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Welcome To The

Training Session On

Riba: Its Meaning,


Classification and
Difference among
Bai, Riba, Profit,
Rent etc. M. Sanaullah
SPO & FM,
IBTRA

Points to be Discussed
A. Riba
B. Riba and the Holy Quran
C. Riba and the Hadith
D. Controversial Issues about Riba
E. Arguments on behalf of Riba
F. Impact of Riba

Definitions and
Lexical
Analysis of
Riba

Lexical
Meaning of
Riba

Literary Meanings of Riba


i) Dictionary Meaning-Riba = Increase, excess,
expansion,
additional
ii) Technical Meaning
=Interest/Usury/Sud

What Increase is
Known as Riba?

The Holy Quran is the best


Evidence to answer this
question



But if you turn back, you shall have your

capital sums, deal not unjustly, and you


shall not be dealt with unjustly
(Sura Al-Baqara-278-279)

Extracted Principle
1. Imam Qurtubi (671AH/1070AC) clearly
indicates thatMuslims are agreed on the authority of
their Prophet that the condition for an
increase over the amount lent is Riba
2. Ibn Manzur (711AH/1311AC) clearly states
thatwhat is prohibited the extra amount,
benefit or advantage received on any loan

Early
Definitions of
Riba

Early Definitions of Riba

1. Imam Abubakr Al-Jassas (305-370 H)=

The Riba of Jahiliyya is a loan given for


stipulated period with a stipulated increase on
the principal payable by the loanee

Abubakr Al-Jassas
Ahkamul Quran
P.469 V.1

Definitions

(Cont)

2. Imam Abubakr Al-Jassas=

The Riba which was known to and practiced


by the Arabs was that they used to advance
loan in the form of Dirham (silver coin) or
Dinar (gold coin) for a certain term with an
agreed increase on the amount of the
principal advanced

Abubakr Al-Jassas
Ahkamul Quran
P.465 V.1

Definitions

(Cont..)

3. Imam Fakhruddin Al-Raazi (1149-1209


C)=

The Riba Al-Nasiah, it was a transaction wellknown and recognized in the days of Jahiliya i.e.
they used to give money with a condition that
they will charge a particular amount monthly and
the principal will remain due as it is. Then on the
maturity date they demanded the debtor to pay
the principal. If he could not pay, they would
increase the term and the payable amount. So it
was the Riba practiced by the people of Jahiliya

Al-Tafseer Al-Kabeer
Imam Al-Raazi
P.91, v.7

Modern
Definitions of
Riba

Modern Definition of
Riba/Interest
1. Riba is a predetermined, fixed and timerelated excess over and above the principal of
a loan
2. Riba is a discrepancy which results from the
contractual obligations of a party in the
context
of a direct exchange of items of the same
general
kind between two parties.
Islamic Financial
System:
Including Strategy for Elimination of Riba

Definitions

(Cont.)

3. Riba technically refers to the Premium


that must be paid by the borrower to the
lender along with the principal amount as a
condition for the loan or for an extension in
its maturity.
(The nature of Riba in Islam, Dr. M. Umer
Chapra)

4. 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
(The Historic Judgment on Interest)

Classification
s of Riba

Classification of Riba
1. Riba Al-Nasiah
2. Riba Al-Fadl
a) Riba Al-Buyu
b) Riba Al Duyun
i. Riba Al-Jaly
ii. Riba Al-Khafi
I. Riba Al-Quran
II. Riba Al-Hadith

Riba Al-Nasiah

Riba Al-Nasiah refers to the time that


is allowed to the borrower to repay
the loan in return for the addition or
the premium.
Dr. M. Umar Chapra

Riba Al-Fadl

Riba Al-Fadl is anything that is


unjustifiably received as Extra by
one of the two counterparties to a
trade transaction
Dr. M. Umar Chapra

Riba in the
Holy Qur,an

Riba in the Holy Qur,an

The word Riba mentioned in the Holy Quran


-8 Times
The Ayats of the Riba descended -15
The Suras where Riba is discussed -4

The Holy Quran and Riba


a) First Revilation (5th Year before Hijrah, ALRome-39)

b) Second Revilation (Early Madina Period after


Hijrah, AL-Nisaa-160-162)

c) Third Revelation (After Ohud, Al-Imran- 130136)

d) Fourth Revelation (9 or 10, Al Baqarah-275-281)

The Time Period of Prohibition


of Riba

18 years of time period of prohibition


of riba.

