1. Bahria University, Karachi
Riba and its types
Bahria University, Karachi
Presented by
Irshad Ahmad Aijaz | Chairman, Shari'ah Supervisory Board | BankIslami Pakistan Limited

2. Contents Introduction; Definition of Riba; Riba in Qura'n;
Riba in Hadees;
Types of Riba:
Ribal Al Jahiliyyah;
Riba al -Fadl;
Modern forms of Riba;
Rationale for prohibition of Riba;
Riba Vs Interest;
Misconceptions about Riba;
Issue of reference rate;
Q & A;

3. Introduction
As we discussed four basic prohibitions in first lecture here we will discuss inshaa Allah taalah basic concept of Riba and its types;
Topic of Riba is essential and requires deep attention from participants;
Here we go;

4. Definition of Riba Literal meaning of Riba is growth or increase;
The Holy Qur'an did not give any definition for the term for the reason that it was well known to its immediate audience like the prohibition of pork, liquor, gambling, adultery etc, which were imposed without giving any definition;
However, Fuqahaa (Jurists of Islam) have described Riba as an effortless profit or a profit which is without due consideration or the extra earning that is free of exchange;
According to a definition: it is any excess compensation over and above the principal which is without due consideration. Its a premium paid to the lender in return for his waiting as a condition for the loan;

5. Definition of Riba
Another definition of Riba is that: “Riba means and includes any increase over & above the principal amount payable in a contract obligation, not covered by a corresponding increase in labor, commodity, risk or expertise”;
Hazrat Shah Waliullah Dehlvi, a famous great scholar of subcontinent, has given a very concise and precise definition of interest. He says:
"Riba` is a loan with the condition that the borrower will return to the lender more than and better than the quantity borrowed."

6. Definition of Riba So the conclusion is:
Riba literally means 'increase' or 'excess';
Classical and contemporary Islamic scholars define Riba as:
The increase which a creditor (owner of the loan) receives from his debtor (user of the loan) for giving him time to repay his debt;
We can summarize that Riba is the name of:
Every increase in lieu of which there is no Islamically acceptable consideration;
The increase in principal may be in form of cash or kind or services;
The increase is declared Riba if it is stipulated or becomes customary in the society. If the increase in principal is as gesture of thank and without predetermination then it would not be not Riba;
Riba in Arabic or 'Sood' ( ﺳﻮﺩ ) in Urdu or interest or usuary in English give similar meanings;

7. Definition of Riba
In modern financial system, interest or the excess (increase) in loan is the consideration or compensation for the period of re-payment of loan;
But this theory is not acceptable to Islam. Arabs and others used to give money with a condition that they will charge a particular amount monthly or at maturity and the principal will remain due as it was. Then on the maturity date they demand the debtor whether to pay the principal or they would increase the term and the payable amount both;
Islam has prohibited this way of charging compensation and declared it Haram;
Therefore, any increase in principal loan amount for just waiting is not allowed;

8. Riba in Quran
There are four different sets of verses which were revealed on different occasions. Let us see the verses of the Holy Qur'an about Riba:
First, in Surah Ar-Rum, in the following words:
"And whatever Riba you give so that it may increase in the wealth of the people, it does not increase with Allah." [Ar-Rum 30:39]
The second verse is of Surah Al-Nisaa in the following words:
"And because of their charging Riba while they were prohibited from it." [An-Nisaa 4:161];
The third verse of Surah Al-i-'Imran is with these words:
"O those who believe do not eat up Riba doubled and redoubled." [Al-i-'Imran 3:130];

9. Riba in Quran
In the Surah Al-Baqarah the following set of verses has been revealed:
"Those who take interest will not stand but as stands whom the demon has driven crazy by his touch. That is because they have said: 'Trading is but like Riba. And Allah has permitted trading and prohibited riba. So, whoever receives an advice from his Lord and stops, he is allowed what has passed, and his matter is up to Allah. And the ones who revert back, those are the people of Fire. There they remain for ever.
Allah destroys Riba and nourishes charities. And Allah does not like any sinful disbeliever;
O those who believe, fear Allah and give up what still remains of the riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your principal. Neither you wrong, nor be wronged;
And if there be one in misery, then deferment till ease. And that you leave it as alms is far better for you, if you really know.
And be fearful of a day when you shall be returned to Allah, then everybody shall be paid, in full, what he has earned. And they shall not be wronged." [Al-Baqarah 2:275, 275, 276, 278, 279, 280 and 281]

10. Riba in Sunnah
Some traditions (Ahadees) of the Prophet (ﷺ) on Riba, which are explanatory to the Qura'n:
'Zaid Bin Aslam reported that interest in pagan times was of this nature: When a person owed money to another man for a certain period and the period expired, the creditor would say: You pay me the amount or pay the interest. If he paid the amount, it was well and good, otherwise the creditor increased the loan amount and extended the period for payment again'. (Al-Muwatta, Imam Malik);
'The Prophet ( ﷺ ), during his last sermon addressed his revered companions, "Every form of riba (interest) is cancelled; capital indeed is yours which you shall have; wrong not and you shall not be wronged. Allah has given His Commandment totally prohibiting riba. I start with the amount of interest, which people owe to Abbas and declare it all cancelled. He then, on behalf of his uncle, Abbas, cancelled the total amount of interest due on his loan capital from his debtor'. (Tafsir Al- Khazin, vol.1, p.301);

