OverviewDefinition of RibaClassification of RibaLaws governing types of RibaRiba and present day argumentsNature of Money in IslamDifference between money and

Commodity

Definition of RibaRiba means any excess compensation

over and above the principal which is without due consideration. It’s a premium paid to the lender in return for his waiting as a condition for the loan. As per hadith “Every loan that draws interest is riba”

The prohibition of interest is not limited to Islam but it is shared by Judaism and Christianity

Why prohibition of Riba?Creates imbalance in the society,

where money is earned on money without the risk of return.

Banks tend to cater loans only to the rich and entire capital is utilized for the benefit of the few. Community as a whole does not benefit.

Classification of RibaRiba un Nasiyah or Riba al Jahilia

refers to loan transactionsRiba al Fadl or Riba al Bai refers

to sale transactions

Classification of RibaRiba un Nasiyah or Riba al Jahilia

◦The kind of loan where specified repayment period and an amount in excess of capital is predetermined

◦Premium paid to the lender in return for his waiting or taking of every excess amount in exchange of a loan at an agreed rate irrespective of whether it is low or high

◦All loans that draw interest

Classification of RibaRiba al Fadl or Riba al Bai

◦Excess which is taken in exchange of specific homogenous commodities and encountered in their hand to hand purchase & sale as explained in the famous hadith

◦Hadith prohibiting Riba al Fadl specifies: Sell Gold in exchange of equivalent gold Sell Silver in exchange of equivalent Silver Sell Dates in exchange of equivalent Dates Sell Wheat in exchange of equivalent Wheat Sell Salt in exchange of equivalent Salt Sell barley in exchange of equivalent Barley

Classification of RibaIman Abu Hanifa on Riba al Fadl

◦Commodities must have two common characteristics Weight Volume

Includes all commodities having equal weight or volume and are being exchanges

Classification of RibaIman Shafi on Riba al Fadl

◦Commodities must have two common characteristics Medium of Exchange Edible

Therefore, the law applies on everything edible or having natural ability of becoming a medium of exchange (currency)

Classification of RibaIman Maalik on Riba al Fadl

◦Commodities must have two common characteristics Preservable Edible

Therefore, the law applies on everything edible or can be preserved

Classification of RibaIman Ahmad Bin Hanbal on Riba

al Fadl◦Three citations have been related to

him: First conforms to Iman Abu Hanifa Second conforms to Imam Shaafi Third citation includes three

characteristics at the same time namely edible, weight, volume

Classification of RibaPresent day Islamic scholars on

Riba al Fadl:◦If two characteristics i.e. weight and

use as medium of exchange is present then the following transactions are not allowed: A deferred sale of goods having weight

and homogenous nature A sale of unequal goods having weight

and homogenous nature

The laws of Riba Al FadlFirst Law

◦Exchange of any of the six commodities with itself but differing in quality is allowed only under certain conditions

Conditions of Exchange◦Any difference in value/quality should be

ignored and commodities should be exchanged in equal amount

◦ Instead of direct exchange of commodities of the same kind, a person should sell his commodity against cash at the market value and buy the commodity against cash

The laws of Riba Al FadlSecond Law

◦Exchange of a product with its raw material is allowed under certain conditions

Conditions of Exchange◦If the characteristics of the commodity

has been totally altered by the industry, then different amounts can be exchanged

◦If little alteration has been done then the exchange should be either in equal weights or sold against cash

The laws of Riba Al FadlThird Law

◦Exchange of any of the six commodities with one another is allowed in unequal amounts but the payment should not be deferred.

Conditions of Exchange◦General conditions of sale contract

are filled

The laws of Riba Al FadlThird Law

◦Exchange of any of the six commodities with one another is allowed in unequal amounts but the payment should not be deferred.

Conditions of Exchange◦General conditions of sale contract

are filled

The Types of RibaTijarti Sood (Commercial Interest)

◦Interest paid on loan taken for productive and profitable purposes.

Sarfi Sood (Usury)◦Interest paid on loan taken for

personal need and expenses

Riba: Present day argumentsThere are two schools of thought

on Tijarti Sood (Commercial Interest) and Sarfi Sood (Usury)

First School of thought:Riba as practiced during the days of the

Prophet (SAW) was UsuryCommercial Interest did not exist during

the days of the Prophet (SAW)

Riba: Present day argumentsRiba as practiced during the days of

the Prophet (SAW) was UsuryCounter argument: Islam when prohibiting

something does not only prohibit the prevalent form but all forms that might erupt in future. E.g Liquor, Pork, Corruption

Commercial Interest did not exist during the days of the Prophet (SAW)Counter argument: The claim is incorrect

as both forms existed in pre-islamic days.

Riba: Present day argumentsSecond School of thought:

In present day banking no one being exploited or faces injustice, it cannot be called Riba

There is a Quranic verse ‘ O believers do not devour one another’s possessions wrongfully; rather than that let there be trading by mutual consent”. Wrongful devouring only arise if the consent of one or more parties is not present but in commercial interest the mutual consent is present of both parties, so its not Riba.

Riba: Present day argumentsIn present day banking no one being exploited or

faces injustice, it cannot be called Riba Counterargument: Islam prohibits one party getting

confirmed profit and other party getting unconfirmed profit from the same investment

There is a Quranic verse ‘ O believers do not devour one another’s possessions wrongfully; rather than that let there be trading by mutual consent”. Wrongful devouring only arise if the consent of one or more parties is not present but in commercial interest the mutual consent is present of both parties, so its not Riba. Counterargument: Mutual consent does not render a

transaction lawful

Nature of Money in IslamOne of the incorrect assumptions on

which all theories of interest are based is that money has been treated as a commodity.

It is hence argued that just as a merchant can sell his commodity for a higher price than the cost, one can also sell money at a higher price i.e. interest

Money is treated differently from commodity as they have different characteristics

Difference between Money and CommodityMoney has no intrinsic utility. It cannot be utilized directly for fulfillment of human needs

A commodity has intrinsic utility and can be utilized directly without exchanging it with for some other things

The money has no quality except that it’s a measure of value or a medium of exchange

A commodity can be of different qualities

All units of money are the same denomination and are 100% equal to each other

In commodities, the transaction of sale and purchase are affected on identifies commodity

Opinion on Money `

Post great Depression Economic Crisis Committee discussing the pitfalls stated:

“In order to ensure money performs its true function of operating as a means of exchange and distribution, it is desirable that it should ceased to be traded as a commodity”

Opinion on Money `

Prof. John Gray of Oxford University stated:

“Most significantly perhaps transaction on foreign exchange market share have now reached the astonishing sum of $1.2 trillion a day…………over 50 times the level of world trade. 95% of these transactions are speculative”

Opinion on Money `

James Robertson in his work Transforming Economic Lives stated:

“Today’s Money and finance system if unfair, it results in a massive world wide diversion of effort away from providing useful goods and services. At least 95% of the billions of dollars transferred daily around the world are unlinked to transactions in real economy”

Opinion on Money `

Richard Thomson in his “Apocalypse Roulette” stated:

“Financial Derivatives have grown to $64 trillion industry by 1996. How do you imagine a number that big? You could say that if you laid all those dollar bills end to end. They would stretch from here to the sun sixty six times or to the moon 25, 900 times”