Things you should know about Riba

 

Riba - the prohibited act in Islam

What is Riba? 

The literal meaning of Riba in Islamic banking terms refers broadly to concept of growth or increase i.e. Charging Interest or usury that include earning Interest or paying off the interest in any form.

Riba' (Arabic: ربا ,الربا، الربٰوة‎ ribā or al-ribā) can be roughly translated as "usury", or unjust, exploitative gains made in trade or business under Islamic law. The term "riba" has also been roughly translated as the pursuit of illegal, exploitative gains made in business or trade under Islamic law, akin to usury.

Islam forbids riba, even at low interest rates, as both illegal and unethical or usurious.

Islamic banking has provided several workarounds to accomodate financial transactions with charging explicit interest.

There is also another form of riba, according to most Islamic jurists, which refers to the simultaneous exchange of goods of unequal quantities or qualities. Here, however, we will be referring to the practice of charged interest.

Types of Riba

1. Riba Duyun : 

Unjustified increment in money lent whether in kind or cash over and above the principal amount. The following are the sub types of Riba Duyun : 

 

           —  Riba Qard : Increase (interest) on the principal sum of the loan is agreed upon at the point of contract.

           –   Riba Jahiliyyah : Increase levied on the borrower for late repayment or failure to repay the financial loan.

         

2. Riba Buyu`: 

Occurs in trading and exchange transactions, in which unequal exchange of certain commodities (gold, silver, dates, etc.) of same kind and same basis. The following are the sub types of Riba Buyù :

            –   Riba Fadl : Due to unequal amount/quantity

            –   Riba Nasi`ah : Due to extension of time of delivery

Sources of prohibition of Riba :

Quran and prohibition :

Riba is mentioned and condemned in several different verses in the Qur'an

The prohibition of Riba or interest in the Quran came gradual and in stages, starting with discouragement and condemnation of Riba by the Quran to the final prohibition as laid down in the following verse of the Quran:

And what you give in usury (riba), that it may increase upon the people's wealth, increases not with God; (Quran 30:39)

... for their taking usury (riba), that they were prohibited, ... (Surah An-Nisaa Quran 4:161)

O believers, devour not usury (riba), doubled and redoubled, and fear you God; haply so you willprosper (Surah Al' Imran Quran  3:129-130)

"Allah permitted the sale and forbade Riba" (Verse 275, Surah Al Baqarah)

“Whatever riba (increased amount) you give, so that it may increase in the wealth of the people, it does not increase with Allah” [Ar-Rum: 39]

“ And for their charging ribā (usury or interest) while they were forbidden from it, and for their devouring of the properties of the people by false means. We have prepared, for the disbelievers among them, a painful punishment.” [Al-Nisa: 161]

“O you who believe, do not eat up the amounts acquired through ribā (interest), doubled and multiplied. Fear Allah, so that you may be successful.” [Al-Imran: 130]

“Those who take riba (usury or interest) will not stand but as stands the one whom the demon has driven crazy by his touch. That is because they have said: ‘Sale is but like riba.’, while Allah has permitted sale, and prohibited riba. So, whoever receives an advice from his Lord and desists (from indulging in riba), then what has passed is allowed for him, and his matter is up to Allah. As for the ones who revert back, those are the people of fire. There they will remain forever. Allah destroys riba and nourishes charities, and Allah does not like any sinful disbeliever. Surely those who believe and do good deeds, and establish salah (prayer) and pay zakah (charity) will have their reward with their Lord, and there is no fear for them, nor shall they grieve, O you who believe, fear Allah and give up what still remains of riba, if you are believers. But if you do not (give it up), then listen to the declaration of war from Allah and His Messenger. However, If you repent, yours is your principal. Neither wrong, nor be wronged.” [Al-Baqarah]

The Prophet Muhammad ﷺ explained these verses of the Quran and clearly prohibited riba (interest) in a number of his sayings. Some of them are presented here :

The Hadith of the Prophet went further that: "Every loan which attracts benefit is Riba".