11. Riba in Sunnah
'The Prophet ( ﷺ ) is reported to have said "Sell gold for gold, silver for silver, wheat for wheat, barley for barley, date for date, salt for salt, in same quantities on the spot; and when the commodities are different, sell as it suits you, but on the spot'. (Muslim);
'Bilal visited the Messenger of Allah (pbuh) with some high quality dates, and the Prophet ( ﷺ ) inquired about their source. Bilal explained that he traded two volumes of lower quality dates for one volume of higher quality. The Messenger of Allah (pbuh) said: “this is precisely the forbidden Riba! Do not do this. Instead, sell the first type of dates, and use the proceeds to buy the other.' (Muslim)

12. Types of Riba Riba, which is prohibited by Islam, is of two types;
First types of Riba:
Riba al-Jahiliyya or Riba an-Nasee'ah or Riba al-Qura'n (pre-Islamic Riba, Riba in loans or Riba that is mentioned in Qura'n);
This is “that kind of loan where specified repayment period and an amount in excess of capital is predetermined” (Imam Abu Bakr Hassas Razi);
“The loan that draws profit is one of the forms of riba” (definition from Sahabi Fazala Bin Obaid);
This is the primary type of Riba which was common in Arabs and other nations at the time of revelation of Qura'n Kareem;
Riba An-Nasiah or Riba al-Jahiliyyah was a transaction well-known and recognized in the days of Jahiliyya;

13. Types of Riba Riba al jahiliyyah is classified in two types:
Arabs and others used to give money with a condition that they will charge a particular amount monthly if the borrower does not return the amount and the principal will remain due as it is;
Then on the maturity date they used to demand the debtor to pay the principal or the term and the payable amount both would be increased;
Since Riba al-Jahiliyyah was interest on loans and because of its common nature it was easy to understand and known to everyone easily, therefore it was named “Riba al- jahiliyyah;
Riba al jahiliyyah is classified in two types:
Simple Interest: Interest calculated only on the initial investment;
Compound Interest: Reinvestment of each interest payment on money invested to earn more interest;

14. Types of Riba Second type of Riba:
Riba al-Fadl (Riba in trade, Riba in exchange):
A secondary type of Riba is Riba in exchange of goods. This type of Riba was extracted from famous Hadees in which Holy Prophet (Sallallahu Alayhi Wa Sallam) said:
'Sell gold for gold, silver for silver, wheat for wheat, barley for barley, date for date, salt for salt, in same quantities on the spot; and when the commodities are different, sell as it suits you, but on the spot'. (Saheeh Muslim);
According to this Hadees Riba al-Fadl has been explained with regard to six defined things/commodities;

15. Types of Riba
Exchange of these things (barter system of trade) should be with two conditions:
If the transacted commodities are of same nature then (1) Spot delivery – immediate delivery of both commodities and (2) Same quantity on both sides, is essential;
Like exchange of wheat with wheat;
If the transacted commodities are of different nature then (1) Spot delivery – immediate delivery of both commodities is essential (2) But the quantity may differ;
Like exchange of wheat with barley;

16. Riba Al Fadl – business application
Riba al-Fadl was not famous in Arabs before Islam. Islam has introduced this type of Riba in the world;
Riba Al Fadl was mentioned in six commodities only by Holy Prophet (Sallallah u Alayhi wa Sallam). Is this prohibition limited to these six commodities or the prohibition is general?
The rule of Riba al-Fadl is not limited to these six commodities in opinion of Fuqahaa and it is applicable to some other commodities as well. But Fuqahaa have differences in its generality;
First viewpoint:
The common feature of these six commodities is that they can either be weighed or measured, therefore, any commodity which is sold by weighing or measuring falls within this category and is subject to the same rule, if it is bartered with a similar commodity;

17. Riba Al Fadl – business application
Second viewpoint:
The common feature of these six commodities is that they are either eatables or they are used as a universal legal tender. Wheat, barley, date, salt represent eatables while gold and silver represent universal legal tenders. Therefore, all eatables and universal legal tenders are subject to the rule mentioned in the hadith;
Third viewpoint:
The common feature among these six commodities is that they are either food items or they can be stored. Therefore every thing that is a food item or can be stored is included in the same category, hence, subject to the same rule.
Forth viewpoint:
The major characteristic on the basis of which the rules of Riba are applicable to other commodities by is 'their being in the nature of money'. Therefore, rules of Riba would apply to anything that serves the functions of money, such as, paper currency;

18. Riba Al Fadl – business application
There are now two conditions for exchanging money for money:
1. Spot payment and delivery – Hand-to-hand basis and 2. Equal quantity – in case of same currency;
Like exchange of PKR with PKR and exchange of PKR with US $;
Rules for exchange of commodities that attract ruling of Riba:
When the commodities are similar, “excess/shortfall in quantity” and “delay in payment” both are prohibited, e.g., gold for gold or wheat for wheat;
When the commodities are different but belong to a same group (the effective cause of prohibition is the same for both), then excess/shortfall in quantity is allowed while the delay in payment is not allowed;
Like the case of sale of gold for silver (the common reason being their use as medium of exchange) or of wheat for rice (the common reason being edibility);