Nature of Prohibition
of Riba by the Holy
Quran

Nature of Prohibition of Riba by


the Holy Quran
The nature of the Prohibition of Riba is1. Strict
2. Unambiguous and

3. Absolute

Dr. M. Umar Chapra


Prohibition of Interest: Does it make sense?
P.4

Riba in the
Hadith

Riba in the Hadith


1. Total Hadith

- 40

2. Class of Riba Prohibited - Riba Al-Fadl


3. Items of Riba Prohibited -6
4. Items Prohibited by the Hadith- Gold, Silver,
Wheat,
Barley, Dates
and Salt
5. Nature of Items- Universal Legal tender and
Food

Characteristics of
Riba Al-Fadl in
Islamic Shariah

Decision of Islamic Shariah


about Riba Al-Fadl
1. Imam Abu Hanifa (80-150H) and
Imam Ahmad (116-241H) are of the
opinion that=
The common feature of these six
commodities is that-

They can either be weighed or


measured

Cont
2. Imam Al-Shafie (150-204H) is of the
view that=

The common feature of these six


commodities is that-

They are either eatables or they are


used as a universal legal tender

Cont
3. Imam Malik (93-179H) is of the
opinion that=

The common feature among these six


commodities is that-

They are either food items or they


can be stored

Classification of
Goods and
Services in this
World

Classifications of Goods and


Services
The goods and services available in this World are
divided into two groupsa. Fungible Goods (Maale Faani)- Fully consuming or
once using

b. Non Fungible Goods (Maale Gaire Faani)- Can be


use again and
again

The Riba and


the Religions

Prohibition of Interest by all the


Religions
1.

2.

3.

4.

Judaism

-Prohibited

Christianity -Prohibited
Hinduism

-Prohibited

Islam

-Prohibited

Verdict of the
Four Schools
of Thoughts
about Riba

Decision of the Four Schools of


Thought
There is, thus, absolutely no difference of
opinion among all Schools of Muslim
Jurisprudence that-

Riba al-Nasiah stands for interest

and is Haram or prohibited.

Dr. M. Umar Chapra


Prohibition of Interest: Does it make sense?
P.4

Unanimous
Verdict of the
Muslim
Ummah

Unanimous Verdict of the


Muslim Ummah

This is also the unanimous verdict of a


number of international conferences of fuqaha
held in modern times to discuss the question
of riba-

1. The International Conference of the


Mutamar al-Fiqh al-Islami held in Paris in
1951
2. The International Conference of the
Mutamar al-Fiqh al-Islami held in Cairo in
1965

Cont.
3. The International Conference of the OIC and
Rabitah Fiqh Committee meetings held in 1985
and 1986 in Cairo and Makkah respectively

4. The Historic Judgment on Interest, Delivered


in The Supreme Court of Pakistan in 1999
5. In the presence of such an overwhelming
consensus there is no room for arguing that
interest is not prohibited in Islam

The Condemned
Parties of the
Riba

The Condemned Parties of the


Riba
1. Those who take it
2. Those who give it
3. Those who record the transaction
4. Those who act as witnesses

Relationship
Pattern with the
Debtor

Prohibition of Borrower Gifts

1. Receiving of a Small Gift


2. Taking any Services
3. Accepting any Favour

As a Condition for the Loan

Reasons for
Prohibition of
Riba

Principal Reasons of the Harsh


Verdict Against Interest
The Principal reason why the Quran has
delivered such a harsh verdict against interest
is that-

1. Islam wishes to establish an economic system


where all forms of exploitation are eliminated

2. Islam wishes to establish justice between the


financier and the entrepreneur
Dr. M. Umar Chapra
Prohibition of Interest: Does it make sense?
P.8

Reason for
Prohibition of
RIBA AL-NASIAH

Philosophical Target of
prohibition of Riba
1. Elimination of Injustice that is intrinsic in
the institution of interest on loans
(Riba is inherent in all forms of Injustice)
2. Elimination of dishonest exchange in
business transactions
(Riba is inherent in all forms of dishonest)
3. Elimination of Unjust exchanges in business
transactions
(Riba is inherent in all forms of Unjust)

Reason for
Prohibition of
RIBA AL-FADL

Reasons for Prohibition of Riba


Al-Fadl
The prohibition of riba al-fadl is intended to
1. Ensure Justice
2. Remove all forms of Injustice or
exploitation through unfair exchanges
3. Close all backdoors to riba
(which is referred to in Fiqh as Sadd al- Dharayeh)

Riba Al-Fadl Requires


It requires
1. Absence of Rigging
2. Absence of Uncertainty
3. Absence of Speculation

