RibaRiba , , GhararGharar and and Islamic financeIslamic finance

Muhammad Asif Muhammad Asif asiftct1@yahoo.comasiftct1@yahoo.com

Lecturer city university, PeshawarLecturer city university, Peshawar

ISLAMIC NORMS OF BUSINESS ISLAMIC NORMS OF BUSINESS TRANSACTIONSTRANSACTIONS

Should not indulge in Should not indulge in RibaRiba

Should not involve in Should not involve in GhararGharar

Should not indulge in Should not indulge in fraudulent behaviorfraudulent behavior

Should not coerceShould not coerce Should not deal in Should not deal in

prohibited goods. prohibited goods.

Should not take Should not take advantage of advantage of anybody’s needsanybody’s needs

Should not withhold Should not withhold supplies to raise pricessupplies to raise prices

Should not withhold Should not withhold information to take information to take advantage of advantage of ignorance. ignorance.

First stage: al-Rum, 39First stage: al-Rum, 39

Second stage: al-Nisa’, 161Second stage: al-Nisa’, 161

Third stage: Ali Third stage: Ali ccImran, 130Imran, 130

Fourth stage: al-Baqarah, 275-281Fourth stage: al-Baqarah, 275-281

Stages of RevelationStages of Revelation

“ Those who devour interest become like the one whom Satan has bewitched and maddened by his touch. They have been condemned to this condition because they say trade is just like interest, whereas

Allah has made trade lawful and interest unlawful. Henceforth, if one abstains from taking interest after receiving this admonition

from his Lord, no legal action will be taken against him regarding the interest he had devoured before; his case shall ultimately go to Allah. But if one repeats the same crime even after this, he shall go

to Hell, where he shall abide forever”.

“ O believers fear Allah and give up that interest which is still due to you if you are true believers; but if you do not do so then you are warned of the declaration of war against you by Allah and His

Messenger. If, however, you repent even now (and forgo interest), you are entitled to your principal; do

not wrong, and no wrong will be done to you”.

4. Hazrat Jabir Ibn-e-Abdullah (‘) has reported the Prophet (]) to have cursed those who

charge interest, those who pay it, those who write documents pertaining thereto, those who

keep the accounts of such matters and those who sign as witness. He (]) said that they are

all equal in this crime.

 8.   Hazrat Abu Hurairah (�) has reported the Prophet (]) to have said, “four categories of people are such that Allah has made it binding upon Himself to refuse them admission to the paradise or to let them enjoy is goodies. The first is the one who is a habitual drinker of alcoholic drinks. The second is the one who devours interest, the third is the one who devours the wealth 

belonging to an orphan, without any justification therefore, and the fourth is the one who is disobedient to his parents. This has been reported by Hakim on the authority of Ibrahim bin Khathim bin Irak and he (Ibrahim) reported it on the authority of his father (Khathim) and he (Khathim) reported it on the authority of Hazrat Abu Hurairah (�) Hakim has classified it as an 

authentic saying.”

 8.   Hazrat Abu Hurairah (�) has reported the Prophet (]) to have said, “four categories of people are such that Allah has made it binding upon Himself to refuse them admission to the paradise or to let them enjoy is goodies. The first is the one who is a habitual drinker of alcoholic drinks. The second is the one who devours interest, the third is the one who devours the wealth 

belonging to an orphan, without any justification therefore, and the fourth is the one who is disobedient to his parents. This has been reported by Hakim on the authority of Ibrahim bin Khathim bin Irak and he (Ibrahim) reported it on the authority of his father (Khathim) and he (Khathim) reported it on the authority of Hazrat Abu Hurairah (�) Hakim has classified it as an 

authentic saying.”

19.Hazrat Ibn-e-Masood (�) reporting a saying of the Prophet (]) in which the Prophet (]) said, “When adultery and interest become common place in a people, then they have definitely asked for Allah’s 

punishment for themselves”.

Riba in Hadith Riba in Hadith [contd.][contd.]

Jabir b. Abdallah said: The Prophet Jabir b. Abdallah said: The Prophet (pbuh) said, “All of the riba of Jahiliyah (pbuh) said, “All of the riba of Jahiliyah is annulled. The first riba that I anul is is annulled. The first riba that I anul is our riba, that accruing to ‘ Abbas b. our riba, that accruing to ‘ Abbas b. Abd al Muttalib; it is being cancelled Abd al Muttalib; it is being cancelled compeletely.compeletely.

[ Reported by Muslim and Ahmad : Last [ Reported by Muslim and Ahmad : Last Sermon of the Prophet (Pbuh)]Sermon of the Prophet (Pbuh)]

The Wisdom and Rationale of the Prohibition of Riba• Barter system is not so favourable from the Shariah point of view.

• The impact of riba is on the society at large compared to other crimes prescribed in hudud which impact are restricted to only a few of people.

• It is a clear burden on the borrower. In any circumstances, he is obliged to repay the principal and interest charge (Money renting). Money and time cannot grow by themselves.

• Riba is the main pushing factor for the people with surplus of money to lend their money out to the deficit units in the economy. However, it could render to exploitation of deficit units by the surplus units.

The Wisdom and Rationale of the Prohibition of Riba

• The inflexibility of interest charge results in loss and unemployment in comparison with the profit-and-loss sharing system.

• Security oriented vs Growth oriented. Interest-based system is not for the poor parties with poor creditworthiness.

