Riba in Islam

&
The Islamic Banking Alternatives
By
Dr.Mufti Muhammad Sohail
“The interest which you give to increase the wealth of
people, will have no increase with Allah: But that which
you lay out for charity, seeking favor of Allah (He will
increase): it is these who will get a recompense
multiplied.”

Ar Rum 39 (First Revelation)

“Because of their abuse, We forbade the Jews good things
which were formally allowed to them; because time after
time they debarred others from the path of Allah: Since
they practice Riba although they were forbidden --
and cheat others of their possessions. We have
prepared a painful torment for those of them who
disbelieve.”

An Nisa 161 (Second Revelation)

“O’ believers, devour not Riba, doubling its rate
many times. Fear Allah, and you will
prosper.”
Al-e -Imran 130 (Third Revelation)
 Ale-e-Imran 130

 The words “doubled and redoubled interest” are used to

highlight the shameful aspect of compound interest and
not to limit the scope of riba only to compound interest.

 Similar to Allah’s command “Do not bargain on my

orders for paltry gains in this world”. If one gains the
entire world at the cost of hereafter, it is an
immeasurable loss - a paltry gain.

 It does not mean that it is prohibited to obtain paltry

gains but permissible to obtain a hefty price.
“Those who devour Riba shall rise up before Allah like men
whom Shaitan has demented by his touch; for they claim
that trading is like usury. But Allah has permitted trading
and forbidden usury. He that receives an admonition
from his Rabb and mends his ways may keep what he
has already earned; his faith is in the hand of Allah. But
he that pays no heed shall be among the people of fire
and shall remain in it forever.”
Al Baqarah 275 (Fourth Revelation)
 Al Baqarah 275

 Similarity between a Riba consumer and a mad person:

Both are insensitive to other’s sufferings.

 What does Riba do? Create monopolies & open doors to

selfishness, greed, injustice and oppression

 Islam on the other hand encourage highest moral ethics,

universal brotherhood, collective welfare and prosperity,
social fairness and justice.

 The above verse carries three strong expressions:

a) Haram b) People of Fire c) Forever dwellers
 Al Baqarah 275

 Let bygones be bygones: Don’t do it in future.

 He who repeats and justifies legitimacy of Riba is only

rejecting faith in Allah.
“Allah has laid His curse on Riba and blessed charity with
increase. He bears no love for the ungrateful sinners.”

Al Baqarah 276 (Fourth Revelation)

“O you who believe, Fear Allah and give up what remains of
your demand for Interest, if you are indeed a believer. If
you do not, then you are warned of the declaration of war
from Allah and His Messenger; But if you turn back you
shall have your principal: Deal not unjustly and you shall
not be dealt with unjustly.”

Al Baqarah 278 - 279 (Fourth Revelation)

 Al Baqarah 278-279

 If you are indeed believers: Prove your claim with

deeds.
 Threat in the strongest words : Not used for any other
crime.
 Principle amount should be paid back.
 Islam’s emphasis on justice: Deal not unjustly and you
shall not be dealt with unjustly. After revelation of this
verse, Prophet (SAW) in his last sermon at Haj-e-tul-
Wada which is called the charter/blue print of Islam
declared: “Interest claim in respect of transactions during
the days of ignorance are null and void and would not be
claimed. To begin with, we forego the entire interest
amount due to my uncle Abbas bin Mutalib”.
 What is Riba?

Riba means any excess compensation over

and above the principal which is without due
consideration. Its a premium paid to the
lender in return for his waiting as a condition
for the loan. In the words of Prophet (SAW)
“Every loan that draws interest is riba”.
 Wisdom behind prohibition of Riba

 To prevent individual gains that cause loss to the whole

community. Bank caters loans only to rich sector.
Entire capital is utilized for the benefit of few.
Community gets poorer.

