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Riba’(Interest)

Riba’ (Interest) is “haram” in Islam and hence, any form of transaction involving interest is haram. Therefore, insurance is prohibited in Islam if investments of premiums are made in “Riba’” based

ventures. The practice of imposing penalty for late payment is also perceived as “Riba’” alongside with interest imposed on policy loan. Moreover, the refund of premium in the event the insured event never occurs is not made based on pro-rata basis and therefore is unfair to policyholders. This contradicts the

doctrine of “adil” or fairness.

The literal meaning of Riba’ in the Arabic language means “to excess or increase”. Riba’ is not defined in the Quran and Sunnah because it was well understood in the pre-Islamic time and the Quran use it primarily in the same sense. The earliest documented statement about Riba’ in pre-Islamic time is found in the Muwattaof Imam Malik:

Riba’ (Interest) Riba’ (Interest ) is “haram” in Islam and hence, any form of transaction involving

Malik related to me that Zayd ibn Aslam said, "Riba’ in the Jahiliyyah was that a manwould have a debt on a man for a set term. When the term was due, he would say, 'Will you pay it off or increase me)? If the man paid, he took it. If not, he increased him in his debt and lengthened the term for him."

Imam Shafie defined Riba’ as: And Al-Riba’ – That a man has debt (Al-Dayn) on another and on the due date he says (to the debtor): Would you pay or increase the debt? So he would postpone the payment

and increase his debt”

“When it is said to them, ‘Do not do corruption in the land,’ they say, ‘we are only ones that put things right.’ Truly, they are the workers of corruption.” (2: 11)

“And whatever you may give out of usury so that it might increase the people’spossessions will bring no increase in the sight of God, whereas all that you give out in purification, seeking God’s countenance, for it is they, they shall have their recompense multiplied.” (30:39)

We can conclude that Riba’ is divided into two parts, which are Riba’in loans (Riba’ Alnasia) and Riba’ in excess (Riba’ Al-fadl).

The word 'nasia' means to postpone, defer or wait. Riba’ in loans is defined as a contractual increase, be it normal or excessive, on loaned capital that could be either inmoney form or in kind. All Quranic verses unanimously imply only this kind of interest. Next, Riba’ Al-Fadl means to increase, add or exceed.

In construction projects, they have a potentially complex structure of contractual relations and multiple parties. The payment paths can be wide-ranging from employers to contractors and from contractors down the supply chain to sub-contractors and suppliers. Cash flow is the life blood of the construction

industry and keeping payments flowing is essential. The performance of payment obligations on all sides is, therefore, of fundamental importance and involves a consideration of how such performance can best be secured and risks of non-payment minimized as far as possible.

Then, the employer may enter into development and funding obligations with third parties, such as funders, purchasers and tenants. Many employers receive funding from different sources, such as banks

and building societies. These funders will require ‘construction security’ documents to be in place to

help protect their loans and before they will release funds.

Example of Riba’ in construction The use of Islamic insurance by the contractor in the construction of marketing opportunities.

In contruction industry, an insurance is essential for example when a contractor wants to start a project. Insurance can be defined as a financial arrangement between the parties that distributes the costs of unexpected damages and losses. The system of insurance in construction building is practiced when a contractor transfer the burden of risks to an approved insurance company as the insurer, for an agreed financial consideration called the ‘premium’. Premium is the amount to be paid for an insurance contract or policy and could be regarded as the transferring of some or all of the risks of loss and damage. After the payment of such amount, the insurance company or insurer is assumed to provide the insured with insurance contract or policy. In the practice of insurance of works in the Malaysian construction industry, a contractor will pay premium for the exchange of insurance policy to an approved insurance company. The insurance policy is an agreement setting out the risks covered and the circumstances, the allocation of payment if such risks or loss occurs, and the duration or period of the insurance contract.

In conventional insurances contradict to the takaful system , the risk is transferred to an individual or entity in the exchange of premium. Conventional insurance is prohibited or haram under the Islamic Law or Syariah as the conventional insurance consists the existence elements of Riba’. Riba’ activities exist at each level starts with the calculation of the premium to the payment of damages (Afzalur- Rahman, 1991). The bulk of the company's income is dividends from conventional insurance fund (accumulated premiums the policyholder) invested in investment practice Riba’ (interest).

In financial transactions, the term Riba’ is referred to as the “premium that must be paid by the borrower to the lender along with the principal as a condition for the loan or for an extension in the duration of loan”. Interest or Riba’ is prohibited, thereby restricting the recovery by a contractor of financing charges and interest. Provisions which provide for the recovery of interest in a contract will not be enforced and should not be included because they may taint the contract and make it unenforceable.

Riba’ in the contruction procurement is when where a contractor is borrowing loans to start a project or obtaining insurance from a Riba’-based bank. Then, when a debtor (contractor) is unable to pay back his loan at the due date and so he requests to pay the loan later with an added amount.

In overcoming this situation, Islamic insurance known as Takaful which prohibits the element of usury, uncertainties, and gambling is was introduced to substitute the conventional system that using Riba’. Losses that may be suffered by a contractor during the performance of a construction project can be reduced by taking an insurance policy. Islamic insurance system that provides protections for workers in construction projects are permitted by Islamic law, established in Malaysia due to the interest of Muslims to practice Islamic teachings and laws fully in their lives after seeing and experience the weakness of the existing conventional insurance system, starting with the establishment of Syarikat Takaful Malaysia Sdn Bhd in 1984 followed by the establishment of the Islamic insurance company, Syarikat Takaful Sdn Bhd MNI in 1993. The Bank is in the process of applying for a license to operate a third Islamic insurance companies in Malaysia (Utusan Malaysia, 16 October 2001).

However, based on statistics issued by the Central Bank of Malaysia, the market penetration growth for conventional insurance is still relatively higher than Takaful. One of the major reasons is the lack of understanding on Takaful by the contractors in the construction industry.