Dr. M. Umar Chapra


Prohibition of Interest: Does it make sense?
P.7

Riba Al-Fadl Demands


Riba Al-Fadl Demands1. Fair knowledge of the prevailing prices of
the goods
2. Fair knowledge of the quality of the goods

Dr. M. Umar Chapra


Prohibition of Interest: Does it make sense?
P.7

Key
Arguments
about Interest

Logical Causes of Interest


1. Interest is the Price of Money
2. Interest is a reward for waiting
3. The rate of interest is a price like all other
prices
4. Interest plays a crucial role in the supply of,
and demand for, financial resources in any
economy

Factors of Interest
There are three factors of interesta) Time Factor
b) Opportunity Cost
c) Element of Risk

Reason for Quranic


Prohibition from the
View point of
Capitalist

Logic

i. Exorbitant or Excessive Interest


ii. Consumptive Loan and/Consumptive
Interest
iii. Commercial Interest being the back-bone
of the Modern Economic

Descriptions of
Bai

Descriptions of Bai
1. Production of Goods & Services
2. Consumption of goods and services
3. Demand of goods and services

4. Supply of goods and services

Description of
Profit

Description of Profit

1. Ownership
2. Possession
3. Risk

SocioEconomic
Impact of Riba

Impact of Riba on Investment


and Production
1. Impact of Riba on allocation of Resources
2. Impact of Riba on production
3. Impact of Riba on distribution
4. Impact of Riba in expansion of artificial
money and inflation
5. Impact of Riba on Stability

Impact of Riba on
Allocation of Resources

Impact of riba on allocation of


Resources
Loan in the interest based banking system
are advanced mainly to those whoa. On the strength of their wealth
b. Can offer satisfactory collateral

Cont
1. According to Lester Thurow-

Credit tends to go to those who are


Lucky rather than smart or meritocratic
Zero-Sum Society
P.175

2. According to Arne BigstenThe banking system thus tends to


reinforce the unequal distribution of
capital
Poverty, Inequality and Development
P.156

Cont..
3. Dr. Umar ChapraWhile deposits come from a broader crosssection of the population, their benefit goes
mainly to the rich

Why has Islam Prohibited Interesr


P.18

Cont..
1. The end use of the funds does not
constitute the main criterion for financing
2. It encourages people to live beyond their
means
3. The people do not borrow for productive
projects only, but also for conspicuous
consumption
Dr. Taqi Usmani
The Historic Judgmen on Interest
P.103

Cont..
4. Similarly, Government borrow money not
only for genuine development programs,
but also for their lavish expenditure and for
projects motivated by their political
ambitions rather than being based on sound
economic assessment
5. Non-project related borrowings, which were
possible only in an interest-based system
have thus helped in nothing but increasing
the size of our debts to a horrible extent
Dr. Taqi Usmani
The Historic Judgmen on Interest
P.103

Impact of Riba on
Distribution

Impact of riba on distribution


a. It increase injustice
b. It enhances difference between have and
have not's

Cont.
1. When business is financed on the basis of
interest, it may bring injustice either to the
borrower if he suffers a loss, or to the
financier if the debtor earns huge profits
2. The both situations are equally possible in
an interest-based system, where the
payment of interest has brought total ruin
to the small traders
3. The injustice brought to the financier is
more pronounced and much more disturbing
to the equitable distribution of wealth

Cont.
3. The big entrepreneurs deployed their funds
from their own pocket are much less than the
funds borrowed by them from the common
people through banks and financial
institutions (90%:10%)
4. When these huge projects bring enormous
profits, only a small proportion will go to the
depositors whose input in the projects was
90%, while all the rest will be secured by the
big entrepreneurs whose real contribution to
the projects was not more than 10%
Dr. Taqi Usmani
The Historic Judgmen on Interest
P.103

James Robertson
1. The pervasive role of interest in the
economic system results in the systematic
transfer of money from those who have less
to those who have more
2. It is partly because those who have more
money to lend, get more in interest than
those who have less; it is partly because
those who have less, often have to borrow
more
James Robertson
Future Wealth: A New Economics for the 21 st Century
London 1990
P.130,131

Cont..
3. The transfer of revenue from poor people
to rich people, from poor places to rich
places, and from poor countries to rich
countries by the money and finance system
is systematic

James Robertson
Transformation of Economic Life: A Millenial Challenge
London 1998
P.51-54

