Omar, K. B. (2011). Riba: The Underpinning Principle. International Journal of Finance & Economic ...

Omar Khalid Bhatti. PhD Candidate, International Islamic University Malaysia.

Riba: The underpinning principles.

By

Omar Khalid Bhatti

ا قباٮ م نحؼارف ا كى شؼب ـ جؼه أث ذكز كى ي ـ أيہا ٱناس إا خهق ـ أجقٮكى ي ٱل زيكى ػ أ ػهمى إ ٱل (٣١خبمز ) إ

“O mankind! Lo! We have created you from male and female, and have made you nations and

tribes that ye may know one another. Lo! The noblest of you, in the sight of Allah, is the best in

conduct. Lo! Allah is Knower, Aware”.

Introduction

The word Islam is an Arabic word meaning “peace and submission”. The submission is to Allah

the creator of all. In principle Islam is the religion of Allah revealed upon the Prophet

Mohammad peace be upon him (PBUH) in order he further proclaim it to all mankind. Therefore

enabling the believers to practice the teachings and regulations of Islam.

“Islam is not only one of the greatest monotheistic religions, signifying submission to the will of

Allah, but as complete code of life in entirety. It lays down a complete system of conduct for

every day human life in all its spheres and manifestations. It does not incarcerate itself to a

spiritual and a holy relationship between man and Allah or describes the Almighty only with a

transcendental orientation but also regulates, in right proportions, an interactive relationship

between man and man, and between man and society with moral, political and economic origins.

As a result, it is a religion lived in everyday life and no Muslim is in any doubt as to exactly how

he or she should carry on the events of his day” Kahf, Ahmad and Sami (1998).

A number of religious scholars have inferred in various books and articles (Among His Signs,

The Islamic Guide, The road to Maecca etc) that Islam is usually said to be a total way of life or

a holistic system for men, women and societies. This elucidates that Islam broadens its sphere to


organize all aspects of human life that is politically, socially, spiritually, morally and as well as

economically ensuring that it is in line with the pillar of faith, meaning absolute oneness of God.

Generally Islamic views over life of a true Muslim as shown in figure 1, is based on Aqidha also

know as faith and belief, Shariah known as Islamic law and Akhlaq referring to morality and

ethics. These three components play a very vital role in the lives of all Muslims as Aqidah shows

the truth of Islam, Shariah shows the justice of Islam and Akhlaq shows the beauty of Islam.

As we endeavor to understand the basics and fundamentals of Islamic banking and finance, it is

imperative that we first recognize the connotation of Shariah as what exactly it is and its

embraces.

Figure 1:

Source : Antonio (1999)

Explanation in context of Shariah and Quran

Shariah is based upon the teachings of the holy Quran whereas Sunnah is based upon the real

life practices of holy Prophet Mohammad peace be upon him (PBUH).The true and supreme


success of human beings in Arabic is called „falah‟ or „eternal salvation‟ for attaining success in

this world and the life hereafter. Sincere and honest submission to the Islamic faith brings a

fundamental change in an human being. Reliance and dependence by human beings solely on

divine guidance for managing their personal and social institutions ensures their growth in

material and spiritual spheres, and success in both worlds (Naqvi, 1982; Choudhury, 1998). Thus

the root of Islamic economic contracts composes of two components that is; Ibadah meaning

Man to God worship and Muamalat meaning Man to Man activities. Muamalat that is Man to

Man activities further leads to economic activities and finally stir to banking and financial

activities. For this reason Islamic Economics is an ideological discipline that primarily aims for

fostering equality, justice, fairness, brotherhood, mercy, compassion, solidarity and freedom of

choice in human society.

Guiding principles of Islamic Economics

The guiding principles of Islamic Economics provides a framework for undertaking economic

activities as they do not decree stiff patterns which might become irrelevant with the passage of

time . The beginning of Islamic Economics can be traced back to the seventh century, when holy

Prophet Muhammad (PBUH) laid the foundation of the first Islamic state in Medina, in the

Arabian Peninsula. He (PBUH) personally undertook the responsibility to monitor market and

business activities in the promising Islamic state.

The Prophet (PBUH) educated people towards some core and important Islamic economic values

and principles which later on underlined every transaction in that time. Sharia contracts

composed of some old Arabic transactions which were approved by the Prophet (PBUH) and

other contracts which were new contracts implemented by himself and his companions.

