A CRITICAL ANALYSIS ON RIBA & GHARAR IN ISLAMIC JURISPRUDENCE

By

SYUHAEDA AENI BINTI MAT ALI IZUAN IZZAIDI BIN AZMI

SYUKRINA ALINI BINTI MAT ALI RAFIDAH@MALISSA BT DATUK SALLEH

OCTOBER 2009

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TABLE OF CONTENTS Page

SURAT PENYERAHAN LAPORAN 11

REGISTER OF RESEARCH TEAM IH

ACKNOWLEDGEMENT V

ABSTRACTS 1V

CHAPTER 1: INTRODUCTION

1.1 Introduction 1

1.2 Problem Statement 2

1.3 Objective of study 2

1.3 Literature Review 3

1.4 Methodology 5

1.5 Limitation 5

1.6 Significant of the study 6

1.7 Outline of chapters 6

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C H A P T E R 2 : A N O V E R V I E W O N R I B A ( I N T E R E S T )

2.0 INTRODUCTION

2.0.1 Ribainqur'an 8

2.0.2 Riba in hadith 11

2 .0 .3 .Scholars view 13

2.1 CLASSIFICATION OF RIBA

2.1. Riba al-nasiah 15

2.2. Riba al-fadl 15

C H A P T E R 3 : A N O V E R V I E W O N G H A R A R

3.1 Definition 17

3.2 Conditions for gharar 19

3.3 Prohibition of gharar 20

3.3.1 Spectrum Of Prohibition 21

3.3.2. Excessive And Minor Gharar 23

3.3.3 Sale of Unseen (ghaib) and the Non Existant 26

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CHAPTER 4: COMPARATIVE STUDY BETWEEN RIB A AND

GHARAR

4.1.1. Scope or subject matter 30

4.1.2 Effect of riba and gharar 34

4.1.3. Possibility of removing gharar 38

4.1.4. Islamic banks are more exposed to

gharar, not riba 40

CHAPTER 5: ISSUES RELATING TO ISLAMIC BANKING PRODUCTS 43

CHAPTER 6: RECOMMENDATIONS TO ISLAMIC FINANCIAL INSTITUTION IN MALAYSIA TO ENSURE THEIR PRODUCTS ARE INTEREST-FREE AND GHARAR-FREE 46

CONCLUSION 57

BIBLIOGRAPHY 58

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Tarikh : 30 O C T O B E R 2009 No Fail Projek:

Penolong Naib Canselor (Penyelidikan)

Institut Pengurusan Penyelidikan

Universiti Teknologi M A R A

40450 Shah Alam

Yang Berbahagia Prof,

Laporan A k h i r Penyel id ikan "A Critical Analysis O n Riba & G h a r a r In Islamic Jurisprudence"

Merujuk kepada perkara di atas, bersama-sama ini disertakan 3 (Tiga) naskhah laporan Akhir Penyelidikan bertajuk "A Critical Analysis On Riba & Gharar In Islamic Jurisprudence "

Sekian, terima kasih

Syuh&da Aeni Mat Ali Projek Penyelidikan

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RESEARCH TEAM M E M B E R S

SYUHAEDA AENI BINTI MAT ALI PROJECT LEADER

IZUAN IZZAIDI B AZMI P R O J E C T M E M B E R

SYUKRINAi LINI BINTI MAT ALI P R ® b T M E M B E R

Signature

RAFIDAH (a) MALISSA B T DATUK SALLEH

PROJECT M E M B E R

Signature

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ACKNOWLEDGEMENT

Our greatest appreciation and sincere thanks are extended to all those involved directly or indirectly in completing this study.

Special thanks to:

Dr Mohd Daud Bakar The President/CEO of International Institute of Islamic Finance (IIF) Inc. (BVI) and

Amanie Business Solutions Sdn Bhd (The Former of Deputy Rector (Student Affairs and Development) and an Associate Professor at the International Islamic University

Malaysia

Associate Professor Saudah Sulaiman Dean, Faculty of Law UiTM Shah Alam

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ABSTRACT

Nowadays, financial institutions like banks are the backbone of the nations economy.