 Validity of a Transaction is not based on the

Financial Status of the party. It rather depends on
the intrinsic nature of the transaction itself. If a
transaction is valid by its nature it is Valid
irrespective of weather the parties are rich or poor.
 Riba: Selected Ahadith

 From Hazrat Jabir Ibn-e-Abdullah (RA): The Prophet,

may peace be on him, cursed the receiver and the
payer of interest, the one who records it and the
witnesses to the transaction and said: "They are all
alike [in guilt]." (Muslim, Tirmidhi and Musnad Ahmad)

 From Hazrat Abu Hurayrah (RA): The Prophet, peace

be on him, said: "Riba has seventy segments, the least
serious being equivalent to a man committing adultery
with his own mother." (Ibn Majah)
 Riba: Selected Ahadith

 From Hazrat Amr bin Al Aas (RA): “When interest based

dealing becomes common among people, they will start
facing draught and shortage of food. And when bribery
becomes norm among people they will live under
constant fear of their enemy”.

 From Hazrat Abu Hurayrah (RA) : The Prophet, peace

be on 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 Dawud, Ibn
Majah)
The prohibition of Interest is not limited to
Islam, but it is shared by Judaism and
Christianity.
• Some of the old testaments have rendered riba as haram (See
Exodus 22:25, Leviticus 25:35-36, Deutronomy 23:20, Psalms
15:5, Proverbs 28:8, Nehemiah 5:7 and Ezakhiel 18:8,13,17 &
22:12).

• Agibi Bank was established circa 700 B.C. in Babylonian

and functioned exclusively on equity basis.
CLASSIFICATION OF RIBA

• Riba-un-Nasiyah or Riba-al-Jahiliya

• Riba-al-Fadl or Riba-al-Bai
CLASSIFICATION OF RIBA

Riba-un-Nasiyah or Riba-al-Jahiliya

“that kind of loan where specified repayment period

and an amount in excess of capital is

predetermined”( Imam Abu Bakr Hassas Razi)

CLASSIFICATION OF RIBA

Riba-un-Nasiyah or Riba-al-Jahiliya
“all loans that draw interest is riba”(Hadith quoted
by Ali ibn Talib)

“the loan that draws profit is one of the forms of

riba”(definition from Sahabi Fazala Bin Obaid)

CLASSIFICATION OF RIBA

Riba-un-Nasiyah or Riba-al-Jahiliya

real and primary form of riba

premium paid to the lender in return for his waiting
giving or taking of every excess amount in
exchange of a loan at an agreed rate irrespective
of whether it is low or high
CLASSIFICATION OF RIBA

Riba-al-Fadl

excess taken in exchange of specific commodities

which are homogeneous

legal definition defers in every fiqh

CLASSIFICATION OF RIBA

Hadith prohibiting Riba-al-Fadl

‘sell gold in exchange of equivalent gold
sell silver in exchange of equivalent silver
sell dates in exchange of equivalent dates
sell wheat in exchange of equivalent wheat
sell salt in exchange of equivalent salt
sell barley in exchange of equivalent barley
CLASSIFICATION OF RIBA

Hadith prohibiting Riba-al-Fadl

sell barley in exchange of equivalent barley but if a

person transacts in excess, it will be riba.

However sell gold for silver anyway you please on

the condition it is hand-to-hand(spot sales) and sell

barley for date anyway you please on the condition

it is hand-to-hand(spot sales)
CLASSIFICATION OF RIBA

Imam Abu Hanifa on Riba-al-Fadl

commodities must have two common
characteristics

Weight
Volume

includes all commodities having weight or volume

and are being exchanged

CLASSIFICATION OF RIBA

Imam Shafi on Riba-al-Fadl

commodities must have two common
characteristics

•be a medium of exchange

•be edible

includes all commodities that are edible or can be

used as a medium of exchange(currency)

CLASSIFICATION OF RIBA

Imam Maalik on Riba-al-Fadl

commodities must have two common
characteristics

•can be preserved
•be edible

includes all commodities that are edible and can be

preserved
CLASSIFICATION OF RIBA

Imam Ahmad Bin Hanbal on Riba-al-Fadl

• First citation conforms to the opinion of Imam Abu
Hanifa
• Second citation conforms to the opinion of Imam
Shafi
• Third citation includes three characteristics at the
same time i.e. edible, weight and volume
CLASSIFICATION OF RIBA

