Riba al- Hadith, Riba al Buyu: (Riba al-Fadl plus Riba al-Nasa) Riba al-Fadl: Riba by way of excess: An unequal exchange of two things of the same kind such as exchange of wheat against wheat. Riba al-Nasa: Riba of delay: When articles of the same genera or different genera, whether measured or weighted, are exchanged with deferment on one side, whether or not there is real excess in favor of either side. Gold, Silver, Barley, Wheat, Dates, Salt. In Nutshell, 1. A transaction of money for money (Bai al-Sarf)of the same denomination where the quantity on both sides is not equal, either in a spot transaction or in a transaction based on deferred payment. 2. A barter transaction between two weighable or measurable commodities of the same kind, where the quantity on both sides is not equal, or where the delivery from any one side is deferred. 3. A barter transaction between two different weighable or measurable commodities where delivery from one side is deferred.
Similarly, in a case involving a borrowed camel, the Prophet ordered the payment of a better camel in repayment of the debt, as a camel of the age of the borrowed one was not available at the time of repayment.
However, the gracious repayment (overpayment) of a loan or debt is a matter of individual discretion and cannot be adopted as a system, because a requirement to repay any excess as gift would mean that the loan would necessarily yield a profit.
Gracious payment must not be a pre-condition; neither explicit nor implicit and it is allowed when it must not be the Urf.
"And whatever riba you give so that it may increase in the wealth of the people, it does not increase with Allah."
Notes Surah Ar-Rum which was undisputedly revealed in Makkah. This verse is not of prohibitive nature. It simply says that the riba does not increase with Allah i.e. it carries no reward in the Hereafter. Ibn Jarir Al-Tabari (D310 AH), the most famous exegete of the Holy Qur'an, reports from Ibn Abbas, Radi-Allahu anhu, and several Tabi'in like Saeed Ibn Jubair, Mujahid, Tawoos, Qatadah, Zahhak, and Ibrahim Al-Nakha'i that the word riba in this verse means a gift offered by someone to a person with the intention that the latter will give him in return a greater gift. However, some commentators of the Holy Qur'an have taken this word to mean usury. This view is attributed to Hasan Al-Basri as reported by Ibn Al-Jawzi. It is emphasized that Riba does not carry a reward from Allah in the Hereafter. Although this verse does not contain a prohibition against Riba. However, it may be taken as a subtle indication to the fact that the practice is not favored by Allah.
" O ye who believe! Devour not riba, doubled and multiplied; but fear Allah; that ye may (really) prosper. Notes
Revealed in 4th Hijra While listing the evil deeds of Jews, Muslims have been informed about the practice of taking Riba by Jews. It simply mentions that riba was prohibited for the Jews but they did not comply with the prohibition in their practical lives. But it cannot be taken as a direct and explicit prohibition of riba for the Muslims. The inference, though, would be that it was a sinful act for the Muslims also, otherwise they had no occasion to blame the Jews for the practice.
"And because of their charging Riba while they were prohibited from it. Notes
Revealed in 2nd Hijra Riba/Interest has been abolished in it. The prohibition of Riba is laid down. This verse contains a clear prohibition for the Muslims and it can safely be said that it is the first verse of the Holy Qur'an through which the practice of riba was forbidden for the Muslims in express terms.
"Those who take interest will not stand but as stands whom the demon has driven crazy by his touch. That is because they have said: 'Trading is but like riba'. And Allah has permitted trading and prohibited riba. So, whoever receives an advice from his Lord and stops, he is allowed what has passed, and his matter is up to Allah. And the ones who revert back, those are the people of Fire. There they remain for ever. Allah destroys riba and nourishes charities. And Allah does not like any sinful disbeliever. Surely those who believe and do good deeds, establish Salah and pay Zakah, have their reward with their Lord, and there is no fear for them, nor shall they grieve. O those who believe, fear Allah and give up what still remains of the riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your principal. Neither you wrong, nor be wronged. And if there be one in misery, then deferment till ease. And that you leave it as alms is far better for you, if you really know. And be fearful of a day when you shall be returned to Allah, then everybody shall be paid, in full, what he has earned. And they shall not be wronged
Notes
The fourth set of verses is contained in Surah Al-Baqarah where the severity of the prohibition of riba has been elaborated in detail.
First Form The Arabs in the pre-Islamic period advanced loan by stipulating excess over and above the principal sum of loan contract. Thus, the increase was stipulated in the beginning of the contract i.e. at the time of advancing a loan. Second Form They used to advance loan on the condition that they would take a fixed amount each month, while the principle amount still remained. Thereafter, when it was time for the repayment of the debt, they demanded the principal from the debtor. If he was unable to pay, they increased the term and payable amount. Third Form They used to sell a commodity on deferred payment basis, when the time of payment approached, the seller used to increase the amount due and give him more time. Allama Suyuti explains this practice in the following words:They used to purchase a commodity on the basis of deferred payment, then on the maturity the seller used to increase the amount due in lieu of further delay:. Thus, the increase of amount was not stipulated at the time of concluding contract of debt, but at the time of maturity of contracts.
I. II.
In the 17th century, two new technical terms of interest emerged after the establishment of banking system, namely: Commercial Interest (Tijarti Sood):Interest paid on loan taken for productive & profitable purposes. Usury(Sarfi Sood)Interest paid on loan taken for personal need and expenses.
Misconception Riba is restricted to consumption loans and does not include Productive/ Commercial loans. The Holy Qur'an had prohibited claiming any increase over and above the principal in the case of consumption loans only, where the borrowers used to be poor person's borrowing money to meet their day to day needs of food and clothes etc. While in case of productive & commercial loans there is no Zulm because in most cases the debtors are wealthy or at least economically well-off and the loans taken by them are generally used for generating profits. Therefore, any increase charged from them by the creditors cannot he term as Zulm (injustice) which was the basic cause of the prohibition of 'riba'.
