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RIBA AND ISLAMIC ECONOMICS SYSTEM - Coggle Diagram
RIBA AND ISLAMIC ECONOMICS SYSTEM
INTRODUCTION
Practice of Riba during the Prophet’s Era
The rich merchants of Mekkah (i.e the musyrikun) who stood against the teaching of Prophet Muhammad (saw) usually make money from loans (qard) in two ways: 1) making loans to the poor sorely for their consumption needs 2) making loans to traders as capital
Making loans with riba to the poor often exploits them.
Defaulting borrowers eventually becomes slaves to the lending party. For this reason, the Quran prohibits riba as it is unfair. Riba opens the doors to exploitation
Meaning:
Literally: excess, increase, expansion or growth
Ibn al-Arabi:
every excess in return of which no reward is paid.
Mawdudi:
predetermined excess or surplus over and above the loan received by the creditor conditionally on relation to a specified period.
Haque
: an increase or excess which, in an exchange or sale of commodity, accrues to the owner (lender) without giving in return any equivalent counter or recompense
TYPES OF RIBA'
1. Riba Al-Nasi’ah (due to delay)
described by the Quran as a ‘continued redoubling’ over capital. Al Imran : 130
it refers to the time period that is allowed for the borrower to repay the loan , but with a penalty in the form of ‘an increase’ over the principal loan.
Relate to loan term means to postpone or to wait
An example of loan-based riba al-nasi'ah would be a loan with $1,000 principal on which $1,200 is to be paid next year..
2.Riba Al-Fadhl (due to excess-commodities)
Injustice due to differences in quality and/or quantity in the exchange of the same species
What is essentially being required is justice and fair play in spot transaction;
Riba al-Fadhl refers to all injustices or exploitations in trade. It requires absence of oppression, uncertainty or speculation, monopoly or monopsony.
Justice is when only if the two scales of the balance carry the same value of goods.
both riba covers in Al Baqarah: 275)
To give an example, a deal stipulates that the purchaser buys 1,000 kilograms of wheat for 1,200 kilograms of wheat.
How Q&S define Riba'
A. Quran
Stage 2
Surah al-Nisa’: 160-161 (taking interest despite its prohibition, and consuming people’s wealth unjustly. We have prepared for the disbelievers among them a painful punishment)
attaching the practice of riba’ with the Jews
Consider the practice as an inequity
Stage 1
compare riba’ with Zakat and charity
praising Zakat but not riba’
Surah al-Rum: 39 (Whatever loans you give, ˹only˺ seeking interest at the expense of people’s wealth1 will not increase with Allah. But whatever charity you give, ˹only˺ seeking the pleasure of Allah—it is they whose reward will be multiplied
Stage 3
Surah ali-Imran: 130 (O believers! Do not consume interest, multiplying it many times over. And be mindful of Allah, so you may prosper.)
Prohibiting the practice of charging double and multiple riba’
Stage 4
Conclusively prohibiting all forms of riba’
Any excess over the capital is disallowed
Surah al-Baqarah: 275-281
B. Sunnah
From the Sunnah:
“From Jabir the Prophet s.a.w cursed the receiver and the payer of riba’, the one who records it and the two witnesses to the transaction: they are alike in guilt”
RATIONALES PROHIBITION OF RIBA'
2. Prohibition eliminate Injustice in distribution
-RIBA prevents the free flow of capital in society and actually reverses the directions of its flow from the less privileged towards the richer people.
Money concentrated in the hands of a few people and eventually leads to a total collapse of the social structure.
-Interest based system of economy is total disharmony with the Quran according to which Islam wants to rebuild human civilization and culture, reorganize society economically and rejuvenate individuals morally.
3. Prohibition help ensure a more efficient allocation of resources
-An Islamic system based on profit/loss sharing financing methods would offer, in principle, an efficient substitute.
-for instance- available funds will always be distributed efficiently among investors since financiers share with them expected profit, high or low.
The interest system oppress the borrowers and incapable of allocating available liquid funds among firms and activities in the society according to considerations of efficiency, productivity and growth
1. Prohibition prevent negative attitude in an Individual and society
-In individuals, Riba is a system that gives rise to the attitude of stinginess, selfishness, apathy and capital-worship.
in society ,it develop the materialistic trend.
It promotes self interest. It sows the seeds of conflict among nations and communities and weaken the bonds of cooperation among fellow humans
4. A more just Risk Sharing
The interest system encourages passive behavior of avoiding risk and responsibilities which are develop among people having liquid/excess funds.
In contrast sharing in responsibilities and risks is inherent in the profit/loss sharing methods of finance
5. Positive correlation with inflation
It is crystal clear fact that interest rate is co determinant of inflation and that affects and is being affected by inflation on real basis
Evidence: in 1973 10% increase in interest rate cause three percent reduction in real demand for money M1
eduction in demand of money results in declining GDP. interest rates affects Money demand, supply and GDP however no extra output was produced at large.
DIFFERENCE BETWEEN RIBA AND TRADE
1
In trade
: the purchaser and vendor exchange on the basis of equality, for the purchaser derive profit from that which he has purchased from the seller, while the seller gets profit in consideration of the labour/effort and time which he spends in providing that commodity for the purchaser.
In Riba
: there is no division of profits between the two parties on the basis of equality. The creditor gets for himself a definite amount of money for his loan, but all the debtor gets is certainly the time to use the money, whilst time does not necessarily give him profit.
2
In trade:
however big a profit the seller might demand from the purchaser, he does so only once. The amount is fixed and stated only once (cannot change the amount of the original/spot price). Buying on credit is allowed but the buyer just need to pay the stated amount/spot price.
In Riba':
the creditor does not cease to demand his interest (as long as the principal is not returned). It can be last for years or the whole lifetime of the borrower until the principal is returned. It is a kind of slavery and oppression to the borrowers
3
In trade,
the moment a commodity is exchanged for its price (which includes its profit), the transaction comes to an end. The purchaser does not give anything after that transaction to the seller.
In Riba
, the debtor actually spends the amount borrowed from the creditor and has to return the same amount with an addition by way of interest.