Present day Islamic scholars on Riba-al-Fadl

if two characteristics i.e. weight and use as medium
of exchange is present then the following
transactions are not allowed
•a deferred sale of goods having weight and
homogeneous nature
•a sale of unequal goods having weight and
homogeneous nature
THE LAWS OF RIBA AL FADL

THE LAWS OF RIBA AL FADL

First law

Exchange of any of the six commodities with itself

but differing in quality, is allowed only under certain

conditions
THE LAWS OF RIBA AL FADL

First Law
CONDITIONS OF EXCHANGE

•Any difference in value/quality should be ignored

• The commodities should be exchanged in equal
amounts (equal weight and volume).
•No of direct exchange of commodities of the same
kind
•A person should sell his commodity against cash
at the market value and buy someone else’s
commodity in exchange of cash proceeds at the
market value
THE LAWS OF RIBA AL FADL

Second law

Exchange of a product with its raw material is

allowed under certain conditions

THE LAWS OF RIBA AL FADL

Second Law
CONDITIONS OF EXCHANGE
• If the characteristics of the product has been
totally changed by the industry, then different
amounts can be exchanged.
• If little difference has been made :-
either the exchange should be in equal weights
or one of the commodities should be sold in the
market and the cash proceeds used to buy the
then one.
THE LAWS OF RIBA AL FADL

Third Law
• Exchange of any of the six commodities with one
another is allowed in unequal amounts but the
payment should not be deferred:-

•Provided that the general conditions of a sale

contract are fulfilled

TYPES OF RIBA

Riba al Nasiah is classified in two types:-

•Sood-e-Mufrad( Simple Interest)
interest calculated only on the initial investment
•Sood-e-Murakkab(Compound Interest)
reinvestment of each interest payment on
money invested to earn more interest
TYPES OF RIBA

Quranic verses on absolute prohibition of Riba:

“O believers fear God and give up the interest that

remains outstanding (i.e. whether it is simple

interest or multiplied interest) if you are believers”

(Surah Al-Baqrah, verse 278)

TYPES OF RIBA

Quranic verses on absolute prohibition of Riba:

“If you do not do so then be sure of being at war
with God and His Messenger. But if you repent, you
can have your principal( only not any kind of
interest or premium). Neither should you commit
injustice nor should you be subjected to it”
(Surah Al-Baqrah, verse 278)
TYPES OF RIBA

Tijarti Sood(Commercial interest)

•interest paid on loan taken for productive and
profitable purpose
Sarfi Sood (Usury)
•interest paid on loan taken for personal need and
expenses
TYPES OF RIBA

Tijarti Sood(Commercial interest)

•interest paid on loan taken for productive and
profitable purpose
Sarfi Sood (Usury)
•interest paid on loan taken for personal need and
expenses
 Riba: Present day arguments
Commercial interest and Usury

In the 17th Century, two new technical terms of interest

emerged after the establishment of Banking system
namely:

1. Tijarti Sood (Commercial Interest): Interest paid on

loan taking for productive and profitable purposes.

2. Sarfi Sood (Usury): Interest paid on loan taken for

personnel need and expense.
 Riba: Present day arguments
Commercial interest and Usury

There are two schools of thought on this issue.

First School:
This school present two arguments:

1. Riba as practiced during the days of Prophet

(SWS) was Usury.

2. Commercial interest does not exist during the

days of Prophet (SWS)
 Riba: Present day arguments
Commercial interest and Usury

1) “Riba as practiced during the days of the Prophet

(SAW) was only Usury”.

 Islam when prohibiting something does not only prohibit

the prevalent form, but all forms that might erupt in
future. The changed state does not change the ruling.
E.g. Liquor, Pork, Corruption/Immorality: Today’s
modern and sophisticated forms does not change their
rulings.

 The same applies to interest and gambling.

