Part I- Riba

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7th Distance Learning Course: Fall 2008

Lecture on 11-3-2008

Riba and Gharar

PART ONE - Riba

Dr. Muhammad Anas Zarka

1. Lecture objective

to explain the " what" and " how" of riba

prohibition, and its implications for Islamic finance.

we do not discuss the " why" of riba prohibition

(The rationale behind the prohibition of ribawhich

will be covered in a separate lecture.)

2. What is Riba? In Islamic Shariah Riba is of twotypes : Riba al-fadhl and riba al-nasia

3. Riba al-fadhl it is relevant to certain barter

exchanges- of little practical importance to Islamic

finance.

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4. riba al-nasiah = Riba of debts and loans, is our

topic in this lecture.5. Concept and definition of Riba:

- Loan in money or in kind, to be repaid withsomething extra

- Both fixed and variable extra is riba

- Usury vs. interest in Western culture

- Interest in accounting

6. Is bank interest riba?

- Yes for sure: according to all Muslimscholars and academies interest is one major

form of riba. But riba has wider scope than

interest.

- It is also the opinion of Western economists

i. - (Don Patinkin: "Usury " in New

International Encyclopedia of the Social

Sciencesii. Prof. Rodney Wilson, Durham Univ.

iii. Prof John Presley

7. What is the difference between profit and interest?

In Shariah, in economics? Irving Fisher; Frank

Knight [tried to eliminate the terrible confusionwhich results from mixing up the rate of return on

investment with the rate of interest on loans... ] ;

Robert Solow.

8. Implications for Conventional banking services:

Riba is the main objection

9. Economic functions of the Finance Industry (FI)in general

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- Support the country monetary payment system,

and

- Financial intermediation between those who save

and business community.- These economic functions are acceptable and

encouraged by Shariah. What are objectionable

are some conventional methods and contracts that are

used to achieve them. Shariah has

provided alternatives.

10. The difference between conventional andIslamic banks

On the liability side

On the asset side.

11. Main Shariah rules about debt and credit:(A) Loan vs. debt;(B) money debt vs. real (in kind) debt;(C) goods and services vs. (currencies, gold and

silver).(D) credit (debt) is not just another commodity

(Joseph Stiglitz).

(E) Psychology: Individuals' behavior towards

debt and gambling is less rational than

towards normal goods, and often addictive.(F) More details in the Appendix.

12. Major Shariah-compatible financing contracts

used by Islamic Financial institutions

(A) introduction to Islamic financial contracts

(B) Classical (nominate) contracts.

(C) Spot vs. financing contracts.

(D) Major financing contracts in Shariah:

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i. equity-based: Mudaraba and sharikah forsharingprofits, and muzara'ah

( sharecropping) and musaqaah for

sharingrevenue.ii. Note: monitoring costs and information

asymmetry are very important in selecting

one financing contract or the other.

iii. sale-based: Sale for deferred price; Salam;

Istisnaa

iv. rent-based.,

v. loan = qardh hasan,supplementary onlyin commercial (profit seeking) financingvi. controversial and prohibited contracts :

eenah Tawarruq ; Sukuk with buy-backobligation.

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Part I- Riba