Impact of Riba in Expansion


of Artificial Money and
Inflation

Impact of riba in expansion of


artificial money and inflation
1. The financier, after securing a strong collateral,
normally has no concern how the funds are
used by the borrower, the money supply
effected through banks and financial
institutions has no nexus with the goods and
services actually produced on the ground. It
creates a serious mismatch between the supply
of money and the production of goods and
services. This is obviously one of the basic
factors that create or fuel inflation
2. This phenomenon is aggravated to a horrible
extent by the well-known characteristic of the
modern banks normally termed as Money
creation

Cont.
3. The money-creation system turned into the
fashionable standard practice of the modern
banks under the fractional reserve system
Dr. Tqi Usmani-P.109

4. In this way, through fractional reserve


lending, banks create far in excess of 90%
of the money, and therefore cause over 90%
of our inflation
Patrick S. J. Carmack and Bill Still
The Money Masters, How International Bankers Gained Control of America
1998
P.78,79

Impact of Riba on Stability

Impact of riba on Stability

a. It increase inflation, fluctuation and


volatility etc.
b. It increase trade cycle, depression
c. It leads to destruction

Tendency of
Interest
Based Loans

Tendency of Interest Based


Loans

1. Interest based loans have a persistent


tendency in favor of the rich and against
the interest of the common people

Dr. Taqi Usmani


The Historic Judgmen on Interest
P.100

Interest and
Humanitarian
Goals

Interest and the Realization of


Humanitarian Goals

Justice demand that

the resources provided by God to mankind


as a trust must be utilized in such a manner
that the universally-cherished humanitarian
goals of-

Cont..
1. General need fulfillment
2. Full employment
3. Equitable distribution of income and
wealth
4. Economic stability
Dr. M. Umar Chapra
Prohibition of Interest: Does it make sense?
P.13

Actions of
Islamic Shariah
in the Field of
Finance

Actions of Islamic Shariah in the


Field of Finance

Islam abolished the interest-based


nature of the financier-entrepreneur
relationship and reorganized it on the
basis of profit-and-loss-sharing
Dr. M. Umar Chapra
Prohibition of Interest: Does it make sense?
P.13

Investment
Mechanism of
Islamic
Banking

Investment Mechanism of
Islamic Banking
There are three (3) investment mechanisms
in Islamic Banking System-

a) Equity Based Financing


b) Debt Based Financing
c) Benevolent Loan and Services

Equity Based Financing


There are five (5) Modes in Equity Based Financing1. Mudaraba

Trustee Partnership/Profit Sharing

2. Musharaka

Joint Venture

3. Muzara-ah

Sharecropping- Harvest Yield Profit


Sharing
Irrigation- Plantation of Fruit

4. Musaqot
Bearing

Trees5. Mugharacha - Agriculture- Plantation of Non-Fruit


Bearing Trees

Debt Based Financing


The five (5) Modes we are exercising now1.Bai-Murabaha Cost-Plus sale/Mark- Up
2. Bai Muajjal
sale

Credit Sale/Deferred payment

3. Bai-Salam

- Deferred Delivery sale

4. Bai-As sarf

-Trading in Currencies.

5. HPSM
Promise

-Leasing Contract includes a


to Transfer the Ownership

Benevolent Loan (Qard AlHassan) and Services


Benevolent Loans1.
2.
3.
4.

Qard Al-Hasa-Benevolent Loan


QPF/QBF
QTDR
QMSS

Services1. Wakalah- Power of attorney/Agency,


Opening of
Letter of Credit
2. Kafalah- Letter of Guarantee
3. Hawala- Debt Transfer

Objective of
Islamic Finance

Objective of Islamic Finance


Islamic Finance
Produce of Goods & Services
Consumption
Demand
Supply
Production

THANK
You FOR
LITENING

The Authors of Books about


Foreign Loans
1. Susan George
The Debt Boomerang, How the Third World
Debt Harms Us All
2. Susan George and Fabrizio Sabelli
Faith And Credit, The World Banks Secular
Empire
3. David Korten
When Corporations Rule the Earth

Cont
4. Michael Rowbtham
The Grip of Death
5. Cheryl Payer
The Debt Trap
6. Bade Onimode
The IMF, The World Bank and African Debt
7. Jaques B. Gelinas
Freedom From Debt

Cont
8. Dr. M. Umar Chapra
Prohibition of Interest: Does it make sense?
9. Michael Rowbotham
The Grip of Death: A Study of Modern Money
10. Dr. Taqi Usmani
The Historic Judgmen on Interest
11. John Tomlinson
Honest Money: A Challenge to Banking

Cont..
12. James Robertson
Transforming Economic Life: A Millennial
Challenge
13. James Robertson
Future Wealth: A New Economics for the
21st Century
14. Richard Thomson
Apocalypse Roulette: The Lethal World of
Derivatives