NORMS OF ISLAMIC FINANCE Prohibition of Riba AUSAF AHMAD IBF-NET COURSE ON ISLAMIC FINANCE Chennai October 04 2008

NORMS OF ISLAMIC FINANCE

Prohibition of Riba

AUSAF AHMADAUSAF AHMADIBF-NET COURSE ON ISLAMIC FINANCEIBF-NET COURSE ON ISLAMIC FINANCE

ChennaiChennaiOctober 04 2008October 04 2008

In the name ofIn the name of ALLAH ALLAH

the most kindthe most kindThe most merciful.The most merciful.

Islamic Finance: A Islamic Finance: A Value based ProjectValue based Project

Modern Economics claims to be Modern Economics claims to be positive, universal and value positive, universal and value neutral. neutral.

Its value judgments are hidden.Its value judgments are hidden. Islamic Finance does not hide its Islamic Finance does not hide its

value premises.value premises. The values of Islamic Finance are The values of Islamic Finance are

based on Islamic norms and based on Islamic norms and Islamic Philosophy. Islamic Philosophy.

ISLAMIC NORMS OF BUSINESS ISLAMIC NORMS OF BUSINESS TRANSACTIONSTRANSACTIONS

Should not indulge Should not indulge in in RibaRiba

Should not involve Should not involve in in GhararGharar

Should not indulge Should not indulge in fraudulent in fraudulent behaviorbehavior

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 supplies to raise pricesprices

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

Prohibition of Prohibition of RibaRiba in in Qur’anQur’an

FIRST REVEALATION:FIRST REVEALATION:

That which you give as Riba That which you give as Riba (interest) the people’s wealth (interest) the people’s wealth increases not with God; but that increases not with God; but that which you give in Charity, seeking which you give in Charity, seeking the goodwill of God, multiplies the goodwill of God, multiplies manifold. [ 30 : 39] manifold. [ 30 : 39]

Prohibition of Prohibition of RibaRiba in in Qur’an [contd.]Qur’an [contd.]

SECOND REVEALATION:SECOND REVEALATION:

And for their taking interest even And for their taking interest even though it was forbidden for them, though it was forbidden for them, and their wrongful appropriation and their wrongful appropriation of other people’s property, We of other people’s property, We have prepared those among them have prepared those among them who reject faith a greivous who reject faith a greivous punishment. [4: 161]punishment. [4: 161]


THIRD REVEALATION:THIRD REVEALATION:

o believers, take not doubled o believers, take not doubled and redoubled interest, and and redoubled interest, and fear God so that you prosper. fear God so that you prosper. Fear the fire which has been Fear the fire which has been prepared for those who reject prepared for those who reject faith, and obey God and the faith, and obey God and the Prophet so that you may Prophet so that you may receive mercy [3: 130-2]receive mercy [3: 130-2]


FOURTH REVELATIONFOURTH REVELATION

Those who benefit from interest Those who benefit from interest shall be raised like those who have shall be raised like those who have been driven to madness by the been driven to madness by the touch of the Devil; that is because touch of the Devil; that is because they say: “Trade is like interest” they say: “Trade is like interest” while God has permitted trade and while God has permitted trade and forbidden interest. [2: 275]forbidden interest. [2: 275]


God deprives interest of all God deprives interest of all but blesses Charity. He loves but blesses Charity. He loves not the ungrateful sinners not the ungrateful sinners (276)(276)


O believers ! Fear Allah and give O believers ! Fear Allah and give up interest that remains up interest that remains outstanding, if you are true outstanding, if you are true believers. [2: 278] believers. [2: 278]


If you do not, then be sure of being at If you do not, then be sure of being at war with God and His messenger. But war with God and His messenger. But if you repent, you can have your if you repent, you can have your principal. Neither you should commit principal. Neither you should commit injustice nor you be subjected to it. injustice nor you be subjected to it. (279)(279)

If the debtor is in difficulty, let him If the debtor is in difficulty, let him have respite until it is easier, but if you have respite until it is easier, but if you forego out of charity, it is better for forego out of charity, it is better for you if you realize.(280)you if you realize.(280)