The Prophet Muhammad ﷺ cursed the receiver and the payer of interest, the one who records it and the two witnesses to the transaction and said: "They are all alike [in guilt]." [Sahih Muslim]

The Prophet Muhammad ﷺ prohibited riba explicitly in his last hajj (pilgrimage to Mecca) which was the most attended gathering of his companions. Jabir ibn 'Abdallah, giving a report on the Prophet Muhammad ﷺ's last hajj, said: The Prophet Muhammad ﷺ addressed the people and said "All of the riba of Jahiliyyah (the days predating Islam) is annulled. The first riba that I annul is our riba, that accruing to 'Abbas ibn 'Abd al-Muttalib [the Prophet Muhammad ﷺ's uncle]; it is being cancelled completely." [Sahih Muslim]

From 'Abdallah ibn Hanzalah: The Prophet Muhammad ﷺ said: "A dirham of riba which a man receives knowingly is worse than committing adultery thirty-six times." [Mishkat al-Masabih]

From Abu Hurayrah: The Prophet Muhammad ﷺ said: "On the night of Ascension I came upon people whose stomachs were like houses with snakes visible from the outside. I asked Gabriel who they were. He replied that they were people who had received interest." [Ibn Majah]

From Abu Hurayrah: The Prophet Muhammad ﷺ said: "Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother." [Ibn Majah]

It can be understood from the above verses of the Quran and the sayings of the Prophet Muhammad ﷺ that riba is very severe sin and prohibited strictly. The committing of riba or involving interest-based transactions is considered as equivalent to being at war with God and His Prophet Muhammad ﷺ.

The benefit which renders the transaction prohibited may be a sum of money, or any goods of a value.

Thus, the prohibition has a far wider meaning and application than prohibition of charging interest on loans. It is a prohibition of usury and any unearned accretion on the capital or the principal, whether it is in the form of interest or any benefit.

Why riba is prohibited

Riba is prohibited under Shari'ah law for a couple of reasons. 

It is meant to ensure equity in exchange.

It is meant to ensure that people can protect their wealth by making unjust and unequal exchanges illegal.

Islam aims to promote charity and helping others through kindness. 

To remove sentiments of selfishness and self-centeredness, which can create social antipathy, distrust, and resentment. 

By making riba illegal, Shari'ah law creates opportunities and contexts in which people are encouraged to act charitably—loaning money without interest.

It is forbidden under Shari'ah Law (Islamic religious law) because it is thought to be exploitative and unlawful

Riba-based loans exploit the poor and tend increase poverty. Many poor people end up refinancing these loans over and over in a never-ending cycle of debt and riba. 

Riba leads to excessive leverage in business which can lead to systemic risks and business failures. In finance, leverage means using debt to buy assets. After the 2008 financial crisis, many businesses failed because they had high levels of debt (leverage) and they could no longer sustain the payments of riba. Economists call this process “de-leveraging”.

Riba conflicts with the spirit of brotherhood and sympathy, and is based on greed, selfishness and hard heartedness. Rather than sharing in the risks of a business or investment, riba sets up a lender/borrower relationship. The lender has a financial incentive to squeeze the borrower as much as possible to get the loan back with interest, regardless of the borrower’s situation.

Riba-based investments encourage directionless and short-sighted investments rather than channeling investments towards visionary and meaningful advancements.

Islamic Banking

Islamic banking refers to a banking and financing system which ensures that the financial transactions conform to Islamic law principles. The Islamic financing and banking institutions have grown successfully within the last 20 years in response to popular need in Islamic countries for free interest financing as well as the need of Western and American markets for new capitals. OPEC surplus made it possible for both sides to use the huge surplus money. However, the size of the Islamic Banking transactions remains small as compared to the traditional banking, but it is steadily growing.

It is estimated that there are about US $ 100 billion investment worldwide according to Sharia principles; relatively a small sum but significant considering the short period during which Islamic financial institutions and Islamic funds have existed. The use of Islamic investment funds and banking is not confined to the Middle East but has been adopted by a number of conventional banks in USA and Europe.

We shall attempt here-below to outline the main features of Islamic banking and the differences with conventional banking as well as some of tools used by such institutions as financing instruments.

Depending on the interpretation, riba may only refer to excessive interest; however, to others, the whole concept of interest is riba and thus is unlawful. Though Muslims agree that riba is prohibited, there is much debate over what constitutes riba, whether it is against Shari'ah law, or only discouraged, and whether or not it should be punished by people or by Allah.

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