19. Riba Al Fadl – business application
When the commodities are different and belong to a different group too (where the effective cause of prohibition of is different), then “shortfall or excess in quantity” and “delay in payment”, both are permissible, as for example, sale of gold for wheat (the former being medium of exchange and the latter, edibility);

20. Modern forms of Riba The modern forms of interest of two types:
Interest on loans:
This is main type of interest which is clear and easy to understand for everyone;
Lending and borrowing on interest is simple example of it like Banking interest;
Under this way cash is advanced to a borrower for receiving interest from him;
Interest on debts:
Debt originates with a loan and also with a sale and other transactions wherever the payment of money is deferred to a future date. The Quranic prohibition of Riba in debt, no increment is permissible when the debt is repaid or settled;

21. Modern forms of Riba
The settlement of debt sometimes involved its replacement with a new increased debt and this has been condemned as the worst form of Riba or Riba al-jahiliyya;
The Riba in debts corresponds to the compounding mechanism used in case of interest-based debt. Therefore, the rules for exchange of debts is that:
Exchange of debt for money: When a debt is exchanged for money, it must be at par;
Exchange of debt for debt: When a debt is exchanged for debt, it must also be at par;
Rescheduling of debts: When a debt is rescheduled it should be without any increase or decrease;
Some implications of these are as follows:
The compounding and discounting of debt are two similar functions and both are prohibited;
Once the debt is established, it is repayable at par. Charging an increase for further deferment of the payment of such debts as a function of time (e.g. a late rental payment in a lease, or a late installment payment in a credit sale) would be Riba;
The opposite rule, in which the amount of the debt is reduced due to prepayment, is prohibited too;

22. The Rationale for Prohibition of Riba
Imam Al-Ghazali pointed evil effects of Riba in the following words:
"Riba (interest), is prohibited because it prevents people from undertaking real economic activities. This is because when a person having money is allowed to earn more money on the basis of interest, either in spot or in deferred transactions, it becomes easy for him to earn without bothering himself to take pains in real economic activities. This leads to hampering the real interests of the humanity, because the interests of the humanity cannot be safeguarded without real trade skills, industry and construction”;
Some other reasons are mentioned in next slide;

23. The Rationale for Prohibition of Riba
Injustice:
In a transaction of loan, and it is not necessary that everybody finds out all the elements of injustice in a Riba transaction, yet the evil consequences of interest were never so evident in the past than they are today;
Injustice in a personal consumption loan was restricted to a debtor only, while the injustice brought by the modern interest affects the economy as a whole.
Effects of interest on production;
Effects of interest on distribution of wealth;
Lenders are secured all the time;

24. The Rationale for Prohibition of Riba
Time based valuation of money is not acceptable;
Valuation of money is allowed if it enters in circulation of business;
Time and Location are important factors in determining the price of any asset / good/commodity but they do not have value in pricing of loan, debt and money;
Jurists allow the difference between cash and credit prices of a commodity considering it a genuine market practice. It is quite natural that in the market credit price of a commodity is more than its cash price at a point of time.;

25. Riba Vs Interest
Sometime it is argued that Riba and Interest are two different words with different meanings. But this argument is based on misunderstanding the correct scenario;
The word “interest" by and large, is now considered as Riba in view of big majority of Islamic scholars. The reason of this view is that 'interest' implies that excess amount which a creditor settles to receive or recover from his debtor in consideration of giving time to the debtor for repayment of his loan;
The word 'Riba', that revealed in Qura'n, was meant for Riba al-Jahiliyya or pre-Islamic Riba. This Riba manifests when the lender asks the borrower at maturity date if he would settle the debt or swap it for another larger debt of longer maturity period. The difference between the maturity value of old and new debt would be Riba;

26. Riba Vs Interest
This clearly shows that the Riba which was common in Arabs at the time of Revelation was the same thing which is now practiced in modern financial system;
Therefore, the present system of time-based compounding of debt clearly falls in this category and no difference is there between interest and Riba;

27. Misconceptions about Riba
Only Compounding of interest is prohibited;
Interest on consumption loans is prohibited and not on Production loans;
Debtors are not poor in current times – they earn huge profit so they pay interest;
Commercial interest / Banking Interest that prevails now, is different from years old Riba;
Usury is prohibited but banking interest is not;
Riba should be should be allowed in public interest;
Interest keeps value of currency/money intact in future – solution of inflation;
Riba should be allowed on the basis of doctrine of Necessity – since its focal point of modern banking & trade so must be allowed;

28. Misconceptions about Riba
Islam is the only religion that prohibits Riba:
This claim is purely incorrect;
Prohibition of interest is not limited to Islam it is prohibited in Judaism and Christianity;
In fact Islam shares prohibition of Riba, Liquor and Adultery with other revealed and unrevealed religions;

29. Q & A