The application of riba-based banking system has contributed astonishingly to the

growth and development of our modern society. The emergence of Islamic financial

system has shown us that it is possible to have a financial institutions that are competitive

and yet, shariah-compliance. Islamic financial institutions offered us alternative products

that are interest-free and gharar-free. Therefore, this study seeks to analyse the concept of

riba and gharar in Islamic Jurisprudence, the comparative study between these two and

suggested remedies on how Islamic financial institutions can ensure that their products

are interest-free and gharar-free. It is hope that we can have a better understanding of the

issue and able to appreciate the need and possibility to have better products that are not

only shariah-compliance, but fulfill the aim and spirit of the shariah itself. Our finding is

that Islamic Bank is free from riba, but subject to gharar since it main product based on trade,

which is exposed to gharar.While riba is totally null and void, gharar depends on the

degree on how it affect the contract to render the contract is void or voidable.

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CHAPTER ONE : INTRODUCTION

1.0 Introduction

Nowadays the role of financial institutions like banks as the backbone of the

nations economy is obvious. It is without doubt that the riba-based banking system has

contributed astonishingly to the growth and development of our modern society.

Development cannot be achieved, as it has been widely propagated, without the role of

financial intermediaries i.e. banks.

The emergence of Islamic financial system has shown us that it is possible to

have a financial institutions that are competitive and yet, shariah-compliance. Islamic

financial institutions offered us alternative products that are interest-free and gharar-free.

There are many attractions to prefer Islamic financial system rather than the

conventional interest-based system. For the Muslim, one of the main attractions is

obviously the divine warning concerning the consumption of riba as stated in the Holy

Quran and Sunnah of the Prophet S.A.W. Therefore, Islamic financial institution like

Islamic bank must prove from a purely financial aspect that it is competitive and capable

of providing alternative products that is as good, if not better, than the products offered

by the interest-based financial institution.

Therefore, this study seeks to analyse the concept of riba and gharar in Islamic

Jurisprudence, the comparative study between these two and suggested remedies on how

Islamic financial institutions can ensure that their products are interest-free and gharar-

free. Hopefully, by the end of this paper, we can have a better understanding of the issue

and able to appreciate the need and possibility to have better products that are not only

shariah-compliance, but fulfill the aim and spirit of the shariah itself.

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1.1 PROBLEM STATEMENT

There are several legal issues that needs to be addressed as regard to incursion of gharar

in some of the products offered by Islamic Financial Institution in Malaysia. The

researchers shall identify on what constitute riba and gharar. We will also critically

analyse the practice by Islamic Financial Institution in Malaysia on whether their

products are gharar free and interest free.

1.2 OBJECTIVE OF STUDY

The overall aim of this research is to analyse the concept of Riba and Gharar in

Islamic Jurisprudence. Further we will identify on whether the shariah products offered

by Islamic Financial Institutions are interest free and gharar fee.

The specific objectives of the study are:-

1. 1. To critically analyse the concept of Riba and Gharar in Islamic Jurisprudence.

2. To determine whether the shariah products offered by Islamic Financial

Institutions are interest free and gharar fee.

3. To identify the solutions to ensure the shariah products offered by Islamic

Financial Institutions are interest free and gharar fee.

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1.3 LITERATURE REVIEW

In this Reseach/Study, The Researchers reviewed the various literature related to Riba

and Gharar. A book entitled Islamic Law on Commercial Transactions1 discussed in

chapter three on Sale of Goods. The relevant part for our research is the condition of sale

and Gharar in sale. He elaborated in detail on how the validity of sale contract will be

affected due to the existence of gharar. The Juristic opinions on gharar and reasons for

prohibitions of Gharar are discussed in detail.

An Article on Contract In Islamic Commercial And Their Application In Modern

Islamic Financial Institution System explained the historical evolution of contract in

Islamic Law . Islamic law has prohibited many pre-Islamic period's contracts of

exchange because they were either uncertain or lead to injustice as it involved riba al-

fadl and riba al-nasiah. An overview on Islamic Financial Institution in Malaysia which

is known as Interest Free banking scheme were further elaborated. Sources of Fund in

Islamic Financial Institution such as Wadi'ah Yad Dhamanah where the bank's practice

to reward a hibah to the depositors are necessary to be competitive with the

conventional banking. However, the bank are not allowed to declare or promise any

amount or rate of hibah upfront as this would be tantamount to riba.

