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Riba, gharar and qimar
- 2. RIBA, GHARAR AND QIMAR Presentation by: Mufti Ibrahim Essa Shariah Advisor
- 3. ISLAMIC BANKING • RIBA – Riba means excess, increase or addition – Riba in Islam implies any excess compensation without due consideration
- 5. Those who spend their wealth night and day, secretly and openly, they have their reward with their Lord, and there is no fear for them, nor shall they grieve. Those who take riba (usury or interest) will not stand but as stands the one whom the demon has driven crazy by his touch. That is because they have said: Trading is but like riba. So, whoever receives an advice from his Lord and stops, he is allowed what has passed, and his matter is upto Allah. And the ones who revert back, those are the people of Fire. There they remain forever. Allah destroys riba and nourishes charities. And Allah does not like any sinful disbeliever. Surely, those who believe and do good deeds, establish Salah and Zakah have their reward with their Lord, and there is no fear for them,nor shall they grieve. O those who believe, fear Allah and give up what still remains of the riba if you are believers. But if you don 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. (Verses of Surah Al Baqarah: 274-281)
- 6. Surah Al Baqarah • These verses elaborate the severity of the prohibition of Riba. • After the invasion of Makkah Holy Prophet (PBUH) declared as void all the amounts of Riba that were due at that time. • Tribe of Thaqif who were the inhabitants of Taaif came to Holy Prophet (PBUH) and embraced Islam and also entered into a treaty with him. In which they signified that all the riba payable by tribe of Thaqif will be void but the amount of Riba that is to be received by the people of Thaqif will not be void. • The Holy Prophet (PBUH) instead of signing the treaty simply wrote a sentence that Banu- Thaqif will have the same rights as the Muslims have. • Banu Ibn-al-Mughirah declined to pay interest on the ground that Riba was prohibited in Islam. Matter was placed before the Holy Prophet (PBUH) on which the holy verse was revealed and Banu- Thaqif surrendered and said we have no power to wage war against Allah.
- 7. Prohibition of Riba in Hadith
- 9. The prohibition of Interest is not limited to Islam, but it is shared by Judaism and Christianity. Some of the old testaments have rendered riba as haram (See Exodus 22:25, Leviticus 25:35-36, Deutronomy 23:20, Psalms 15:5, Proverbs 28:8, Nehemiah 5:7 and Ezakhiel 18:8,13,17 & 22:12). Agibi Bank was established circa 700 B.C. in Babylonian and functioned exclusively on equity basis.
- 10. ISLAMIC BANKING • CLASSIFICATION OF RIBA – Riba-un-Nasiyah or Riba-al-Jahiliya – Riba-al-Fadl or Riba-al-Bai
- 11. 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 Hassas Razi)
- 12. 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)
- 13. 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
- 14. ISLAMIC BANKING • CLASSIFICATION OF RIBA – Riba-al-Fadl • excess taken in exchange of specific commodities which are homogeneous
- 15. ISLAMIC BANKING Hadith prohibiting Riba-al-Fadl Ubadah Ibn Al Samit narrated that the Holy Prophet (SA) said Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and 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 hadnd to hand. (Muslim) In another tradition/narration the Holy prophet (SA) added that Better quality and bad quality of them is equal.
- 16. ISLAMIC BANKING • Exchange of the six commodities homogenously is allowed equally but not different in quantities, even they differ in quality For example: 10 kg wheat with 15 kg wheat • Exchange of the six commodities heterogeneously is allowed at spot not on credit For example: 10 kg wheat with 20 kg barley is allowed at spot not on credit • CLASSIFICATION OF RIBA – Hadith prohibiting Riba-al-Fadl
- 17. ISLAMIC BANKING • Illah OF Prohibition of Riba Al Fadhl: • commodities must have two common characteristics – Weight – Volume • includes all commodities having weight or volume and are being exchanged
- 18. ISLAMIC BANKING Another classification of Riba Al Nasseah: – Tijarti Sood(Commercial interest) • interest paid on loan taken for productive and profitable purpose – Sarfi Sood (Usury) • interest paid on loan taken for personal need and expenses
- 19. Arguments given to Justify Commercial Interest a: Commercial Interest is charged from wealthy persons whereas usury is charged from the poor. It does not exploit the poor while consumption interest or usury exploit the poor. Ans. Validity of a transaction is not based on the financial status of a party, like sale, leasing etc. Law does not differentiate between poor and wealthy in crimes like bribery, theft etc. Further, Commercial Interest also exploit the poor.
- 20. b: It was not in the prevalent modern shape in those days. Ans. When some thing is prohibited, it is not directed to a particular form of it but it covers every form which comes in its general sense, e.g. gambling and pork, liquor and adultery are as Haram now as they were in Jahiliyyah
- 21. Gharar Gharar is one of those impediments which make the contract illegitimate. An agreement that has any element of Gharar is not Valid from the Shariah point of view, irrespective of whether the parties to the agreement agree upon the agreement or not.
- 22. The Practical Definition of Gharar Keeping in view the Ahadith and the work of Islamic Jurists, Gharar can be defined as follows: “The uncertainty that is present in the Basic elements of an Agreement: Wording, Subject Matter, Consideration and the Liabilities”.
- 23. Effectiveness of Gharar The effectiveness of the Gharar is subject to these conditions: i. To be in a commutative contract (financial exchange) ii. To be excessive
- 24. Qimar Qimar is an event in which there is a possibility of total loss to one party.
Editor's Notes
- Definition of Riba The word “Riba” means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration. Here consideration does not include time value of money. This definition of Riba is derived from the Quran and is unanimously accepted by all Islamic scholars.
- 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.
- 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.”
- 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”.
- 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.
- 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.
- 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:
- 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.
- 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.
- The present day banking system which has given interest the moral and legal license is the backbone of the prevalent capitalism. When Muslim countries became subjugated to west in economic field it resulted in, on one hand increasing progress of west in trade and industry and on the other the shattering condition of the Muslim states. Some noted westernized Muslims felt that interest based banking is inevitable when it comes to trade and industry not only on national level but also on international level. This prompted them to say that only usury is haram and not commercial interest because rendering commercial interest haram would pose irresolvable problems to their way up to industrialization and economic progress. They included only usury in the term Riba as categorically prohibited in Quran and freed commercial interest from it calling it totally different from the western concept of interest. Therefore it was concluded the prohibition of Riba was restricted to usury while commercial interest was perfectly Islamic.
- This verse is taken from Surah-e Al Baqarah, Ayat 275. This verse was revealed in reply to the argument that if profit on the money invested in a business enterprise is permissible, why should the profit accruing on loan money be deemed unlawful? The verse differentiates between the profit one gains on investment in commercial enterprise from the profit on trade by saying that no enterprise paying fixed interest is immune from risk. Then what is the justification for the fact that out of all the people in the business world, the financier alone should be considered entitled to a profit at a fixed rate in all circumstances.
- This verse is taken from Surah-e Al Baqarah, Ayat 275. This verse was revealed in reply to the argument that if profit on the money invested in a business enterprise is permissible, why should the profit accruing on loan money be deemed unlawful? The verse differentiates between the profit one gains on investment in commercial enterprise from the profit on trade by saying that no enterprise paying fixed interest is immune from risk. Then what is the justification for the fact that out of all the people in the business world, the financier alone should be considered entitled to a profit at a fixed rate in all circumstances.