Transforming such classical Arabic economic contracts and the whole economic system, the

Prophet (PBUH) successfully developed a new society with fair economic transactions and a

much better economic condition than before (Ismal, 2009). Later on, his devout and pious

successors and Islamic jurists administered the state‟s economic affairs on the basis of Islamic

principles. Hence equity, justice, fairness and mutually beneficial economic transactions with

other parties are among Islamic muamalat values that have to be implemented in all regards.

More over it is worth mentioning that Islamic economy is a market economy that is guided by

moral values. As such economic activities are based on the principles of mutual support and


responsibility that are guided ethically, and aimed at establishing a fair and just society where

everyone behaves sensibly and honestly. The fundamental principles of an Islamic economic

system are based on socio-economic justice and equitable distribution, trading of controversial

products, trusteeship, prohibitation of hording, corporation, duality of risk and no gain without

effort or liability (khir et al., 2008).

As quoted in Quran Sura 26, verse 181-183;

( خسزي ٱن ل جكا ي فا ٱنكمم سحقمى )٣٨٣أ سا بٲنقسطاس ٱن ا ف ٣٨١( ل جؼث ل جبخسا ٱناس أشماءى )

( ي (٣٨١ٱلرض يفس

“Give full measure, and be not of those who give less (than the due). (181) And weigh with the

true balance. (182) Wrong not mankind in their goods, and do not evil, making mischief, in the

earth. (183).”

The Holy Prophet (PBUH) conferred Quran and his own judgement to teach people those Islamic

values and principles essential for muamalat. However nowadays, the sources for Islamic Law in

muamalat are not only the Holy Quran and valid Hadith (sayings and practices of Prophet

(PBUH)) but also Ijma (consensus of scholars on a particular issue),Qiyas (analogical deduction

from rulings already derived from the Quran, Sunnah and ijma), Ijtihad (rational independent

deduction by qualified Islamic scholars) and Urf (common practice and custom).Hence Sharia

when applied to banking and finance is based on two core concepts;

The first is that the charging of interest also know as riba is completely forbidden.

The second key element is that activities that are not halal (permitted) in Islam are

therefore not allowed to be involved in economic transactions, whether that is the

granting of loans for haram (unlawful) activities or investing in companies that conduct

unlawful activities.

The general principle of acceptability of economic activities in Sharia is that every economic

activity is permissible unless clearly and explicitly prohibited. To answer the question as what is

riba, it is important to understand its basic meaning; Riba has been extracted from Raba as it

means addition; increase (Maudoodi, 1987).


In Sharia riba 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.

Riba in light of Holy Quran

Riba is prohibited in Islam as it appears explicitly in the Holy Qur‟an various sura‟s. Since the

Qur‟an is the undoubted and unquestionable source of guidance and direction in Islam for all

Muslims, there is unanimous agreement on the fact that Islam has forbidden the practice of riba.

More over it is necessary to acknowledge the fact that the debate whether interest is riba or not is

settled and no longer debatable. As the Ulama have made crystal clear that interest is riba and

therefore is haram.

In the Qur‟an Allah (SWT) says:

يا ءاجمحى ي ٱل ٳل ٱناس فل يزبا ػ أي ا ف ا نمزبب ) ر ؼف ى ٱن ٮ ـ ن

فأ ج ٱل جزي سك يا ءاجمحى ي ١٩)

“That which ye give in usury in order that it may increase on (other) people's property hath no

increase with Allah; but that which ye give in charity, seeking Allah's Countenance, hath

increase manifold”. (30:39)

طم ـ ٳل ٱناس بٲنب ى أي أكه ہا ػ ق ا ب ى ٱنز أخذ ا نهكـ أػح ا ) ہى ػذاب ا أنم ي (٣٦٣فزي

“That they took riba (usury), through they were forbidden and that they devoured men‟s

substance wrongfully – We have prepared for those among men who reject faith a grievous

punishment.” (4:161)

يأ س ٱنذي ٱن ي ـ مط ا يقو ٱنذ يحخبط ٱنش إل ك ا ل يقي ب ٱنز ا ه ب ا ٱنبمغ يثم ٱنز ا إ ى قان بأ ذٳن م ٱل أ