Riba and Islamic Banking explained among others the meaning of riba, classification

of riba, the prohibition of Riba in Islam during the lifetime of prophet passed over four

different phases and stages and the rationale and reason for the prohibiton of riba. Islam

promotes positive sum game where all parties gain or at least there is a possibility of gain

1 Professor Dr Razali Hj Nawawi, Islamic Law on Commercial Transactions, CT Publications Malaysia 1999 2 Assoc prof Dr Mohd Daud Bakar, HUM, unpublished article 3 Assoc prof Dr Mohd Daud Bakar, HUM, unpublished article

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and loss on both parties. Whereas riba activities do not create new stock of wealth.

Instead they lead to the transfer of the wealth from one party to another i.e from borrower

to the lender. Islamic Banking : A Quick Guide4 stated inter alia the concept of riba

and consequences of riba which includes "in the hereafter, they shall be raised by Allah

like those who have been driven to madness by the touch of the devil (Al-Baqarah:275) "

"A dirham of Riba which a man receives knowingly is worse than committing adultery 36

times. (Hadith reported by Muslim).

The Issue of Interest and the Islamic Financing Alternatives5 discussed the interest or

riba which is regarded by economists as containing three elements which justify payment

of a return to savers: a time factor, an opportunity cost and an element of risk. However,

Islam emphasis on profit sharing as an alternative to fixed or variable interest-based

lending. For instance: Mudarabah (Trust Financing), and Musharaka (Venture Capital

Finance). Understanding Riba6 highlighted a dispute which arise between scholars as to

the status of interest paid by banks on deposit accounts. The majority of the scholars

describe this as riba but a minority lead by Mufti of Egypt, Shaikh Muhammad Tantawi

suggests that the deposit is not a loan but an investment in which the bank acts for the

depositor. The whole operation was called mudaraba. However, his view were counted

by arguments that is the profit in the form of interest in not a proportion of the profit

accrued by the employment of the capital but is a fixed percentage of the capital as in riba

transaction. Further, the bank acquire their profit through lending at fixed interest which

is clearly a riba transactions.

4 Assoc Prof Dr NorHashimah Mohd Yasin , paper presented at the Public Lecture

organized by Islamic Society of University of New South Wales (ISOC UNSW), Sydney,

Australia on 12 November 1999.

5 Rodney Wilson, University of Durham (1998) J.I.B.L. Issue 1 © Sweet & Maxwell Limited ( And Contributors) 6 Islamic Banker, 20 July 1995

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1.4 METHODOLOGY

This research is based on a qualitative method since it is most recommended in the legal

study. Whereas, a comparative approach is also considered for riba and Gharar. The

collection of facts and information would be library based research. We will also do

research by the latest sources of information that is by using the internet, newspapers and

magazines. Various literatures will be referred to, ranging from statutes, reported cases,

legal documents, law books, articles, online journals that can be found under the

Malaysian law and Islamic Law. Online database such as LexisNexis and CLJ Law

database will be used .

1.5 LIMITATIONS OF STUDY

In order to achieve the aim and purposes, this research will analyze the concept of

Riba and Gharar in Islamic Jurisprudence. The comparative study between the

Riba and Gharar will be elaborated in detail. The researchers will also identify

and analyze the the products offered by Islamic Financial Institutions It will

make us keep abreast with the current arising issues on the same. This study is

also prepared to discover any suggested remedies on how Islamic financial

institutions can ensure that their products are interest-free and gharar-free.

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1.6 SIGNIFICANCE OF THE STUDY

The researchers hope that the study of this research would throw more light in the

understanding of the concept of Riba and Gharar in Islamic Jurisprudence. The

finding of this study would be to provide a better understanding to the society

especially to the bankers, lawyers and customers dealing with Islamic Banking

products.

1.7 OUTLINE OF CHAPTERS

This research consists of Six (6) chapters which are as the followings:-

Chapter 1 is the introductory chapter which explains the background of the

study, its objective, methodology, literature reviews, significance, limitations and

outline of chapters.

Chapter 2 is the explanatory/ descriptive chapter which describe (briefly

or give an overall overview of Riba, the authorities from verses of Qur'an and

Hadith, reasons for prohibitions

Chapter 3 is the explanatory/ descriptive chapter which describe (briefly

or give an overall overview of Gharar, the Authorities from verses of Qur'an and

Hadith, reasons for prohibitions, possibility of removing gharar

Chapter 4 is the comparative study between Riba & Gharar

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Chapter 5 is analytical and evaluative study which provides a detailed

analysis on issues relating to Islamic banking products.

