SHARIAH PRINCIPLES PROHIBITIONS

1. Riba – interest
2. Maisir – gambling
3. Gharar – uncertainty

PROHIBITION : RIBA

Riba, interest, or usury is strictly prohibited in Islam.

The literal meaning of the Arabic word riba is increase, excess, addition or growth

The Shariah meaning ‘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.

The Holy Quran has clear instructions regarding business and trading activities as earnings from trade
(Bai) is halal but interest (Riba) based activities are Haraam.

Banking activities are the part of economic activities and Islam allows Riba-free banking only.

Riba An-Nasiah:

"That kind of loan where specified repayment period and an amount in excess of capital is
predetermined." Imam Abu Bakr Hassas Razi

"Every loan that draws profit is one of the forms of Riba" Sahabi Fazala Bin Obaid

"Every loan that draws more than its actual amount" Abu Ishaq az Zajjaj
 Riba Al-Fadl:

It involves excess received when two alike commodities are exchanged. This is explained further in
the hadith:

Abu Sa'id al-Khudri (r) reported Allah's Messenger (p) as saying: Gold is to be paid for by gold, silver
by silver, wheat by wheat, barley by barley, dates by dates, salt by salt, like by like, payment being
made hand to hand. He who made an addition to it, or asked for an addition, in fact dealt in riba.
Sahih Muslim

Every excess in return of which no reward or equivalent counter value is paid

A predetermined excess or surplus over and above the loan received by the creditor conditionally in
relation to specified time period

A forced “increased of value” in “the medium of exchange” that is loaned.

Quran : “ they say, trade is like riba, but Allah has permitted trade and prohibited riba….” 2:275

Riba and Inflation

Inflation, defined as a continuous rise in prices, can reduce the value of money. Assume that person X
provides a $100 loan to person Y, to be paid back in 12 months time. However, if prices have increased
by 10 per cent during that time, the value of that $100 will be worth less to the lender (person X). In
such a case, can person X charge an excess or premium to take into account the loss of value of money?
The Islamic opinion is against the charging of any premium. Scholars contend that although it is
unfortunate that person X has lost some value, this is not the fault of person Y (borrower), hence the
borrower should not be burdened with this excess.

RIBA VS PROFIT
RATIONALE BEHIND THE PROHIBITION:

1.Element of exploitation in financing consumption

The rich is able to generate more without exerting much effort

2.Inconsistent with Islam on the perspective of debt

Incurring debt and interest is discouraged

3.Negative effects on “credit society”

Easy availability of credit cultivates a materialistic society

Banks – controller, Customers- enslaved

4.Elements of injustice in financing productive activities

Contract done with unequal counter-value

Injustice to debtor- obligated to pay even no profit or loss

PROHIBITION : GHARAR

•Literally: Deceit, fraud, uncertainty, danger, peril, or hazard that might lead to destruction or loss.

•Technically: Uncertainty and/or ignorance of one/both parties in a contract over the substance or
attributes of the object of sales, or doubt over its existence and availability at the time of contract.

•An unknown fact or condition. An element which must be avoided in Islamic banking dealings as
excessive gharar may make the contract null and void.

For example:

 –Sale of birds in the air

 –Sale of fish still in the sea
 –Sale of unborn animal

 Rationale for prohibiton of gharar:

Gharar may lead to injustice, exploitation and enmity among contracting parties.

To ensure full consent and satisfaction of both parties in a contract

Contract will not valid-without full consent.

Contract valid if certainty, full knowledge, full disclosure and transparency.

PROHIBITION : MAISIR

Definition: Easily obtaining something without effort, acquisition and wealth by chance.

Applies to all activities where a person wins or losses by mere chance; gambling.

The main idea behind the prohibition of gambling (maisir) in Islam is that money should be earned by
way of work and effort example knowledge and not by mere pure chance.

Playing a lottery is one form of gambling.

Gambling include any activity where a person pays something of value for the chance to win a prize.
When someone gambles, it will involve three things, namely:

 Prize: anything of value: money, physical items, software

 Consideration: what the person must pay to enter
 Pure chance: something that is opposite to the pure skill. For example, chess requires pure
skill and slot machine require pure chance. It seems apparent that the chance factor is the
dividing line between gambling and non-gambling functions with a consideration.
 For example, risking $10,000 (i.e. the consideration) in a joint-venture (JV) project is not
gambling because the outcome of the JV is based on knowledge and market skills.

COMPARISON BETWEEN ISLAMIC BANK AND CONVENTIONAL BANK

MAIN DIFFERENCE ISLAMIC BANK CONVENTIONAL BANK

Principles IB follows the principles of
shariah given by Allah to
perform operations and
activities
Source of Earnings Profit, service charges and
consultancy fee is the main
source of earnings of Islamic
banks. Profit is variable which
may be negative in case of loss.
Risk sharing Risk is shared among borrower,
lender and bank.
Profit maximization It aims at maximizing the profit
but subject to principles of
shariah
Objectives Islamic bank works as a trading
concern to generate its income
Nature of earnings Income of Islamic banks varies
depending upon business
borrowers and environment. It
may negative in case of loss.
Conventional banks follows
manmade principles to perform
operations and activities
Interest is the main source of
income for conventional banks
that is charged on the different
types of loans/products. It
assures a predetermined rate of
interest.
Risk is fully transferred to
others
It aims at maximizing the profit
without any restriction even at
the cost of other stakeholders.
It generates income as financial
intermediary. Its prime goal is
the maximization of
shareholders value at any cost.
Income of CB is constant even if
business borrowers suffer from
loss bcs it charges fixed rate of
interest irrespective of profit
value.