ا ب و ٱنز ز جاء ٱنبمغ فػظة فه ۥ ي بۦ فٲح ر أيز ي ۥ يا سهف ٱنار ۥ إن ٱل ـ أ ٮ ـ ن

فأ ػا ي ى فمہا

( ه ـ ( ١٧٢خ

“Those who devour usury will not stand except as stands one whom the evil one by his touch

hath driven to madness. That is because they say: „Trade is like usury.‟ But Allah hath permitted

trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be

pardoned for the past; their case is for Allah (to judge). But those who repeat (the offence) are

companions of the fire, they will abide therein (forever)” (2:275)


Abdullah Yusuf Ali (1992) in his commentary on the Holy Qur‟an mentioned that usury is

condemned and prohibited in the strongest possible terms. There can be no question about the

prohibition. Yet the modern banking system is organized on the basis of a fixed payment called

interest. That is why the practices of the modern banking system are in conflict and not in line

with the principles and teachings of Islam which strictly forbids riba. Islam clearly and firmly

opposes exploitation in every form and stands for fair and fair dealings among all men

irrespective of color, cast and creed. To charge interest from someone who is forced and

constrained to borrow to meet his essential consumption requirement is considered an

exploitative practice in Islam, over and above charging of interest on loans taken for productive

purposes is also prohibited because it is not an equitable form of transaction (Ahmed, 1984).

Thus, the verses stating riba illustrate that all unlawful accumulation of wealth at the expense of

others is destined, and practices either by individuals or nations are enclosed by this ban. The

basic belief and principle is that any profit that human beings seek should be through their own

effort and not through the exploitation of others. Al-Qur‟an regards riba as a practice of

unbelievers and stresses it as a test of belief, clearly highlighting to discard such unlawful

practice. The aforementioned verses prohibiting riba make no distinction between production

and consumption loans. However, it may be suggested that this was because at that time loans

were taken only for consumption purposes. nevertheless much more research is needed, a good

deal of documentary confirmation has been adduced in recent years to show that loans for

production purposes did exist during the time of the Prophet (Al-Afghani, 1975).

However, the absolute prohibition of riba in al-Qur‟an is a command from Allah to establish an

economic system from which all forms of misuse is abolished, specifically, the bias of the

financier who are guaranteed and assured for a positive return without sharing the risk and threat

of loss, while the entrepreneurs, irrespective of the hard work put in by the management are

never assured with positive returns. The prohibition of riba in al-Qur‟an is therefore, a way to

institute equity and fairness among financiers and entrepreneurs. So, any attempt to treat the

prohibition of riba as an isolated religious command and not as an integral part of the Islamic

economic order with its overall philosophy, goals and values is bound to create confusion

(Ahmad and Hassan, 2007).


Prophets (PBUH) view on Riba

As stated earlier, Allah has laid great stress on riba making it evident for all Muslims to

understand its implications and significance. However Prophet (PBUH) has provided detailed

explanation and has also defined the meaning of riba. On the day Makkah was conquered the

Prophet said,

ؼباس ل رب ا أضغ، ربا ان أ ، يي اجم ث ق ضع ج جاهمة ي كم رب ا في ان

All cases of Riba during the time of Jahiliyyah (pre-Islamic period of ignorance) is annulled and

under my feet, and the first Riba I annul is the Riba of Al-'Abbas (the Prophet's (PBUH) uncle).

An-Nu`man bin Bashir said that he heard the Messenger of Allah say,

ح بات اس اجق انش ، ف حبات أير يش ذن بم ، زاو بم ان إ لل بم ان قغ إ بات قغ في انش ي ض، ػز ي ب زأ ن

أ يش ل ان ػ اػي يز زاو، كانز جغ فمفي ان يز

Both lawful and unlawful things are evident, but in between them there are matters that are not

clear. So whoever saves himself from these unclear matters, he saves his religion and his honor.

And whoever indulges in these unclear matters, he will have fallen into the prohibitions, just like

a shepherd who grazes (his animals) near a private pasture, at any moment he is liable to enter

it.