Chapter 6 are Recommendations To Islamic Financial Institution In Malaysia

To Ensure Their Products Are Interest-Free And Gharar-Free

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CHAPTER 2: AN OVERVIEW ON RIBA (INTEREST)

2.0 INTRODUCTION

Literally, Riba means increase, addition, expansion or growth. However, not

all type of increase or growth is prohibited. Profit is also a kind of increase but profit

gained from lawful trade is not prohibited. Instead, Muslims are encouraged to enter

into lawful business.

In order to understand what is Riba, reference should be made to the primary

sources of Shariah i.e the Holy Quran and the Sunnah of the Prophet S.A.W to seek

for guidance.

2.0.1 RIBA IN QUR'AN

The Quran says:

Allah permits al-Bay' and prohibits al-Riba.1[2]

It should be noted that this Quranic verse is general in nature and it only stated

two categories of business: 'Bay' and 'Riba'. The precise definition of riba is not

1 Holy Quran, 2:275.

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given in the Holy Quran but Allah states in the very same verse that 'they are

certainly not the same with trade.2[3]

To have a better and more systematic approach, let us first refer to the relevant verses

one by one.

1. The first revelation ( Surah al-Rum, verse 39):

"That which you gave as interest to increase the people I s wealth increases not with

God; but that which you give in charity. Seeking the goodwill of God, multiplies

manifold." (30:39)

2. Second revelation (Surah al-Nisa', verse 161)

"And for their taking interest even though it is forbidden for them, and their wrongful

appropriation of other peoples' property, We have prepared for those among them

who eject faith a grievous punishment. "

(4:161)

2 Dr.Norhashimah Mohd yasin, BBA:Sale or Contract

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3. Third revelation ( Surah al Imran, Verse 130-132)

"O believers, take not doubled and redoubled interest, and fear God so that you may

prosper. Fear the fire which has been prepared for those who reject faith, and obey

God and the Prophet so that you may receive mercy. "

(3:310-132)

4. Forth revelation ( Surah al-Baqarah, verse 275-281)

"Those who benefit from interest shall be raised like those who have been driven to

madness by the touch of the Devil; this is because they say: 'Trade is like interest'

while God has permitted trade and forgiven interest. Hence those who have been

received the admonition from their Lord and desist, may have what has already

passed, their case be entrusted to God; but those who revert shall be the inhabitants

of the fire and abide therein forever. "

(2:275)

5. God deprives interest of all blessing but blesses charity; He loves not the

ungrateful sinner.

(2:276)

6. "O believers, fear God, and gave up the interest that remains outstanding if

you are believers."

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7- "Uy°u do not do so, be sure to be at war with God and His Messenger. But if

you repent, you can have your principal. Neither should you commit injustice

nor should you be subjected to it. "

(2:279)

2.0.2 RIBA IN HADITH

1. From Jabir: The Prophet, may peace be upon him, cursed the receiver and

payer of interest, the one who records it and the two witnesses to the

transaction and said: "they are all alike (in guilt)".

(Muslim Kitab al-Muqasat, Bab la 'ni akili riba wa mi kilihi; also in Tirmidhi

and Musnad Ahmad).

2. From 'Abdallah ibn Hanzalah: The Prophet, peace be upon him, said: 'A

dirham for riba which a man receives knowingly is worse than committing

adultery thirty-six times'.

( Miskat al-Masabih,Kitab al-Buyu', bab al-riba, on the authority of Ahmad

and Daraqutni. Bayhaqi has also reported the above hadith in Shu'ab al-Iman

with the addition that ' Hell befits him whose flesh has been nourished by the

unlawful' (ibid).

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3. From Abu Hurairah : The Prophet, peace be upon him, said: 'Riba has 70

segments, the least serious being equivalent to a man committing zina with his

own mother.' (Ibn Majah)

4. From Abu Hurairah: The Prophet, peace be upon him, said: 'There will

certainly come a time for mankind when everyone will take riba and if he does

not do so, its dust will reach him.'

( Abu Dawud, Kitab al-Buyu', Bab fi ijtinabi al-shubuhat; also in Ibn Majah).

5. From 'Ubada ibn al-Samit: The Prophet, peace be upon him, said: 'Gold for

gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and

salt for salt- like for like, equal for equal, and hand-to-hand; if the

commodities differ, then you may sell as you wish, provided that the exchange

is hand-to-hand'. (Muslim, Kitab al-Muqasat; also in Tarmidhi).

