Concept of RIBA, Interest & Profit in Islamic Economics System

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RIBA does not justify money to be a medium of exchange and develop a love of money, greed and selfishness instead of respect for the money for socioeconomic development for the humanity.

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Concept of RIBA, Interest & Profit in Islamic Economics System

  1. 1. Research & Written YOUSUF IBNUL HASAN Program Consultant Islamic Banking & Applied Finance IQRA University Pakistan usufhasan@hotmail.com
  2. 2. RIBA- PROFIT & INTEREST Introduction & Differences ALMIGHTY ALLAH CLEARLY DEFINES PRINCIPLES & MEANS FOR GOODS & SERVICES, WEIGHT & MEASUREMENT, TIME & PERIOD, INCREASE & DECREASE, PROFIT & LOSS, BUYING & SELLING, GIVING & TAKING, EFFORTS & LAZINESS, SUCCESS & FAILURE, DEFEAT & WINNER, RICHNESS & POVERTY, KNOWLEDGE & IGNORANT, CIVILIZED & ORTHODOX, TRADITIONS & CUSTOMS, MORALS & ETHICS, TRANSPARENCIES & WICKEDNESS, HONESTY & FRAUD, CRIME & PUNISHMENT, REWARD & PENALTY. 2 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  3. 3.  Performance in man’s daily life is define only in the will of Almighty Allah. Holy books and messengers were blessed and send to explain evil & sins, losses & gains, health, hygiene, wealth and happiness for mankind.  For better humanity Allah define limits of everything that the men have in this daily life.  Men have been bless unlimited power by achieving knowledge that can be stored in human mind & act according to an organize system that is clearly explain in Holy Quran, Hadiath and Sharia'h 3 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  4. 4. PRIME IMPORTANCE FOR MANKIND Almighty Allah prohibited any object or any act that is harmful to humankind that creates instability, bring injustice, become injurious to human life and considered as unconstructive to Socio Economic System. 4 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  5. 5. RIBA. Riba is an Arabic word drive from word RIBH which means Profit. Ribh means excess, increase or addition in accordance to the Islamic guidance for commercial & business practices & correctly interpreted according to Sharia'h terminology as Double Profit. 5 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  6. 6.  RIBA is any earning, income, profit or benefits being earned, taken or received through wrong means, bad intentions, shady practices or wicked participation.  Riba is not only treated as immoral, unjust filthy but furthermore threat to SOCIO ECONOMIC LIFE OF SOCIETY.  Riba leads to crimes of various nature, through Cruelty, Humiliation, Exploitation, Self- importance, Discrimination, Power, Lust Selfishness, Greed and self-esteem 6 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  7. 7.  Riba is as a combination of evil and sins.  Riba is bad practice to earn & gain.  Riba bring instability in the community life.  Riba is the source for the increase of inflation.  Riba create classes in the society.  Riba create injustice in seeking the rights.  Riba is non transparent economic activity.  Riba is the most hated practice in Islam  Riba is a social crime 7 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  8. 8. Riba is Immoral, Unethical, Unjustified Commercial, Economical, Trading, Business, Political, Social, Cultural and traditional practices and activities to gain benefit At Individual, Collective or Institutional level 8 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  9. 9. People who indulge in Riba shall be raised like those who have been Driven to madness by the touch of Devil. That is because they say that Riba-based transaction is just like trading, while Allah has permitted trade and prohibited Riba. Hence those who have received the warning from Allah and have stop accordingly, may have what has already passed, their case being entrust to Allah but those who revert to Riba-based dealings, shall be the inhabitants of the hell-fire and abide therein for ever. (You must know that) Allah deprives Riba from all blessings and blesses charity; He loves not any ungrateful sinners. 9 YousufIbnulHasan, usufhasan@hotmail.com HOLY QURAN AL-BAQARAH 2:275-6 14/03/2014
  10. 10. AL-BAQARAH 2:278-79 O you believers! Fear Allah and give up Riba that remains outstanding if you are true believers. Watch out! If you do not obey this directive, then Allah declares war against you from Himself and from His Prophet. But, if you give up your outstanding Riba, then you can claim your principals. Neither should you cause harm with Riba to others, nor should others harm you. 10 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  11. 11. Prophet Muhammad (May Peace Be Upon Him) Said At the last Pilgrimage, All Riba of Jahilliya is null and void. In this respect, the first Riba I (May Peace Be Upon Him) withdraw that the borrowers owe to my uncle Abbas; it is cancelled completely. (Muslim) The Prophet (May Peace Be Upon Him) cursed all those who take Riba, who give Riba, who write a Riba contract and the two witnesses to a Riba contract. He (May Peace Be Upon Him) further said: "They are all alike (in fault).“ (Muslim 2995) 11 YousufIbnulHasan, usufhasan@hotmail.com HADIATH REINFORCE CONCEPT OF QURANIC RIBA 14/03/2014
