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7th Distance Learning Course: Fall 2008

Lecture on 11-3-2008

Riba and Gharar


Dr. Muhammad Anas Zarka

1. Lecture objective

to explain the " what" and " how" of riba

prohibition, and its implications for Islamic finance.
we do not discuss the " why" of riba prohibition
(The rationale behind the prohibition of riba which
will be covered in a separate lecture.)

2. What is Riba? In Islamic Shariah Riba is of two

types : Riba al-fadhl and riba al-nasi’a
3. Riba al-fadhl it is relevant to certain barter
exchanges- of little practical importance to Islamic

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4. riba al-nasi’ah = Riba of debts and loans, is our

topic in this lecture.
5. Concept and definition of Riba:
- Loan in money or in kind, to be repaid with
something extra
- Both fixed and variable “ extra” is riba
- Usury vs. interest in Western culture
- Interest in accounting

6. Is bank interest riba?

- Yes for sure: according to all Muslim
scholars and academies interest is one major
form of riba. But riba has wider scope than
- It is also the opinion of Western economists

i. - (Don Patinkin: "Usury " in New

International Encyclopedia of the Social
ii. – Prof. Rodney Wilson, Durham Univ.
iii. Prof John Presley

7. What is the difference between profit and interest?

In Shariah, in economics? Irving Fisher; Frank
Knight [tried to “eliminate the terrible confusion
which results from mixing up the rate of return on
investment with the rate of interest on loans...” ] ;
Robert Solow.
8. Implications for Conventional banking services:
Riba is the main objection

9. Economic functions of the Finance Industry (FI)

in general

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- Support the country monetary payment system,

- Financial intermediation between those who save
and business community.
- These economic functions are acceptable and
encouraged by Shariah. What are objectionable
are some conventional methods and contracts that are
used to achieve them. Shariah has
provided alternatives.

10. Thedifference between conventional and

Islamic banks
On the liability side –
On the asset side.

11. Main Shariah rules about debt and credit:

(A) Loan vs. debt;
(B) money debt vs. real (in kind) debt;
(C) goods and services vs. (currencies, gold and
(D) credit (debt) is not just another commodity
(Joseph Stiglitz).
(E) Psychology: Individuals' behavior towards
debt and gambling is less rational than
towards normal goods, and often addictive.
(F) More details in the Appendix.
12. Major Shariah-compatible financing contracts
used by Islamic Financial institutions
(A) introduction to Islamic financial contracts
(B) Classical (nominate) contracts.
(C) Spot vs. financing contracts.
(D) Major financing contracts in Shariah:

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i. equity-based: Mudaraba and sharikah for

sharing profits, and muzara'ah
( sharecropping) and musaqaah for
sharing revenue.
ii. Note: monitoring costs and information
asymmetry are very important in selecting
one financing contract or the other.
iii. sale-based: Sale for deferred price; Salam;
iv. rent-based.,
v. loan = qardh hasan,supplementary only
in commercial (profit seeking) financing
vi. controversial and prohibited contracts :
eenah Tawarruq ; Sukuk with buy-back

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