Accounting for Islamic Accounting for Islamic Banks (Lecture Week Banks (Lecture Week 2)2)

Part 1Part 1

Islamic Prohibition of Riba’ Islamic Prohibition of Riba’

The Prohibition of Riba’ and The Prohibition of Riba’ and GhararGharar

Meaning of Riba’Meaning of Riba’ Literally: excess, increase, expansion or Literally: excess, increase, expansion or

growthgrowth

Definitions of Riba’Definitions of Riba’Ibn al-Arabi: every excess in return of which no Ibn al-Arabi: every excess in return of which no

reward is paidreward is paidMawdudi: predetermined excess or surplus Mawdudi: predetermined excess or surplus

over and above the loan received by the over and above the loan received by the creditor conditionally on relation to a creditor conditionally on relation to a specified periodspecified period

Haque: an increase or excess which, in an Haque: an increase or excess which, in an exchange or sale of commodity, accrues to exchange or sale of commodity, accrues to the owner (lender) without giving in return the owner (lender) without giving in return any equivalent counter or recompense to the any equivalent counter or recompense to the other partyother party

Prohibition of Riba’Prohibition of Riba’

In the Qur’an - 4 Stages:In the Qur’an - 4 Stages:

1.1. Surah al-Rum: 39 Surah al-Rum: 39 compare riba’ with Zakat and charitycompare riba’ with Zakat and charity praising Zakat but not riba’praising Zakat but not riba’

2. Surah al-Nisa’: 160-1612. Surah al-Nisa’: 160-161 attaching the practice of riba’ with the attaching the practice of riba’ with the

JewsJews Consider the practice as an inequityConsider the practice as an inequity

3. Surah ali-Imran: 1303. Surah ali-Imran: 130 Prohibiting the practice of charging Prohibiting the practice of charging

double and multiple riba’double and multiple riba’

Prohibition of Riba’ Prohibition of Riba’

4. Surah al-Baqarah: 275-2814. Surah al-Baqarah: 275-281 Conclusively prohibiting all forms of riba’Conclusively prohibiting all forms of riba’ Any excess over the capital is disallowed Any excess over the capital is disallowed

“…“…they say: trade is like riba’, but Allah has they say: trade is like riba’, but Allah has permitted trading and forbidden (haram) riba’ permitted trading and forbidden (haram) riba’ (usury)”(usury)”

Example in the Sunnah:Example in the Sunnah:

““From Jabir the Prophet s.a.w cursed the From Jabir the Prophet s.a.w cursed the receiver and the payer of riba’, the one who receiver and the payer of riba’, the one who records it and the two witnesses to the records it and the two witnesses to the transaction: they are alike in guilt”transaction: they are alike in guilt”

Types of Riba’Types of Riba’1.1. Riba’ al-Buyu’ (exchange transaction)Riba’ al-Buyu’ (exchange transaction) Riba al-Fadl (due to excess)Riba al-Fadl (due to excess) Riba al-Nasiah (due to delay)Riba al-Nasiah (due to delay)Example:Example:(a) Trading commodities of the same (a) Trading commodities of the same

commodities (gold – gold; dates – dates)commodities (gold – gold; dates – dates) Both commodities must be equivalentBoth commodities must be equivalent Prompt deliveryPrompt delivery(b) Trading commodities of the same group but (b) Trading commodities of the same group but

different kinds (gold - silver; wheat – barley)different kinds (gold - silver; wheat – barley) Equality not a conditionEquality not a condition Prompt deliveryPrompt delivery(c) Trading commodities of different groups (c) Trading commodities of different groups

and kinds (gold – wheat; silver – barley)and kinds (gold – wheat; silver – barley) No conditions imposed i.e. free trading No conditions imposed i.e. free trading

Types of Riba’Types of Riba’

2. Riba’ al-Duyun (loan/debt transaction)2. Riba’ al-Duyun (loan/debt transaction) Riba’ al-Nasi’ah (due to delay)Riba’ al-Nasi’ah (due to delay)

Characteristics of Riba’ al-NasiahCharacteristics of Riba’ al-Nasiah

3 Elements:3 Elements:

1.1. Excess or surplus over and above the Excess or surplus over and above the loan capital;loan capital;

2.2. Determination of surplus in relation to Determination of surplus in relation to time; and,time; and,

3.3. Stipulation of surplus in the loan Stipulation of surplus in the loan agreement.agreement.

Riba’ vs TradeRiba’ vs Trade

Wisdom behind prohibition of riba’Wisdom behind prohibition of riba’ Elimination of injustice and encourage Elimination of injustice and encourage

cooperationcooperation Spirit of brotherhoodSpirit of brotherhood

Riba’ is not trading:Riba’ is not trading: Money loaned for self-generating or self-Money loaned for self-generating or self-

expanding value is not saleexpanding value is not sale Growth or increase in money is Growth or increase in money is

inequitableinequitable One party receives an increase without One party receives an increase without

equivalent return to the other partyequivalent return to the other party In sale, there is productive exchange such In sale, there is productive exchange such

as goods for goods and money for goodsas goods for goods and money for goods

Part 2Part 2

Islamic Prohibition of Islamic Prohibition of GhararGharar

Meaning of GhararMeaning of Gharar

Literally: In Arabic means negative Literally: In Arabic means negative elements e.g. deceit, fraud, elements e.g. deceit, fraud, uncertainty, danger, risk, hazard etc. uncertainty, danger, risk, hazard etc. that might lead to destruction and lossthat might lead to destruction and loss