 Riba: Present day arguments
Commercial interest and Usury

2) “Commercial interest did not exist in the days of

Prophet (SAW).”
 This claim is wrong as both forms of interest existed in
Islamic and pre Islamic history. Some examples:
 The tribe of Umr bin Aamir used to take interest from
the tribe of Mughairah.
 The tribe of Thaqeef advanced cash as well as
commodities on interest to the natives of Taif, the tribe
of Mughairah and the business community of Makkah.
 H.Abbas and H. Khalid bin Waleed (RA) formed a
company with joint capital whose prime business was
cash advancement on interest.
 Hazrat Usman (RA) lent money on interest.
 Riba: Present day arguments
Commercial interest and Usury

Second School of Thoughts:

This school present two arguments:

1) “In the present day banking since no-one is exploited

or faces injustice, therefore it cannot be called Riba.”

Counter Argument:
Islam has not only prohibited that one party faces a loss
and the other gets profit but also prohibits one party
getting confirmed profit and the other party unconfirmed
profit from the same investment.
 Riba: Present day arguments
Commercial interest and Usury

2) There is a Qura’nic verse “O believers do not

devour one another’s possession wrongfully;
rather than that, let there be trading by mutual
consent” (Al Nisa verse 29). “Wrongful devouring”
only arise if the consent of one of the parties is
absent but in commercial interest the mutual
consent is present of both parties, so its not Riba.
 Riba: Present day arguments
Commercial interest and Usury

Counter Argument:

Mutual consent is not the criteria to render anything halal

which is haram. Would the act of adultery be allowed if
the condition of mutual consent is fulfilled? Similarly
there are many transactions in business which are
rendered illegal even with mutual concern.

Similarly mutual consent is present in commercial

interest and gambling too but inspite of that it has been
prohibited.
 Nature of Money in Islam

 One of the wrong presumptions on which all theories of

interest are based is that money has been treated as a
Commodity.
 It is therefore argued that just as a merchant can sell
his commodity for a higher price then is cost, he can
also sell his money for a higher price than its face
value, or just as he can lease his property and can
charge a rent against it, he can also land his money
and claim interest there upon.
 Nature of Money in Islam

 Islamic principles, how ever, do not subscribe to this

presumptions. Money and commodity have different
characteristics and there fore they are treated
differently.
 Difference between Money
and Commodity
 Money has no intrinsic utility. It
cannot be utilized in direct
fulfillment of human needs. It
can only be used for acquiring
some goods or services.
 The money has no quality
except that it is a measure of
value or a medium of
exchange.
 All the units of money of the
same denomination, are
hundred percent equal to each
other.
 An old and dirt note of
Rs.1000/- has the same value
as a brand new note of
Rs.1000/-.
 Acommodity, has intrinsic
utility and can be utilized
directly with out exchanging it
for some other things.
 The commodities can be of
different qualities.
 Every commodity is different
from other like an old car and
new car have a different value.
 In commodities, the
transactions of sale and
purchase are effected on an
identified particular commodity.
 If A has purchased a
particular car by pinpointing it,
and seller has agreed, he
deserves to receive the same
car.
 Difference between Money
and Commodity

 Money cannot be pinpointing in a transaction of

exchange.
 If A has purchased a commodity from B by showing him a
particular note of Rs.1000/- he can still pay him another
note of same denomination.

Conclusion:
Money (of the same denomination) is not held to be the
subject matter of trade like other commodities, it can only
be used as a medium of exchange. If for exceptional
reasons, money has to be exchanged for money or it is
borrowed, the payment on both side must be equal.
 Nature of Money according to
Imam Al-Ghazali (R.A)

Imam Al-Ghazali (R.A) the renowned jurist and

philosopher of the Islamic history has discussed the
nature of money in an early period when the western
theories of money were not existent, at all. He says:
The creation of Dharhams and Deenars (Money) is one
of the blessing of Allah. They are stones having no
intrinsic use of usufruct or utility but all human beings
need them, every body have a different necessities and
they have to fulfill there necessity, there fore the
transaction of exchange are inevitable. But there must be
a measure on the basis of which price can be
determined…….
 Nature of Money according to
Imam Al-Ghazali (R.A)