Answer
Firstly, The validity of a financial or commercial transaction does never depend on the financial position of the parties. It rather depends on the intrinsic nature of the transaction itself. Secondly, 'poverty' is a relative term which has different degrees. Once it is accepted that interest cannot be charged from the poor, while it is quite lawful to be charged from the rich, who will have the authority to determine the exact degree of poverty required for exempting a person from the charge of interest? Thirdly, Quran has prohibited riba in general terms, which include all the forms of riba. Fourthly, Zulm is the hikmat and not the illat (basic cause) of prohibition.
Misconception
The prohibition of riba is applicable only to those interest transactions where the rate of interest is exorbitant or excessive. This argument is sought to be supported by the verse of Surah Al-i-'Imran:
"O ye who believe! devour not Usury, doubled and multiplied; but fear Allah; that ye may (really) prosper." [Al-i-'Imran 3:130]
No verse can be interpreted in isolation from the other relevant material available in other parts of the Holy Qur'an. "O those who believe fear Allah and give up whatever remains of riba, if you are believers." [AlBaqarah 2:278] The point is further clarified in express terms by the following sentence: Unlike the text of a statute book, the Holy Qur'an contains some words or expressions used either for emphasis or for explaining the evil results of a particular act. "Do not sell my verses for a little price." [Al-Baqarah 2:41]
The origination of term interest dates back to 17th century with the emergence of banking system at a global level. Interest means giving and/or taking of any excess amount in the exchange of a loan or on debt. Hence, it carries the same meanings/ value as that of Riba as defined earlier.
It means that if wheat is exchanged for wheat, the quantity on both sides must be equal to each other and if the quantity of any one side is more or less than the other, this transaction is also a Riba transaction, because in the tribal system of Arab these commodities were used as money, and the exchange of one kilogram of wheat for one and a half (1 1/2) kilogram of another wheat would stand for the exchange of one dirham for one and a half (1 1/2) dirham. However, this transaction was termed as riba by the Holy Prophet, Sall-Allahu alayhi wa sallam, and this meaning was not covered by the term 'riba al-Jahiliyya'. Therefore, it was called as 'riba al-fadl' or 'riba-al-sunnah'.
Tawarruq (Monetisation): The process of purchasing a commodity for a deferred price determined through Musawama or Murabaha, and selling it to a third party for a spot price as to obtain cash. Arranged Tawarruq (Tawarruq al-Munazzam). Real Tawarruq.
Indexation: Indexation is a technique to adjust income payments by means of a price index, in order to
maintain the purchasing power of the public after inflation. This technique was primarily aimed at restoring two functions of money which are affected by inflation, viz. store of value and standard of deferred payment.
Causes of Inflation;
1.
2.
3.
4. 1. 2.
Monetary expansion due to public expenditure often through deficit-financing (Govt. is responsible), bank finance (Banking Inst. are responsible), and foreign remittances which become inflationary if these are spent on consumption rather than on investment (Consumer is responsible), Disequilibrium between demand for and supply of goods Demand: increasing population or urbanization, Scarcity of supply Actual (natural factor is responsible) or Contrived due to time lag between adjustment of supply to the demand (cannot be put on anybody's shoulders) Excessive wage increase (Trade Unions are responsible)or due to heavy indirect taxes imposed by the government (government is responsible) or due to exorbitant profits charged by the traders (trader is accountable). Inflation sometimes occurs as a result of devaluation (international factor is responsible).
Conclusion
Any amount, big or small, over the principal, in a contract of loan or debt is Riba prohibited by the Holy Quran, regardless of whether the loan is taken for the purpose of consumption or for some production activity. A transaction of money for money of the same denomination where the quality on both sides is not equal, either in a spot transaction or in a transaction based on deferred payment is Riba.
It is not permitted to make a judicial demand on a debtor in default to pay financial compensation, in the form either of cash or of other consideration, for a delay in settling his debt. It is permitted to prescribe in contracts involving indebtedness (such as Murabaha) an obligation on the debtor, in the case of default in payment, to donate an amount or a percentage of the payment due on condition that this be donated to charitable courses under the supervision of the banks Sharia supervisory board.
The institution is entitled to include the name of a debtor in default in a list of undesirable customer (black list).
Practice
Stipulated increase or decrease in loan transaction is Riba. Every increase in debt contract is Riba. Guaranteeing the capital in Musharakah turns the contract in Interest bearing loan. Any profit will tantamount to Riba. Guaranteeing the capital in Mudarabah turns the contract in Interest bearing loan. Any profit will tantamount to Riba. Bai al Inah, Bai bil Wafa, Bai al-Tawarruq al-Munazzam are Riba. Deriving the benefit from pledge is Riba, even if buyer allows it. Discounting the financial papers is Riba al Fadl. Selling the share in secondary market of a company, who has only liquid assets is Riba. Charging fee in Guarantee contract will tantamount to Riba. For same species e.g. dollar to dollar or gold to gold (homogeneous currency) Exchange in absolute prices must be; Spot or instantaneous, and Equality in counter values For heterogeneous currencies (dollar to rupees or gold to silver) Exchange in absolute prices of heterogeneous currencies must be Spot or instantaneous Equality in counter-values is not the pre-requisite for permissibility. Forward and Future trading in Sarf contract is Riba. Even for hedging purposes
Reading List: Islamic law of Contracts & Business Transactions by Dr. Muhammad Tahir Mansoori: Chapter 9: Extrinsic Causes of Invalidity: Riba (Usury)