What is Riba or Riba in Islamic Banking?

“Riba” is an Arabic word, and it means: Excess, Increase or Addition. In Quran and Hadith it is used for ‘usury’, or ‘interest’. Now, let us understand riba in Islamic banking and finance, with the help of an example:

“Suppose a person lent a sum of money to another person, and asked the debtor to pay it back together with an agreed additional sum of money within a fixed period. Or a rate of interest was fixed for a specific period, and if the principal along with the interest was not paid within that period, the rate of interest was enhanced for the extended period, and so on. This enhanced or additional amount is Riba”.

Why Riba Islamic Finance is Prohibited?

Islam prohibits Riba in Islamic banking, due to the following reasons:

  • Riba inculcates miserliness, selfishness, callousness, indifference, inhumanity, greed, and worship of wealth.
  • It destroys the spirit of sympathy, mutual help and cooperation, and thus affects the feelings of brotherhood and unity among the community.

Riba is prohibited because it causes many economic evils, for example:

  • It leads to hoarding of money, adversely effecting its circulation among larger sections of society.
  • It also causes establishment of monopolies, cartels, and concentration of wealth in few hands. And so, the gulf between the rich and the poor widens.

Prohibition of Riba in Quran and Hadith

Riba Islamic finance is prohibited in many places in the Quran and Hadith. Here are some examples:

Riba in Quran

In Ar-Rome, Verse-39 of the Quran, Allah says:
“And whatever you give for interest to increase within the wealth of people will not increase with Allah. But what you give in Zakath, desiring the countenance of Allah – those are the multipliers.”

In Al-Nisa, Verse-161 of the Quran, Allah says:
“And [for] their taking of usury while they had been forbidden from it, and their consuming of the people’s wealth unjustly. And we have prepared for the disbelievers among them a painful punishment”.

In Aal-e-Imran Verse-130 of the Quran, Allah says:
“O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful”.

In Surah Al-Baqarah, Verse-275 of the Quran, Allah says:
“Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah . But whoever returns to [dealing in interest or usury] – those are the companions of the Fire; they will abide eternally therein”.

Riba in Hadith

Hazrat Jaa-bir reported that the Prophet Muhammad (Peace Be Upon Him) said on the Farewell Pilgrimage:
“All of the Riba of Jahiliya is annulled. The first Riba that I annul is our Riba, that accruing to Abbas Bin Abdul Mutallib, it is being cancelled completely.”

riba in Islamic banking and finance

Classification of Riba in Islamic Banking?

Riba is divided into two types. We will discuss each of it in details:

Riba An Nasiyah

It is also called Riba Al Jahiliya, and it refers to the addition of the premium, which is paid to the lender, in return for his waiting as a condition for the loan. It is technically the same as interest, and this is the real and primary form of Riba.

Prophet Muhammad (Peace Be Upon Him) said:
“Every loan that draws excess is Riba.”

Riba Al Fadl

It is also called known as Riba Al Bai. Riba Al Fadl is defined as excess compensation, without any consideration, resulting from a sale of goods.

Riba Al Fadl or Riba Al Bai may be understood form the following Hadith:
“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, but if a person transacts in excess, it will be Riba. However, sell gold for silver anyway, you please on the condition, it is hand-to-hand and sell barley for date anyway, you please on the condition, it is hand-to-hand.”

Laws Regarding Riba Fadl

  • Any difference in value or quality should be ignored and the commodities should be exchanged in equal weight and volume.
  • Instead of direct exchange of commodities of the same kind, a person should sell his commodity against cash at the market value, and buy someone else’s commodity in exchange of cash at the market value.

Difference between Trade and Interest

  • In trade, one earns profit as a result of initiative, enterprise, efficiency, hard work, profit fluctuates, and there is risk of loss as well.
  • On the other hand, the interest is not earned through hard work or any value creating process. It is not the reward of labor, but is in fact an unearned income. The lender gets his fixed amount, irrespective of the fact, whether the debtor earns any profit or sustains loss.

Key Points:

  • “Riba” means excess, increase or addition, and it has two types.
  • In trade one earns profit as a result of initiative enterprise, efficiency and hard work. But the interest is not earned through hard work or any value creating process.
  • Loan shall be given without interest.
  • Riba or usury inculcates selfishness, inhumanity, greed and worship of wealth; it destroys the spirit of sympathy and cooperation.
  • Debt should be incurred only, when it is unavoidable. It may be incurred to satisfy basic needs, and it should be taken with a clear intention to pay it back.
  • Contract of loan should be reduced in writing, in the presence of two witnesses.
  • Islamic banking is based on the principle of partnership and profit-loss sharing basis.

 

NOTE:
Understanding the concept of riba in Islamic banking, is a fundamental part of Islamic financial system. Full lecture on Riba in Islamic banking is covered in the Islamic banking course, Islamic finance course and Islamic banking diploma, all these programs are a part of MBA in Islamic banking and finance degree offered by aims.

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