AL-MAKTOUM COLLEGE OF HIGHER EDUCATION

PROFESSIONAL DIPLOMA IN ISLAMIC ECONOMICS AND FINANCE

H46X04 Islamic Commercial Law

Lecture 1:
General Principles of Islamic Commercial Law: Riba (Interest)

Alija Avdukic
alija.avdukic@almcollege.org.uk
alija.avdukic@mihe.ac.uk

Winter Term 2016, Dundee

 Session Outline
• Riba
• Pre-Islamic riba (riba al jahiliyya)
• Riba of Excess (riba al fadl)
• Riba of Delay (riba al nasi’a)
• Why is Riba Forbidden?
• Implications of Riba
• Currency and debt
• Contemporary controversies

2
 Introduction
• General principle of Islamic commercial law –
Permissibility:
– all transactions are allowed, unless explicitly
forbidden by Islamic law
• Prohibitions:
– Riba
– Gharar
• When Shari’ah prohibits something, the harms
outweigh the benefits
 Riba
• Riba literal meaning ‘increase’ or ‘growth’
• Prohibition of riba comes directly from the Quran and Sunnah
“Those who devour riba will not stand except as stands one
whom the evil one by his touch has driven to madness. That
is because they say: ‘Trade is like riba’, But Allah has
permitted trade and forbidden riba” (Quran 2:275)
“All riba is annulled. But you will get back your principal
amounts. Neither shall you wrong nor shall you be wronged
against. Allah has decried that there shall be no riba. The
riba of Abbas bin Abdul Muttalib is cancelled, all of it” (The
last Sermon)
• What is riba?
 Pre-Islamic Riba
• Riba of Quran
• When a thing sold on credit was due and the
debtor was unable to pay the debt on maturity
date. Repayment date was postponed in
return for an additional amount added to the
original amount
• This riba was ex-post (after the creation of
debt)
 Ex-ante Riba
• Riba can occur ex-ante (while structuring a transaction)
• The notion of ex-ante riba is derived from the saying of the
Prophet:
““Gold or gold, silver for silver, wheat for wheat, barley for
barley, dates for dates and salt for salt-like for like, equal
for equal and hand to hand. If the commodities differ,
then you may sell as you wish, provided that the
exchange is hand to hand” (Muslim)
• Equal for equal - if violated - riba of excess
• Hand in hand - if violated - riba of delay
 Riba of Excess (Riba al Fadl)
• Unequal exchange of goods of the same genus
• Differences in range of goods to be included for riba of
excess (ribawi goods)
• Schools identify the effective cause (illah) of ribawi goods
differently
– Hanafis & Hanbalis: one cause - items sold by weight or
volume (includes all types of currency)
– Shafi’i: food and currency only (excludes metals other
than gold/silver)
– Malikis: basic and non-perishable food items and
currency (excludes metals other than gold/silver)
 Trade of Different Qualities within
a Genus
• Hadith
– ‘A man from Khaybar brought the Prophet some
high quality dates. The Prophet asked if all the dates
in Khaybar were of high-quality. The man replied
that they traded 2 or 3 volumes of lower quality
dates with 1 volume of higher quality dates. The
Prophet told him never to do that, but to sell the
lower quality dates and use the proceeds to buy the
higher quality ones’
• Emphasis on use of money (medium of
exchange) in exchanges
 Riba of Excess - Basic Principles
• Ribawi goods of the same genus with same
quality - exchanged spot and equal quantity
• Goods of different qualities within a genus
cannot be exchanged - the good have to be sold
and the proceeds used to buy the desired quality
good
• Exchange of different genera (say dates and
wheat) - can be bartered with excess
– Complication arises on how genus is defined
 Riba of Delay (Riba al Nasi’a)
• Riba of delay - occurs in transactions involving
deferred component (violating ‘hand in hand’)
– For ribawi goods, deferment of one counter-value in
exchange of goods of equal amounts is not allowed
• All schools allow deferred sale if one of the
counter-values is currency (gold, silver, etc.)
 Implications of Riba of Delay
• In exchange between a good and currency, one
counter-value can be deferred
– Salam—delivery of good is deferred
– Bai muajjal—payment of price is deferred
• In non-riba transactions there are no
prohibitions to price setting
– Price paid in salam can be lower than the market
price
– Price in bai-muajjal can be higher than spot market
price
 Riba - Summary
Case Legality
Xt  Xt Allowed (Base Case)

Xt 2Xt Not allowed (riba of excess)

Xt  Xt+1 Not allowed (riba of delay)

Xt 2Xt+1 Not allowed (riba of excess and delay)

Xt 2Yt Allowed

Xt Mt+1/Mt  Xt+1 Allowed

 Session Outline
• Riba
• Pre-Islamic riba (riba al jahiliyya)
• Riba of Excess (riba al fadl)
• Riba of Delay (riba al nasi’a)
• Why is Riba Forbidden?
• Implications of Riba
• Currency and debt
• Contemporary controversies