Technically: uncertainty and ignorance Technically: uncertainty and ignorance of one or both parties of a contract of one or both parties of a contract over the substance or attributes of the over the substance or attributes of the object of sale or doubt over its object of sale or doubt over its existence and availability at the time existence and availability at the time of contractof contract

Gharar in the Qur’anGharar in the Qur’an

The word Gharar appeared 27 times in the The word Gharar appeared 27 times in the Qur’anQur’an

Refer to the need of believers to be aware of Refer to the need of believers to be aware of the deceptive character of the worldly the deceptive character of the worldly pleasures, and not to be deceived by such pleasures, and not to be deceived by such temptationstemptations

Example in Surah al-Nisa’ (4:29):Example in Surah al-Nisa’ (4:29):““O you believe! Eat not your property among O you believe! Eat not your property among

yourselves unjustly (bil batil i.e. by falsehood yourselves unjustly (bil batil i.e. by falsehood and deception) except in a trade amongst you and deception) except in a trade amongst you by mutual consent”by mutual consent”

Most jurists agreed that al-Batil refers in the Most jurists agreed that al-Batil refers in the above verse includes illegal and deceptive above verse includes illegal and deceptive elements in commercial contractselements in commercial contracts

Gharar in the SunnahGharar in the Sunnah

In commercial transactions, the In commercial transactions, the Prophet s.a.w in many of his sayings Prophet s.a.w in many of his sayings prohibited the sale involving ghararprohibited the sale involving gharar

Examples: The prohibition of sale of Examples: The prohibition of sale of fish in the sea, bird in the air, unborn fish in the sea, bird in the air, unborn animals, etc.animals, etc.

Gharar is prohibited by consensus of Gharar is prohibited by consensus of the jurists (ijma’) since the time of the the jurists (ijma’) since the time of the companions, their followers (tabi’in) companions, their followers (tabi’in) and subsequently until now.and subsequently until now.

Reasons for prohibition of Reasons for prohibition of GhararGharar

To ensure full consent and satisfaction To ensure full consent and satisfaction of all parties in a contractof all parties in a contract

Without full consent and satisfaction Without full consent and satisfaction the contract is null and voidthe contract is null and void

Full consent can only be achieved Full consent can only be achieved through certainty, full knowledge, full through certainty, full knowledge, full disclosure and transparency, and zero disclosure and transparency, and zero deceit or frauddeceit or fraud

Gharar also results in the risk being Gharar also results in the risk being built into the contract at its inception built into the contract at its inception which may result in a profit for one which may result in a profit for one party and corresponding loss to other party and corresponding loss to other party (zero-sum game or gambling) party (zero-sum game or gambling)

Factors for Gharar in ContractsFactors for Gharar in Contracts None or incomplete ownership (“do not None or incomplete ownership (“do not

sell if you do not have” or cannot sell if you do not have” or cannot legally guarantee deliverylegally guarantee delivery

Non-possession or cannot guarantee Non-possession or cannot guarantee physical delivery to avoid manipulation physical delivery to avoid manipulation by the seller and protect the interest of by the seller and protect the interest of buyerbuyer

Uncertainty in the contract or Uncertainty in the contract or conditional salesconditional sales

Exceptions of GhararExceptions of Gharar The uncertainty is too trivial or too slight The uncertainty is too trivial or too slight

and tolerable by both or all partiesand tolerable by both or all parties Charitable contracts (tabarru’at i.e. Charitable contracts (tabarru’at i.e.

Waqf etc.)Waqf etc.) The real public need for the transaction The real public need for the transaction

or contracts even gharar is excessive or contracts even gharar is excessive e.g. bay al-Salam (advance purchase), e.g. bay al-Salam (advance purchase), al-Istisna’ (manufacturing contract ) al-Istisna’ (manufacturing contract )

To satisfy people’s immediate need and To satisfy people’s immediate need and removal of hardship makes Gharar an removal of hardship makes Gharar an exception and need takes priorityexception and need takes priority

Exceptions of GhararExceptions of Gharar

Gharar is averted if:Gharar is averted if: Both the price and the subject matter Both the price and the subject matter

are proved to be in existence at the are proved to be in existence at the time the transaction concludedtime the transaction concluded

The qualities are known and the The qualities are known and the quantities are determinedquantities are determined

The contractual parties have control The contractual parties have control over them so as to ensure the exchange over them so as to ensure the exchange can take placecan take place

Term of time can be precisely Term of time can be precisely determined determined