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2.0.3 SCHOLARS VIEW

1. Abdul Rahman alJaziri

According to Abdul Rahman al Jaziri in his al-Fiqh 'ala al-madhahid al-Arba'ah, a

compendium of the juristic opinions of the four dominant schools of Muslim

jurisprudence, he define riba as increase in one of the homogeneous equivalents being

exchanged without this increase being accompanied by a return. In simple words, riba

is defined as unjustified increase in the capital. This definition, incomplete as it is,

reflects the usual and typical understanding concerning the definition of riba.3

Not all increase or excess is prohibited. Generally speaking, profit can also be

considered as increase but obviously, profit gained from lawful trade is halal. Indeed,

it is encouraged.

2. Muhammad ibn 'Abdallah ibn al-Arabi (Quran commentator and Maliki

jurist)

Riba literally means increase, and in the Quranic verse (2:275) it stands for every

increase not justified by the return. ( Ahkam al-Quran, Cairo: Isa al-Babi al-Halabi,

1957, p.242). It should be clarified here that the 4 waiting! involved in a loan is not

considered by the jurists to be a return justifying the increase (interest) on the

principal amount.

3 Muhammad Umar Chopra, Riba in the Quran.Jhadith and Fiqh

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3. Ibn al-'Arabi

Ibn al-'Arabi emphasize on the requirement of iwad (equal counter value or

compensation) in the contract of sale so that it does not fall into riba. This is in line

with the legal maxim 'al-ghorm bil ghorm', (no reward without risk) and 'al-kharaj

bil daman. ( in any benefit lies liability). Ibn al-'Arabi says that every increase, which

is without iwad or an equal countervalue is riba.4 Therefore, it seems that some

scholars put much weight on the requirement for iwad. When there is no

consideration for the extra money except 'time postponement' or 'waiting', there is

high possibility that the contract is tainted by riba.

4 See Ziaul Haque, The Moral Economy of usury, interest and profits.pp.10. He quoted the statement f rom the original work of Abu

Bakar Muhammad ibn Abd Allah aLarabi

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2.1 CLASSIFICATION OF RIBA

2.1. Riba al-nasiah

This type of riba happens when the specified increase is in return for postponement

of, or waiting for, the payment. For example, buying one kilogram of wheat in winter

against one and half kilogram of wheat to be paid in summer. As the half-kilogram,

which has been added to the price, was not accompanied by an equivalent value in the

commodity sold and was merely in return for the waiting, it is called riba al-nasiah.

2.2. Riba al-fadl

Riba al-fadl is applicable in sale and purchase of certain restrictive items where

excess in profit is not allowed.5The increase mentioned is irrespective of the

postponement and is not offset by something in return. For example, this happens

when ten carats of gold are exchange for twelve carats of similar gold product. The

four schools of jurisprudence unanimously held that riba al-fadl as prohibited. One of

the wisdom behinds its prohibition is to prevent defrauding or deception of less

sophisticated persons.

The prohibition of riba is laid down clearly in the Holy Quran and the Sunnah

of the Prophet S.A.W and there is no question on that. The conflicts or problems

5 Hamid Sultan

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faced by scholars are the correct definition of the riba. As mention earlier, there is no

clear-cut definition of riba provided in the Divine revelation. Therefore, the scholars

have to resort to ijtihad to interpret the term riba, which was so strictly prohibited in

the Divine revelation. In order to interpret riba, the scholars have referred to the Holy

Quran and Sunnah of the Prophet S.A.W for guidance. From these divine sources, the

scholars realize that riba is related to certain transaction relating to certain ribawi

items and extension of time as exchange for money. Riba is synonym with money for

money. In other words, money become the commodity and generated more money.

For example, if A borrow $100 from B, A has to pay B $200 at a later date. This is

one example of riba. In this transaction, B gained extra money by doing nothing

except giving loan to A. Therefore, in this transaction, money alone has generate

more money. In Islam, money cannot generate money since money is merely a

medium of exchange. In order to get more money or profit, there must be some

elements of effort or risk taken. If A buy a rabbit for $100 and sell it for $200, he

earned the extra money through his effort and by taking risk. Such transaction is

allowed since it falls under business.

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