RIBA AND ITS TYPES

Compiled by

Mian Ahmad Sajjad Shabbir

MS Banking and Finance
Define Riba (Interest)? Give its types.

“The dictionary meaning of Riba is increase, addition, excess, expansion or growth. It is

however not every increase or growth which has been prohibited in Islam but according to
Shariah Riba refers to the excess amount that must be paid by the borrower to lender along
with the principle amount as a condition for the loan at the time of maturity without due
consideration”

For example:

A person Ali has Rs 100 Million with him and another person Akbar needs Rs 100 Million
to start his business. Akbar asks Ali to give him Rs 100 Million for 1 year. Both the parties
agree upon the given conditions:

Loan Amount will be: Rs 100 Million

Payback time: 1 Year
Payback amount Rs 100 M+Rs 10 M= Rs110M

Here Rs 10 Million is excess on capital that Ali will earn without bearing any risk and
without doing any effort, and according to Islamic economic system money is just used
as a medium of exchange and it does not having any store of value then the Rs 10
Million is excess that is Riba. And according to Quran and Sunna,h Riba is prohibited.

Types of Riba:
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1. Riba Al Quran or Riba al-Nasi’ah or Riba Al Jahiliya

“Kind of loan (In monetary terms) where specified repayment time period and amount in excess
of capital is pre determined”

The term nasi’ah comes from the root nasa’a which means to postpone, defer, or wait, and
refers to the time that is allowed to the borrower to repay the loan in return for the ‘addition’
or the ‘premium’. Hence riba al-nasi’ah is equivalent to the interest charged on loans.

It is also called Riba al Quran because Allah Subhana Talla prohibited Riba in Quran and so many
verses are in Quran for the prohibition of riba.

Qur’an in verse 2:275, which states that

“God has allowed trade and forbidden Riba (interest)”

The prohibition of riba al-nasi’ah essentially implies that the fixing in advance of a positive rate
of return on a loan as a reward for waiting is not permitted by the Shari‘ah. It makes no
difference whether the rate of return is small or big, or a fixed or variable per cent of the
principal, or an absolute amount to be paid in advance or on maturity, or a gift or service to be
received as a condition for the loan.

The point in question is the predetermined positiveness of the return. It is important to note that,
according to the Shari‘ah, the waiting involved in the repayment of a loan does not by itself
justify a positive reward.

Some of the people argue that excess is allowed when you are lending your money for business
while excess is forbidden when you are giving loan to those who need it to fulfill there
necessities this argument is not true because the borrowing during the Prophet’s time loan was
only taken for business purposes not for consumption purpose. Accordingly, the late Shaykh
Abu Zahrah, one of the most prominent and respected Islamic scholars of this century, has
rightly pointed out that:

“There is absolutely no evidence to support that the riba of al- Jahiliyyah [pre-Islamic days] was
on consumption and not on development loans. In fact the loans for which a research scholar
finds support in history are production loans. The circumstances of the Arabs, the position of
Makkah and the trade of Quraysh, all lend support to the assertion that the loans were for
production and not consumption purposes. (Abū Zahrah, 1970, pp.53-4)”

Finally according to Islamic economic system you can not rent out money because it does not
having intrinsic value and it is consumable item (Current assets) you can only rent out the fixed
assets (you only rent out the usufruct) like table, Laptops etc and if you give Rs100 and take Rs
110 in return then this 10 is prohibited and is not allowed.

 Sood-e-Mufrad (Simple Interest)

Interest calculated only one the initial investment is called sood-e-mufrad.

Example:
A person gives Rs100 for 2 year @14% sood-e-mufrad. The amount he will get after 2
year can be calculated as follows
 S.I = PV × r × n
= 1000 × .14 ×2
S.I = Rs 280/-
After 2 years he will get Rs 1280/-
 Sood-e- Murakkab (Compound Interest)

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

Example:
A person gives Rs100 for 2 year @14% sood-e-murakkab. The amount he will get after 2
year can be calculated as follows
n
F.V = PV (1 + i) ^
F.V = 1000 (1 +.14) ^2
F.V = 1000 × 1.2996=Rs 1299
After 2 years he will get Rs 1299/-

2. Riba Al Hadees or Riba al Fadl

“The Hazart Muhammad (P.B.U.H)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).”
(Sources: Jabir ibn Abdullah, Muslim, Tirmidhi, Musnad Ahmed

Definition of Riba Al Hadees:

Quality premium in exchange of low quality with better quality goods of same kind; prohibited
e.g. dates for dates, wheat for wheat etc, Gold for Gold, Salt for Salt

“Any excess taken in exchange of specific commodities which are homogeneous is prohibted”
 The Prophet (P.B.U.H) said: “Sell,

 Gold in exchange of equivalent Gold,

 Silver in exchange of equivalent Silver
 Dates in exchange of equivalent Dates
 Wheat in exchange of equivalent Wheat
 Salt in exchange of equivalent Salt
 Barley in exchange of equivalent Barley

But if a person transacts in excess it is usury (riba), However, sell gold for silver anyway you please
on the condition it is hand to hand (spot) and sell barley for dates anyway you please on the
condition it is hand –to-hand.”