13
 Why Riba is Forbidden? (1)
Reasons given in the Quran (Siddiqi 2004):
• Riba corrupts society (30: 37- 41)
• Riba implies improper appropriation of other
people’s property (4: 161)
• Riba’s ultimate effect is negative growth (2:
276)
• Riba demeans and diminishes human
personality (2:275)
• Riba is unjust (2: 279)
 Why Riba is Forbidden? (2)
• Avoid commercial exploitation - Ibn Qayyim:
the strong exploiting the weak
[What about corporations taking loans and banks
paying interest?]
• Minimizing commerce in currency and
foodstuffs - Ibn Qayyim: with riba money is
treated as commodity and traded (food also
used as medium of exchange)
 Why Riba is Forbidden? (3)
• Linking lawfulness of gain to risk-taking- Legal maxim-’gain
accompanies liability of loss’ (Al-ghurm bi al ghunm)
– Riba riskless gain - risk relates to the performance of the
debtor not business
[What about credit sale?]
• Using money and markets to allocate and moderate risks
• Selling of 10lbs. of wheat spot in exchange for 10lbs of
wheat at a future date - not allowed (buyer exposed to
risk, seller is not)
• Selling of 10lbs. of wheat that costs £1/lb spot for
payment of £11 at a future date - allowed (both seller
and buyer exposed to risks)
 Why Riba is Forbidden? (4)
• Mathematical equivalence:
– Fairness and justice - equality of measurement in
exchange (Ibn Rushd)
– Equality is achieved by transacting through a
medium of exchange
– Delaying one of the deliveries of equal amounts of
the same genus introduces inequality
– Delaying one of the deliveries when one counter-
value is currency is allowed (as this removes the
inequality)
 Session Outline
• Riba
• Pre-Islamic riba (riba al jahiliyya)
• Riba of Excess (riba al fadl)
• Riba of Delay (riba al nasi’a)
• Why is Riba Forbidden?
• Implications of Riba
• Currency and debt
• Contemporary controversies

18
 Currency Exchange (Sarf)
• The rulings on gold and silver - extended to
rulings on currency (sarf).
• Islamic Fiqh Academy Resolution No. 21 (9 - 3)
(October 1986):
“Paper money is real money, possessing all
characteristics of value, and subject to Shari’a rules
governing old and silver vis-à-vis usury, zakat,
salam, and all other transactions.”
 Rules Related to Currency
Exchange
• Hand in hand (spot) - mutual receipt of counter-
values prior to parting of the contracting parties
– Non-deferment - any deferent of any part of the
transaction is not allowed (to avoid riba of delay)
• Same currency - exchange of equal quantities
(to avoid riba of excess)
• Different currencies - exchange can be with
differences in quantities (but has to be on spot)
 Debt (dayn)
• ‘Ayn - specifically exists and is concrete
• Dayn - on object that is defined generically or in
abstract (to pay £100 or deliver 100 barrels of
December oil)
– Can be created from loan, sale, liability of damage,
guarantee, etc.
– Object is owned but not possessed (cannot be sold as it
is not possessed)
– When dayn is presented in concrete form, it becomes
‘ayn (e.g., when £100 is produced as cash)
 Rules Related to Dayn
• Dayn cannot be sold at discount to third parties,
either spot or delayed
– Can be transferred at face value (hawala)
• Maxim—prohibition of exchange of two things
both delayed (al-kali bi al-kali)
– Based on a hadith (weak), but later agreed upon as
consensus (ijma)
• Extension of the maxim—prohibits sale of ‘debt
for debt’ (dayn for dayn)
– Futures contract is forbidden
 Status of Transactions (1)
Spot Exchange Partial Forward Forward
(both counter-values Exchange Exchange
delivered in the (one counter-value (both counter values
present) delivered in the future ) delivered in the
future)

Good X for
Good Y

Money for
Money

Debt for Debt

 Status of Transactions (2)
Spot Exchange Partial Forward Forward
(both counter-values Exchange Exchange
delivered in the (one counter-value (both counter values
present) delivered in the future ) delivered in the
future)

Good for
Money

Good for
Debt

Money for
Debt
 Riba, Qard Hasan, and Zakah
• When there is no riba in a loan - qard hasan
• Qard hasan is mentioned many times in the Quran -
associates it to ‘charity’ and ‘loan to God’ (57:18 and
73:20)
• Zakah: a right of the poor on wealth- a tax to enhance
social welfare
• Zakah is the antithesis of riba
– God will deprive riba of all blessing but will give
increase for deeds of charity (2:276)
– One beneficiary who can receive zakah - indebted
people
 Session Outline
• Riba
• Pre-Islamic riba (riba al jahiliyya)
• Riba of Excess (riba al fadl)
• Riba of Delay (riba al nasi’a)
• Why is Riba Forbidden?
• Implications of Riba
• Currency and debt
• Contemporary Controversies
26
 Riba and Interest
• Some contemporary writers distinguished
between interest and usury, and equated riba
with usury
– Rashid Rida, Fazlur Rahman, Syed Ahmed Khan
• Majority of the scholars view interest as riba -
laws of riba applies to fiat money as it is same as
currency
• Hadith: ‘Every loan that attracts a benefit is riba’
 Riba and Interest
• In 2002, Islamic Research Institute of Al Azhar under
the leadership of Dr. Tantawi issued a fatwa that
legalizes giving fixed return on deposits
– Savers/investors place their funds in bank
– The bank acts as their agents and invests in
permissible dealings
– Banks pays a pre-determined profit that is
distributed at agreed upon time periods
– “Investing funds with banks that pre-specify profits
or returns is Islamically Legal”
 Riba - Legality vs Rationale
• Efficient or effective cause (illah) vs. general cause or
rationale/wisdom (hikma)
• Quran (2:279):
“…you shall have your capital sums. Deal not unjustly (by
asking more than your capital sums), and you shall not be
dealt with unjustly”
– Illah - increase over capital riba
– Hikma - do not deal unjustly
• It is possible to have a legally valid transaction that can lead to
injustice
• Can the focus be only on the rationale (justice) and legality be
ignored?
 Questions
1. Riba is not interest only and all interest is not
riba. Is this correct?
2. Should a lender be compensated for inflation?
3. Is value of time accepted by Islamic law?
4. In pricing of delayed payment in credit sales,
can an interest rate benchmark (e.g. LIBOR)
be used?