 There fore all these commodities need a mediator to

judge their exact value….. Allah Almighty has, created
Dharhams and Deenars as judges and Mediators
between all Commodities so that all objects of wealth
are measure through them.
 That is why Allah has created them, so that they may
be circulated betweens hands and act as a a fair judge
between different Commodities.
 So the one who is using money in an manner contrary
to its basic purpose is, in fact, disregarding the blessing
of Allah.
Money is neither a Consumption
Goods nor a Production Goods
 Ludwing Von Mises, the well-known economist of the
present century has dealt with the subject in detail. He
says:
 “it is true that the majority of economists reckon money
among production goods. Nevertheless, arguments from
authority are invalid: the proof of a theory is n its
reasoning, not in its sponsorship; and with all due
respect for the masters, it must be said that they have
not justify their position very thoroughly in the matter”.
He then concludes:
“Regarded from this point of view, those goods that are
employed as money are indeed what Adam Smith called
them, “dead stock, which… produces nothing. ”
 Report of Economic Crisis
Committee
 During the horrible depression of 1930s, an “Economic
Crisis Committee ” was formed by Southampton
Chamber of Commerce in January 1933. After
discussing the pitfalls of the existing financial system,
one of the committee’s recommended was that:

 “In order to ensure that money performs it true function

of operating as a means of exchange and distribution,
it is desirable that it should cease to be traded as a
commodity.”
 Artificial Money OR False Dawn

 Prof.John Gray (of Oxford University ) ,in his recent

work False Dawn mentioned ,
 “Most significantly perhaps transaction on foreign
exchange market have now reached the astonishing
sum of around $1.2 trillion a day., over fifty times the
level of the world trade .95% of these transactions are
speculative .According to Michael Albert ,the daily
volume of transaction on the foreign exchange markets
of the world holds some of $900 billions-equal to
France ‘s annual GDP and some $200 million more
than the total foreign currency reserves of the world
centeral banks.
 World of illusions

 The size of the total worth of derivatives is much

greater mentioned by Richard Thomson in his
“Apocalypse Roulette” in the following words :
 “Financial derivatives have grown to $64 trillion
industry by 1996. How do you imagine a number that
big ?You could say that if you laid all those dollar bills
end to end ,they would stretch from here to the sun
sixty-six times ,or to the moon 25,900 times.”
 Evil Result of Unnatural Trade

 James Robertson mentioned in his latest

work Transforming Economic Life ,
 “Today ‘s money and finance system is
unfair ,it results in a massive world wide
diversion of effort away from providing
useful goods and services. At least 95%
of the billions of dollars transferred daily
around the world are unlinked to
transactions in the real economy.
Effects of Riba
Has concentration of wealth made people happier?

 1,000 million people world over never see a

health professional.
 2 million children die annually of preventable
infectious diseases.
 192 million children are malnourished.
 1,300 million people lack access to safe water.
 900 million people cannot read or write.
 Suicide rates are highest in developed countries
such as Sweden & Japan.
 Has concentration of wealth made
people happier?

 Family institution weakened.

 Quality of life decayed.
 10 richest men in the world have more
wealth than 48 poorest countries
 What is our contribution?

Each one of us who is supporting the system

based on Riba is a party to this oppression

So please don’t make the war

against Allah you never can win.
 Islamic vs. Conventional Banks

CONVENTIONAL
 Borrows funds from the depositors paying
interest on the liability side of its balance-sheet.

ISLAMIC
 Partnership (Mudarabah) or profit and loss
sharing arrangement between the bank and
the depositors.
 Islamic vs. Conventional Banks

CONVENTIONAL
 Lends the funds to the borrowers, charging
higher interest on the asset or investment side.
ISLAMIC
 Profit and loss sharing (Musharaka) or trade
based financing arrangement (Mubadalah)
between the bank and its investment clients.
 Islamic vs. Conventional Banks

CONVENTIONAL
 Between the depositors and the bank, there is
an iron wall.
ISLAMIC
 Islamic bank entitles the depositors
-- to be informed of what the bank does with
their money.
-- to have a say in where their money would
be invested (Mudarabah).
 Islamic vs. Conventional Banks

CONVENTIONAL
 The interest or the return is predetermined or
fixed in advance.

ISLAMIC
 The profit or the return is based on the actual
investment outcome.
Islamic vs. Conventional Banks

CONVENTIONAL
Transactions are financial asset based

ISLAMIC
Transactions are real asset based
Jazak Allah
Khair