Prepared by: Nuradli Ridzuan Shah & Abdullaah Jalil BOF Y2S2 2 PFS 2253 ISLAMIC FINANCE Prohibition of Riba Prepared by: Nuradli Ridzuan Shah & Abdullaah Jalil

Stages of Revelation First stage: al-Rum, 39 Second stage: al-Nisa’, 161 Third stage: Ali cImran, 130 Fourth stage: al-Baqarah, 275-281

Al-Riba: Its Definition Deferment in the time of exchange (riba al-nasiah) Quantity of one of the counter values (riba al-fadhl) al-Riba Time Factor Quantity Factor Ribawi items

Al-Riba: Its Definition Nabil Salih’s: “An unlawful gain derived from the quantitative inequality of the counter values in any transaction purporting to affect the exchange of two or more species which belong to the same genus and are governed by the same legal cause. Deferred completion of the exchange of such species, or even of species which belong to different genera but are governed by the same cillah (legal cause), is also riba, whether or not the deferment is accompanied by an increase in any one of the exchanged counter values.”

Types and Classifications of al-Riba Riba al-duyun / al-jaliyy / al-Quran / al-Jahiliyyah / al-Nasiah: An increase for the repayment deferment/poseponement in contract of loan Riba al-buyuc / al-khafiyy / al-Sunnah: Riba al-Fadl: Inequality of quantity between the (ribawi) counter values Riba al-Nasiah: Deferment of one of the (ribawi) counter values which share the common cillah

(deferment of one of the al-Riba Al-Buyuc / Al-Khafiyy / Al-Sunnah Al-Duyun / Al-Jaliyy Al-Quran / Al-Jahiliyyah / Al-Nasiah*(excess is charged for deferment) al-Fadl al-Nasiah* (deferment of one of the counter values)

Riba al-Buyuc cUbadah Ibn al-Samit reported a hadith from the Propehet s.a.w: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, 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.”

Differences on the Extension of Riba al-Buyuc al-Riba in Trade - Barter & al_Sarf : Al-Shafiiyyah Differences on the Extension of Riba al-Buyuc Al-Zahiri: The six kinds only. Al-Hanafiyyah: Weighed (al-mawzun) and measured (al-makil) items. Al-Malikiyyah: Price and storable and/or staple food provisions. Al-Shaficiyyah: Commodity money and foods Al-Hanabilah: (1) Same as al-Hanafiyyah (2) Same as al-Shaficiyyah (3) Weighed and measured foods (1) Prompt delivery (time) & (2) with the equivalent quantity 2 1 (1) Prompt delivery (time) only

ISLAMIC BANKING CLASSIFICATION OF RIBA Riba-un-Nasiyah or Riba-al-Jahiliya Riba-al-Fadl or Riba-al-Bai There are two types of Riba, identified to date by Islamic scholars namely ‘Riba an Nasiyah’ and ‘Riba al Fadl’. ‘Riba an Nasiyah’ is defined as excess, which results from predetermined interest (sood) which a lender receives over and above the principle (Raise ul Maal.) ‘Riba al Fadl’ is defined as excess compensation without any consideration resulting from a sale of goods. During the dark ages only the first form (Riba an Nasiyah) was considered to be Riba. However the Prophet Muhammad (P.B.U.H) also classified the second form (Riba al Fadl) as Riba. The two types will be covered in greater detail later.

ISLAMIC BANKING CLASSIFICATION OF RIBA Riba-un-Nasiyah or Riba-al-Jahiliya “that kind of loan where specified repayment period and an amount in excess of capital is predetermined”( Imam Abu Bakr Jassas Razi) Riba-un Nasiyah is the real and primary form of riba. Since the verses of Quran has directly rendered this type of riba as haram, it is called Riba al Quran. Similarly since only this type was considered riba in the dark ages, it has earned the name of Riba al Jahiliya. Imam Abu Bakr Hassas Razi has outlined a complete and prohibiting legal definition of Riba an Nasiyah in the following words: “That kind of loan where specified repayment period and an amount in excess of capital is predetermined.”

ISLAMIC BANKING CLASSIFICATION OF RIBA Riba-un-Nasiyah or Riba-al-Jahiliya “all loans that draw interest is riba”(Hadith quoted by Ali ibn Talib) “the loan that draws profit is one of the forms of riba”(definition from Sahabi Fazala Bin Obaid) These two hadiths also give the same definition of riba that the loans which charge fixed profits are riba. Riba al Nasiah refers to the addition of the premium which is paid to the lender in return for his waiting as a condition for the loan and is technically the same as interest. The prohibition of Riba an Nasiyah is one of those issues which have been confirmed in the revealed laws of all Prophets (AS). Some of the old testaments has rendered riba as haram (See Exodus 22:25, Leviticus 25:35-36, Deutronomy 23:20, Psalms 15:5, Proverbs 28:8, Nahmia 5:7 and Ezakhiel 18:8,13,17 & 22:12). The Quran Karim has also stated the prohibition of Riba in various verses, has warned those who persist in practicing it of a war which is certain to be declared on them by Allah Himself and His messenger and has seriously threatened those engaged as writer, witness and dealer in riba transactions. These verses and ahadith will be discussed at length in a separate chapter called “The prohibition of riba in the light of Quran and hadith”.

ISLAMIC BANKING CLASSIFICATION OF RIBA Riba-un-Nasiyah or Riba-al-Jahiliya real and primary form of riba premium paid to the lender in return for his waiting giving or taking of every excess amount in exchange of a loan at an agreed rate irrespective of whether it is low or high According to the this definition of Riba an Nasiyah, the giving and taking of every excess amount in exchange of a loan at an agreed rate is included in interest irrelevant whether at a high or low rate. It has been proven through ahadith that Prophet (SAW) paid an excess at the loan repayment time but since this excess was not paid through an agreed rate, it cannot be called interest. This clarifies that the word “draws” in the hadith definition“The loan that draws interest is riba.” has been used to highlight the giving and taking of excess amount through an agreed rate in the loan contract. Due to this, Imam Abu Bakr Hasas has added the word “condition” to the definition.

