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TOPIC 6: ISLAMIC BANKING AND FINANCE (RIBA (Riba al-Bay'(riba al-fadl)…
TOPIC 6: ISLAMIC BANKING AND FINANCE
RIBA
Literally: Increase, excess
Technically: a predetermined excess/surplus over & above the loan received by the creditor conditionally in relation to a specific time period.
Pre-Islamic days: Lending out money for a specified time and received from him a
fixed amount of money every month as interest
Modern Jahiliyyah: Lending out money to another on a condition that after a certain
time it would charge a fixed amount in addition to the principal
Elements of Riba
Excess/surplus over and above the loaned capital
Determination of the surplus according to time
Surplus portion is pre-determined even with the willingness from borrower to pay that portion
Riba al-Qard(riba an-nasi'ah)
Loan with interest or other benefits
Excess amount imposed due to delinquency in debt
repayment or default
Riba al-Bay'(riba al-fadl)
the Arabs used certain commodities like wheat, barley, dates & salt(ribawi items) as medium of exchange to purchase things like they were money
TYPE A
Same group, same kind: equality & on the spot
TYPE B
Same group, different kind: on the spot
TYPE C
Different groups & kind: no condition imposed
MISCONCEPTIONS ABOUT RIBA
Modern day interest is not Riba
Argument: Did not elaborate on the interpretation and definition of riba
Addressing this: Other prohibitions like pork, liquor, gambling were also not given elaborate definitions
Ignorance of the correct meaning does not affect lives of Muslims because no precept of Shari'ah is revealed through them
If it is not excessive it is not Riba
Argument: If rate of interest is not excessive, then it does not constitute riba and therefore not prohibited
Addressing this: Every amount, regardless of magnitude, over and above principal is riba
Expression “doubled” meant to emphasize added severity
Riba is allowed under dharurah
Argument: situation where the person find himself in danger/extreme hardship, he is allowed to commit what is normally forbidden/abandon what is normally obligatory
Addressing this: Is the “necessity” real or exaggerated by imaginary apprehensions?
Can the project be delayed until available halal option
exists?
Have all other permissible alternatives been
exhausted?
Riba allowed for commercial loans
Argument: In the past, consumption loans taken by poor people to finance their basic needs
In the present, commercial loans where the debtor is economically well-off and used to generate profit
Addressing this: There are evidences to substantiate that the practice of interest-based production loans dated back to much earlier times
Nature of Qur’anic prohibition - includes all forms of riba
ECONOMIC RATIONALE FOR PROHIBITION OF RIBA
Element of injustice in financing productive activities
Element of biasness in financing projects
Negative effects of a credit society
Gharar
Literally: Deceit, fraud, uncertainty
Technically: uncertainty caused by lack of clarity regarding the subject matter or price in a contract of exchange
Ex: Sale of fish in the sea, Sale of birds in the air
Gharar Yasir(minor): Tolerated & will not invalidate a contract
Gharar Fahish(major): Not tolerated & may result in contract voidability
Rationale for prohibition of gharar: To ensure full consent and satisfaction of the parties in a contract
Gharar in commercial contracts may lead to injustice, exploitation and/or enmity among contracting parties
Maysir
easily available wealth; acquisition of wealth by
chance
A form of gambling
'Iwad
equal countervalue
promotes a sense of equity and justice in economic
transaction, differentiating it from riba
Components
Risk (ghurm): Market risk – price risk, holding costs, obsolescence
Work and effort (ikhtiyar): Services or activities that value-add
Liability (daman): Product liability borne by seller, in the event of defects