Some of the most frequently referred hadits by the Muslim scholars are as under:

The Prophet said: "There is no riba except in loaning." (Nasaee 4504)

The Prophet said: "Verily riba is in loaning." (Muslim 2991)

The Prophet said: "There is no riba in hand to hand (spot) transactions." (Muslim)

Abu Saeed Khudri said that once companion Bilal brought to the Prophet (PBUH) some

good quality dates. The Prophet (PBUH) inquired as to where and how he got those

dates. Bilal on the question replied that he had some low quality dates. Which he had

exchanged in 2:1 ratio for the high quality ones in order to present to the Prophet

(PBUH). Upon hearing this, the Prophet (PBUH) said: "Oh no! Oh no! That is riba. That

is exactly riba. Do not do it again. If you want to do such an exchange, first sell your

dates (for money or another commodity) and then buy other ones." (Bakhari ,2145)


The Prophet (PBUH) on one of the occasions said: "Do not exchange gold for gold

except it is in equal measure and do not increase one over the other; do not exchange

silver for silver except when it is in equal measure and do not increase one over the

other. Furthermore, do not exchange a commodity in hand with the one not in

hand."(Muslim and Bakhari)

The term „riba‟ is well thought-out by al-Qur‟an as „riba al-nasi‟ah‟‟ (Nasi‟ah‟ is related to the

verb nasa‟a, meaning to „postpone‟, „defer‟ or „wait‟) or deferred payment interest whereas the

hadith explains „riba al-fadl‟ or increase interest. The first time the Prophet dealt with riba al-

fadl was when the tribe of Thaqif claimed repayment of its debt from the tribe of Mughira, a debt

which remained from the pre-Islamic riba. The Prophet told the Thaqif that the Qur‟an had

ordered the abandonment of the remnants of pre-Islamic riba. The second time the Prophet dealt

with the subject during his farewell pilgrimage. He said, “Every riba is abolished, and the first

riba I abolish is ours-Àbbas Ibn Àbd al- Muttalib‟s riba - (i.e. the Prophet‟s relatives‟ riba). It

is all abolished”. (Ahmad al-Baihaqi, Al-Sunan al-Kubra, 1854, Chapter: 5, Hadith: 275).

It is evident through close observation that the hadith, do discusses both the types of riba that is

riba - al-nasi‟ah and

al-fadl

However its stance and role in regard to the first one is as an enforcement of Allah‟s

commandment and declaration of eradicating it properly among all transactions. Nevertheless

great emphasis has been placed on riba al-fadl in a number of hadiths, one of the most famous

and commonly quoted hadith by Ahmad, Bukhari, Muslims and others is that “Gold for gold,

silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, like for the

like, hand to hand (i.e., immediate sale), but if the kinds differ, then sell as you may like it from

hand to hand”.

Another hadith is one narrated by Abu Saìd al-Khudri from the Prophet who

said: “Do not sell gold for gold, except when it is like for like, and do not increase one over the

other; and do not sell silver for silver except when it is like for like, and do not increase one over

the other; and do not sell what is away (from among these) for what is ready”.

Therefore in light of the above hadiths it is evident that, if gold, silver, wheat, barley, dates and

salt are traded against themselves they should be exchanged there and then (on the spot) in an


alike and equal manner. The six commodities specified here are gold, silver, wheat, barley, dates

and salt, it is distinctively gold and silver that represents commodity money where as the other

four are referred or represented as staple food items. There has been a great deal of discussion

among Muslim jurists whether riba al-fadl is curbed only to these six items or if it can be

generalized to include other commodities. However keeping in mind the the wide use of gold and

silver as commodity money, it is more of a general conclusion that all commodities being used as

medium of exchange enter the field of riba al-fadl. Though with respect to the other four,

Muslim scholars hold difference of opinion. Nevertheless, the imperative point is that these

differences area normal phenomena in Islamic jurisprudence and importantly not any of the

Muslims scholars justify riba al-nasi‟ah or riba al-fadl. All Muslim scholars and jurists

unanimously agree over the fact of disapproving riba by fully acknowledging it in the light of

Quran and the hadith , the main source of the Islamic Sharia.