ISLAMIC BANKING CLASSIFICATION OF RIBA Riba-al-Fadl Definition: Any excess that is without due consideration For example: excess taken in exchange of specific commodities (Al amwal Ur Ribawiyyah) which are homogeneous The second classification of riba is Riba al Fadl. Since the prohibition of this riba has been established on sunnah, it is also called Riba al Hadith. Riba al Fadl actually means that excess which is taken in exchange of specific commodities, which are homogenous. But what are those like commodities? A complete legal definition is differentiated in every fiqh.

ISLAMIC BANKING CLASSIFICATION OF RIBA Hadith prohibiting Riba-al-Fadl ‘sell gold in exchange of equivalent gold sell silver in exchange of equivalent silver sell dates in exchange of equivalent dates sell wheat in exchange of equivalent wheat sell salt in exchange of equivalent salt sell barley in exchange of equivalent barley This hadith enumerates 6 different commodities, which can only be bought and sold in equal quantities and on spot. An unequal sale or a deferred sale of these commodities will constitute Riba. These six commodities in fiqh terminology are called “Amwal-e-Ribawiya”. The question arises that ‘Does this hadith apply only to the items mentioned in it?’ Scholars such as Taoos and Qatada hold that Riba al Fadl includes these specified types only, however a majority of Islamic scholars believe that some other commodities should also be included. In order to answer the question, which other commodities should be included, some fiqhs have specified which characteristics are common amongst these items and can be used as a basis” (illat) for Riba al Fadl. An illat is the attribute of an event that entails a particular divine ruling in all cases possessing that attribute; it is the basis for applying analogy. Ribawi goods are therefore goods that exhibit one of the efficient causes occasioning application of riba rules. Various schools define these causes differently:

ISLAMIC BANKING CLASSIFICATION OF RIBA Hadith prohibiting Riba-al-Fadl sell barley in exchange of equivalent barley but if a person transacts in excess, it will be riba. However sell gold for silver anyway you please on the condition it is hand-to-hand(spot sales) and sell barley for date anyway you please on the condition it is hand-to-hand(spot sales) These two hadiths also mentions that these specific quantities cannot be transacted in two forms: One is the deferred sale The other is spot sale of unequal amounts.

ISLAMIC BANKING CLASSIFICATION OF RIBA Imam Abu Hanifa on Riba-al-Fadl commodities must have two common characteristics Weight Volume includes all commodities having weight or volume and are being exchanged Imam Abu Hanifa Imam Abu Hanifa sees only two common characteristics namely: Weight Volume Meaning all these six goods are sold by either weight or volume. Therefore all those commodities, which have weight or volume and are being exchanged, with the same commodity will fall under the rules of Riba al Fadl.

ISLAMIC BANKING CLASSIFICATION OF RIBA Imam Shafi on Riba-al-Fadl commodities must have two common characteristics be a medium of exchange be edible includes all commodities that are edible or can be used as a medium of exchange(currency) Imam Shafi The two characteristics observed by Imam Shafi are Medium of Exchange or Eatable Therefore this law will apply on everything edible or having the natural ability of becoming a medium of exchange (currency).

ISLAMIC BANKING CLASSIFICATION OF RIBA Imam Maalik on Riba-al-Fadl commodities must have two common characteristics can be preserved be edible includes all commodities that are edible and can be preserved Imam Maalik identified the following two characteristics: Eatables and Preservable

ISLAMIC BANKING CLASSIFICATION OF RIBA Imam Ahmad Bin Hanbal on Riba-al-Fadl first citation conforms to the opinion of Imam Abu Hanifa second citation conforms to the opinion of Imam Shafi third citation includes three characteristics at the same time i.e. edible, weight and volume Three citations have been related to Imam Ahmad bin hanbal: First citation conforms to the opinion of Imam Abu Hanifa. Second citation conforms to the opinion of Imam Shafai. Third citation includes three characteristics at the same time namely edible, weight and volume.

RIBA IN BANKING On the both sides of the conventional banks Riba exists: On the Liabilities Side, through borrowing from depositors on fixed and guaranteed return On the Assets side, through lending on Interest basis.

Basic Difference between Islamic and Conventional Modes of Finance money Bank Client money + money (interest)

Basic Difference between Islamic and Conventional Modes of Finance Bank Goods & Services Client money

Theoretical Comparison CONVENTIONAL BANKING ---------------------------  Is based on interest. Deals in money or papers. Is based on fixed return on both Sides of the balance sheet. Does not involve itself in trade and business ISLAMIC BANKING ---------------------------  Is based on profit or rent Deals in assets. Is based on profit sharing on deposits side, and on profit on assets side. Actively participates in trade, production and valid services through valid contracts.

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.

The Wisdom and Rationale of the Prohibition of Riba Long-term debts: Paying debts with new debts. Debt-financing and large-scale borrowings expose companies to bigger risk (Islam: Trade-based and equity-based financing). ---------------------------------------------------------------------------------------- Deferment of one of the counter values is unlawful (riba) in a barter trading, but it is permissible in a loan contract. Why?

Some False Thoughts about al-Riba Riba could exist in loan transaction only Riba (interest) is an excessive rate (usury) of premium imposed on the borrower in loan transaction. The prohibition of riba is restricted only to doubled and multiplied riba Riba is prohibited in consumption loan (dharurah) and allowed in productive loan Riba al-duyun is the only type of riba prohibited in Islam