, transferring, paying, lending,
investing, dealing, exchanging, and servicing money and claim to money both domestically
and internationally. In its more specific sense, however the term bank refers to institutions
providing deposit facilities for the general public.

Perhaps the most striking feature in the structure of modern banking and finance is the use of
credit institutions of accumulated wealth. Loans based on deposit funds provide financial
support of the varied business and industrial enterprises in which men engage. Through
credit, the accumulations of wealth, represented by bank deposits, have become a dynamic
force in the modern world. Banking systems not only make the actual value of their deposit
services available to society, but they have also multiplied the effective use of such funds by a
system of discount and reserve which is of a comparatively recent origin. Commercial banks
perform all these functions and are considered to be the chief product of this age.

Therefore, the banks occupy very important position in a modern economy. Through the
process of financial intermediation between savers and investors they exert immense
employment and income generation effects, which ultimately help in economic advancement
and social welfare. Another social welfare aspect of banks is through the provision of a return
to the depositors, who are mainly small savers and include such weaker sections of the
society such as widows, disabled orphans and the aged who could otherwise make no
profitable use of their savings.

Furthermore, the banks are manufactories of credit, which serves the community and keeps
the wheels of commerce and industry revolving. By offering opportunities for investment and
safe custody of deposits, they stimulate the habit of saving, and discourage hoarding or the
unproductive use of surplus wealth, thus promoting investment and the growth of capital. A
wise banking policy may go a long way towards mitigating the shocks of an economic crisis,
while a banking system, if badly constructed or badly handled, is capable of inflicting great
harm on trade and industry and may even upset the whole economy.

Financial intermediaries in an Islamic system which operate in accordance with the Shari`ah
can reasonably be expected to exhibit economies of scale with respect to these costs, as do
their counterparts in a conventional system. Just as in the latter system, the Islamic depository
financial intermediaries transform the liabilities of business into a variety of obligations to
suit the tastes and circumstances of the surplus units.

Due to the nature of their operation, on the other hand, there are a lot of differences between
Islamic and conventional banking. Contrary to Islamic banking, conventional banking has
been defined as “accepting, for the purpose of lending or investing, deposits of money from
the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or
otherwise”. The Islamic banking has been defined by the International Association of Islamic
Banks (IAIB) as “The Islamic Bank basically implements a new banking concept in that it
adheres strictly to the rules of Islamic Shari`ah in the fields of finance and other dealings.
Moreover the Bank functioning in this way must reflect Islamic principles in real life. The
Bank should work towards the establishment of an Islamic society. Hence, one of its primary
goals is the deepening of religious spirit among the people.” Thus, it is evident that Islamic
banking is different from conventional banking in terms of its mission and objectives.
Therefore, obligations of Islamic banking toward society are greater than conventional banks,
for the following reasons:

a) Islamic banking has certain philosophical missions to achieve. That is, since Allah is the
Creator and Ultimate Owner of all resources, institutions or persons have a vicegerency role
to play in society. Therefore, Islamic banks are not free to do as they wish; rather they have to
integrate moral values with economic action.
b) To provide credit to those who have the talent and the expertise but cannot provide
collateral to the conventional financial institutions, thereby strengthening the grass-root
foundations of society; and
c) To create harmony in society based on the islamic concept of sharing and caring in order to
achieve economic, financial and political stability.

Conventional banking is essentially based on the debtor-creditor relationship between the

depositors and the bank on the one hand, and between the borrowers and the bank on the
other. Interest is considered to be the price of credit, reflecting the opportunity cost of money.

In Islami banking, on the other hand, since a loan is considered to be given or taken, free of
charge, to meet any contingency, the creditor should not take advantage of the borrower.
When money is lent out on the basis of interest, more often it happens that it leads to some
kind of injustice. The first Islamic principle underlying such kinds of transactions is that
“Deal not unjustly, and you shall not be dealt with unjustly”. [2:279]

Hence, commercial banking in an Islamic framework is not based on the debtor-creditor

relationship.

The second principle regarding financial transactions in Islam is that there should not be any
reward without taking a risk. This principle is applicable to both labor and capital. As no
payment is allowed for labor, unless it is applied to work, there is no reward for capital unless
it is exposed to business risk.

Thus, financial intermediation in an Islamic framework has been developed on the basis of
the above two principles. Consequently financial relationships in Islam have been
participatory in nature. The institution of interest is thus replaced by a principle of
participation in profit and loss. That means a fixed rate of interest is replaced by a variable
rate of return based on real economic activities.
Conclusion

Inception of Islamic banking across the globe requires a study to differentiate the Islamic and
conventional banking system. Human beings perform religious, social and economic
activities according to their specific environment. In Islam, social and economic activities are
closely tied with religious activities. Every Muslim is required to execute only those activities
which are permissible (Halaal) and must refrain from prohibited (Haraam) deeds. The basic
source of Islamic instructions is the Holy Quran and the Sunnah. Islam allows trade oriented
activities in the society for the collective well being. On the other hand, Riba/interest oriented
transacttions are strictly prohibited in Islam. This study presented a glossary regarding
prohibition of Riba or interest in the light of the Holy Quran and Sunnah (Ahadith). It depicts
the superiority of Islamic banking as interest free banking over the conventional banking
(interest based banking) due to its long lasting benefits. Islamic banking is desirable because
it promotes cooperation and mutual benefit oriented behavior among different stakeholders
with assurance of welfare oriented society. This study attempts to differentiate Islamic
banking from the conventional banking on the basis of interest.
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