Riba in HadithRiba in Hadith

From Jabir: “ The Prophet (pbuh) From Jabir: “ The Prophet (pbuh) cursed the receiver, the payer of cursed the receiver, the payer of interest, the one who records it interest, the one who records it and the two witnesses of the and the two witnesses of the transaction and said: They are all transaction and said: They are all alike (in guilt)alike (in guilt)

[[Reported by Muslim, Tirmidhi and Reported by Muslim, Tirmidhi and Ahmad]Ahmad]

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

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

Meaning of Meaning of RibaRiba

Meaning: Derived from Riba yarbouMeaning: Derived from Riba yarbou Literal meaning: to growLiteral meaning: to grow Technical meaning: interest, usuryTechnical meaning: interest, usury Illah: two considerations: (1) Excess Illah: two considerations: (1) Excess

of Amount (2) delay in deliveryof Amount (2) delay in delivery Example: gold for gold: (i) equal Example: gold for gold: (i) equal

amount (2) on the spot. Implies No amount (2) on the spot. Implies No Riba. Riba.

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 Both types of Riba are prohibited

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

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

Riba of the period of Jahiliyah: Prevailing Riba of the period of Jahiliyah: Prevailing in Arabia before the advent of Islamin Arabia before the advent of 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 is compulsory payment built in the Riba is compulsory payment built in the contract as a necessary condition. It is contract as a necessary condition. It is held that any excess paid by by the debtor held that any excess paid by by the debtor voluntarily shall not be considered Riba. voluntarily shall not be considered Riba.

Is Bank interest Riba?Is Bank interest Riba?

Difference of opinions:Difference of opinions: Traditional View:Traditional View:

– Yes, It resembles Riba al Diyun Yes, It resembles Riba al Diyun where it is built in the contract.where it is built in the contract. Liberal View:Liberal View: No, it is radically different from Riba al No, it is radically different from Riba al

DiyunDiyun

There is near consensus around the There is near consensus around the traditional View. traditional View.

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

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

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

Meaning of the HadithMeaning of the Hadith

Is Riba confined to six commodities: Is Riba confined to six commodities: Gold, silver, wheat, barley, dates and Gold, silver, wheat, barley, dates and salt. salt.

Two categories: precious metals Two categories: precious metals (medium of exchange) and food items (medium of exchange) and food items

Is Riba confined to these two categories?Is Riba confined to these two categories? What is the meaning for Like for Like and What is the meaning for Like for Like and

hand to hand [ Mthlin bi mithlin, yadin bi hand to hand [ Mthlin bi mithlin, yadin bi yadin. yadin.

Meaning of Riba al Meaning of Riba al FadlFadl

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

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

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

RIBA, INTEREST AND RIBA, INTEREST AND USURYUSURY

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

No distinction between No distinction between consumption and production consumption and production loansloans

No distinction between individual No distinction between individual and institutional loansand institutional loans

The attempts to dilute the The attempts to dilute the injunction against Riba have not injunction against Riba have not been successful. been successful.

DEBT FINANCE DEBT FINANCE Vs. Vs.

PARTICIPATORY FINANCE PARTICIPATORY FINANCE

Participatory finance, in Participatory finance, in comparison, to debt finance is:comparison, 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 based finance leads to economic instability. economic instability. Riba Riba based finance leads to based finance leads to economic inequalities. economic inequalities.

ISLAMIC BANKING AND ISLAMIC BANKING AND FINANCEFINANCE

The justification of Islamic The justification of Islamic banking and finance is built banking and finance is built around the prohibition of Ribaaround the prohibition of Riba

It It assumes assumes that Riba is prohibited.that Riba is prohibited. It suggests to conduct banking It suggests to conduct banking

and financial activity on interest and financial activity on interest free basis . That is why it is free basis . That is why it is known as interest free banking known as interest free banking also. also.

THANK YOU VERY THANK YOU VERY MUCHMUCH. .

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NORMS OF ISLAMIC FINANCE Prohibition of Riba AUSAF AHMAD IBF-NET COURSE ON ISLAMIC FINANCE Chennai October 04 2008