Current Economic thinking

A legal verdict issued by the Islamic scholars during the 2nd conference of Islamic Researches

Academy in 1965 practically and explicitly, provides complete agreement and strong support on

the ban on riba (Ahmed and Babikir, 1990). Later on, the Fiqh Academy of the Organization of

Islamic Conference (OIC) supported the preventive interpretation of riba, which had been

adopted by the early jurists, condemning strictly as all interest-bearing transactions “void” (Al-

Omar et al, 1996)

Hence it is undoubtedly clear that Islam strictly prohibits riba (interest). As stated above riba is

unfair and undeserved income in the light of Quran and Hadith. Based upon the teachings and

revelations of Quran and hadith, it is not only argued but firmly deems that riba is the main root

cause of problems and tribulations of the modern economic system. Supported by the argument

the Islamic economic system recommends more transparent and fair approach of profit sharing,

in which both involved parties gain relative income based on the investment carried or done.

Prohibiting riba ultimately give rise to the economic activities that are more centered on trade,

production and actual entrepreneurship, rather than focusing and artificially manipulating interest

rates. If one looks around, the modern capitalism has been facing this problem, resulting in major

market crashes caused by several economic bubbles. Hence causing a negative impact on the

society directly as well as indirectly. Adding further, the modern economic thinking or the


Western concepts take “interest” as a helping tool in increasing ones saving, Islamic teachings do

not align with this viewpoint. Hence Muslims fall out on this standpoint and stress over the fact

that savings are linked to income and not riba or interest earned on the saving. Furthermore an

interest free economic system based on profit sharing would emphasis on particular investment

or investments and business ventures rather than improving individual credit rating.

Many Muslim scholars (Taqi Usmani, Monzer Kahf, Ausaf Ahmad,Sami Homud and more) see

riba / interest as a undermining force in the market. This is because interest intrinsically lends

itself to speculation. Based on speculations, capital is not used productively as advantages are

taken on higher interest rates leading to an unstable market. Such practices convert financial

planning more into a gambling table, making it impossible to predict the market and disrupting

the trade cycle (Hussain, 2010). Though, Muslim scholars and economist firmly believe that

lower debt can be achieved if markets are riba free as it would have less speculations leading to

ethical business practices.

Conclusion

Riba is prohibited in Islam, earning or profit on investment in trade and business is allowed and

encouraged provided that the allied risks and gains are not one-sided but equally balanced. More

over ban of riba/interest is the most distinguishing feature and almost certainly the most

intensively discussed issue of Islamic economics, yet it still remains a major topic for further

probing and research. Though in view to the entire discussion one can bridge the gap by

concluding that market crashes and financial problem in past can be recognized as a result to

major exploitation of interest rates and over speculative practices in the business arena. Hence

the Islamic economic system that is based on free and fair dealing with no riba can be a way

forward for a better and prosper economic future.


References:

Ahmad, Hassan (2007), Riba and Islmaic Banking, Journal of Islamic Economics, Banking and

Finance.

Ahmed, Z. (1984), Prohibition of Interest in Islam, Journal of Islamic Banking and Finance,

Karachi, Pakistan.

Al-Afghani. (1975), Sa`id, „Aswaq al-`Arab Fi al-Jahiliyyah Wa al-Islam,2nd

editon., Beirut.

Antonio, Syafei (1999), Sharia Bank for Bankers and Practitioners, Bank Indonesia and Tazkia

Institute, 1st Edition, Jakarta.

Choudhury, M A, (1998), Studies in Islamic Science and Polity, Macmillan, London- UK.

Ismal, Rikfki (2009), Classical Arab Economic Contracts and Their Relevance in Modern

Financial Institutions, MES, Series no 1, UK.

Mishkin, Frederic S. (1997) The Economics of Money, Banking and Financial Markets fifth

edition Addison-Wesley, New York.

Monzer Kahf, Ausaf Ahmad and Sami Homud. (1998), Islamic banking and development an

alternative banking concept, IRTI.

Naqvi, S N H , (1998), „The quest for macroeconomic stability – Pakistan case‟, Journal of

Islamic Banking Finance, vol. 15.

Naqvi, S N H, (1982), Ethics and Economics: An Islamic Synthesis, The Islamic Foundation,

Leicester- UK.

Roderick Millar (2008), Islamic Finance: A Guide for International Business and Investment,

GMB publishing, UK.


Book:

Kamal khir, Lokesh Gupta and Bala Shanmugam. “Islamic Banking a Practical Perspective”,

Kuala Lumpur, Pearson Longman, 2008.

Omar, K. B. (2011). Riba: The Underpinning Principle. International Journal of Finance & Economic ...

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