• Inequality in loan distribution makes the rich becomes richer and the poor becomes poorer.

• Interest-based system impends the innovations amongst the small-scale enterprises particularly.

The Wisdom and Rationale of the Prohibition of Riba

• Wealth creation and transfer: Riba activities do not create a new stock of wealth.

• Borrowers are not exposed to any risk (except credit risk - does not commensurate the profit made).

• Money is considered as commodity is an interest-based system and subject to the law of demand and supply (Allowing speculation on money).

• Interest is a component of costs in an interest-based system.

TYPES OF RIBATYPES OF RIBA

RIBA OF DEBT (Riba al Diyun)RIBA OF DEBT (Riba al Diyun) RIBA OF TRADE (Riba al Fadl)RIBA OF TRADE (Riba al Fadl) Both types of Riba are prohibited in Both types of Riba are prohibited in

Islam. Riba al Diyun is also known as Islam. Riba al Diyun is also known as Riba al jahiliah. It is prohibited by the Riba al jahiliah. It is prohibited by the Quranic injunctions. Riba al Fadl is Quranic injunctions. Riba al Fadl is prohibited by Hadith of the Prophet prohibited by Hadith of the Prophet (pbuh). (pbuh).

RIBA OF Debt [Riba al RIBA OF Debt [Riba al diyun]diyun]

Riba of the period of Jahiliyah: Riba of the period of Jahiliyah: Prevailing in Arabia before the advent Prevailing in Arabia before the advent of Islamof Islam

The debt is linked with time. Any The debt is linked with time. Any extension in time is granted only by extension in time is granted only by raising the price of debt (interest). raising the price of debt (interest).

Prohibited on the strength of Quranic Prohibited on the strength of Quranic injunction.injunction.

RIBA OF TRADE [ Riba RIBA OF TRADE [ Riba al fadl]al fadl]

The Prophet (pbuh) said: “ Gold for Gold, The Prophet (pbuh) said: “ Gold for Gold, Silver for Silver, Wheat for Wheat, barley for Silver for Silver, Wheat for Wheat, barley for barley, dates for dates, salt for salt - like for barley, dates for dates, salt for salt - like for like, hand to hand. Whoever pays more or like, hand to hand. Whoever pays more or takes more, indulges in takes more, indulges in Riba. Riba. The taker The taker and giver are alike (in guilt). and giver are alike (in guilt).

Narrated by : Abu Saeed KhudriNarrated by : Abu Saeed Khudri Reported by: bukhariReported by: bukhari

Meaning of Riba al FadlMeaning of Riba al Fadl

It is related with the exchange of one It is related with the exchange of one good with the same good. good with the same good.

Some experts consider it to be a form Some experts consider it to be a form of of Bay’ al fasid Bay’ al fasid (illegal sale)(illegal sale)

Barter between different goods is Barter between different goods is allowed. allowed.

RIBA, INTEREST AND RIBA, INTEREST AND USURYUSURY

No distinction between interest and No distinction between interest and usury i.e. between low and high usury i.e. between low and high rates.rates.

No distinction between consumption No distinction between consumption and production loansand production loans

No distinction between individual and No distinction between individual and institutional loansinstitutional loans

AVOIDANCE OF AVOIDANCE OF GHARARGHARAR

Definition of GhararDefinition of Gharar Uncertainty / AmbiguityUncertainty / Ambiguity Ambiguity of Quantity [Gharar fil Ambiguity of Quantity [Gharar fil

Miqdar]Miqdar] Ambiguity of Attributes [Gharar fis Ambiguity of Attributes [Gharar fis

sifah] such assifah] such as Ambiguity in time or place of deliveryAmbiguity in time or place of delivery Ambiguity in price etc. Ambiguity in price etc.

TYPES OF ISLAMIC TYPES OF ISLAMIC CONTRCTSCONTRCTS

Islamic Contracts

Muwadat Musharakat Tabarruat

Fixed Payment Nothing is determined

No Gharar Some Gharar Gharar is allowed

Ratio is determined

TYPES OF ISLAMIC TYPES OF ISLAMIC CONTRCTS [contd.]CONTRCTS [contd.]

Contracts of Sale / Lease are Muawadat. Contracts of Sale / Lease are Muawadat. GhararGharar is not allowed in such contracts. is not allowed in such contracts.

MudarabahMudarabah and and MusharakahMusharakah are contracts are contracts of of MusharakatMusharakat. Some amount of . Some amount of gharargharar may may be tolerated in such contracts.be tolerated in such contracts.

Sadaqat Sadaqat and and Hadaya Hadaya are are TabarruatTabarruat. No . No objection to Gharar in these type of objection to Gharar in these type of contracts.contracts.

DEBT FINANCE DEBT FINANCE Vs. Vs.

PARTICIPATORY FINANCE PARTICIPATORY FINANCE Participatory finance, in comparison, Participatory finance, in comparison,

to debt finance is:to debt finance is:– More justMore just– More equitableMore equitable– More efficientMore efficient– More growth oriented. More growth oriented.

DISADVANTAGES OF DISADVANTAGES OF RIBARIBA BASED FINANCE BASED FINANCE

RibaRiba based finance is inefficient. based finance is inefficient.Riba Riba based finance is unjustbased finance is unjustRiba Riba based finance discourages based finance discourages growth.growth.RibaRiba based finance leads to economic based finance leads to economic instability. instability. Riba Riba based finance leads to economic based finance leads to economic inequalities. inequalities.