  12. 12. RIBA IN FINANCIAL AFFAIRS  Riba must be eliminated from the financial transactions.  No thing is more horrific as compared to Riba that Islam has prohibited.  Nothing is more dreadful than Riba, is remains in widespread threatening socio economic activities in both theory and practice.  Riba convert financing system into lending system that make the money as a commodity and owner of the wealth, a seller and user of the same as buyer.  Riba does not justify money to be a medium of exchange and brings the love of money instead of respect for the money.  12 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  13. 13. INTEREST When money become a commodity and bought and sold with guaranteed results of profitability Or the increase volume of money by using in the transaction. Such increase is the price of the money. This price of the money is classified as Interest which is the part of Riba There is confusion in understanding for the terms Interest & Riba (Usury). 13 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  14. 14. THE QUESTION ARISE “INTEREST IS RIBA OR RIBA IS INTEREST”? To make a distinction of terms with rational reasoning. Islam through definitions and interpretations, provides explanation in Holy Quran and Hadiath, Riba is clearly explained where Interest is define by the scholars. 14 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  15. 15. , ABU ALA MAUDUDI Interest is an earning through lending on money by lender from borrower on condition that lender shall charge a fixed amount of money in addition to the principal. Interest is prohibited in Islam and people are not allowed to make money by lending their capital on interest. Capital is to be invested in productive manner that increases the profits. 15 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  16. 16. GREEK SCHOLAR ARISTOTLE He define Interest in his book “Money & politics”. “Interest is an artificial profit, which does not enter in legal trading. Using money as a commodity is selling, just a forged artificial transaction. Money has to be used as a means of sale and purchase and a measurement of a commodity to be sold or purchased. Money is just a means to ascertain value of commodity and it cannot be sold or purchased within similar quantities and qualities ”. 16 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  17. 17. HOW TO DEFINE INTEREST Any amount, earning or income that is taken over and above to PRINCIPAL AMOUNT, without any RISK, EFFORTS, ACTIVITY, WITHOUT LOSS SHARING and the RETURN IS GUARANTEED within a SPECIFIC TIME is called INTEREST. This compulsory return, income or earning on a fixed term & fixed percentage, upon principal amount, is an INTEREST. INTEREST IS THE PRICE OF MONEY Whereas money is just an intermediary between exchanges of transaction. There are many categories of Riba. INTEREST is one of the categories of Riba. 17 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  18. 18. PROCESS OF INTEREST IN 5 ACTS OF RIBA INTEREST is one of the categories of Riba Five acts of Riba develop the amount of Interest. 1. Exploitation of lender to borrower 2. Non Transparency (purpose undisclosed by borrower to lender for lending) 3. Guarantee for successful maturity by borrower obtain by lender. 4. Humiliation by lender on non performance of borrower on maturity. 5. Cruelty by lender by liquidating and making physical harassment to borrower. 18 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  19. 19. Prophet Moses(May Peace be upon him) Torah 22nd versus of the “Exodus” If you lend money to any of my people with you who are poor, you shall not be to him as an exact Riba from him.” Deuteronomy verse 23rd “You shall not lend upon Riba to your brother, Riba on money, Riba on virtual, Riba on anything that is lent for Riba.” 19 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  20. 20. LEVITICUS 25:35 'If one of your countrymen becomes poor and is unable to support himself among you, help him as you would an alien or a temporary resident, so he can continue to live among you. 20 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  21. 21. Judaism In several Biblical passages in which the taking of interest is either forbidden, discouraged or disliked. The religion of peace and love define Interest as the key to cruelty and hatred and give birth to crime. 21 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  22. 22. Roman Catholic Church In fourth century AD prohibited taking of interest by Church Scholars. In the eighth century under Charlemagne it was declared usury to be a general criminal offence. "The love of money is the root of all evil." (Timothy 6:10) 22 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  23. 23. Ancient Hindu Religion Vasishtha, a well known Hindu law-maker made a special law which forbade higher castes of Brahmans (priests) and Kshatriyas (warriors) from being usurers or lending at interest. Vedic texts of Ancient India (2000-1400BC) In the Jatakas, (600-400 BC) Usury is referred to in a humiliating manner: “Two-Faced Elites accused of practicing Usury”. 23 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  24. 24. Islam for Money Matter Riba does not justify money to be a medium of exchange and develop the love of money in several ways that disrupt the entire system of mankind. Islam stresses a respect of money by disregard lending and borrowing Islam guide to financing on participation by uniting money with skill as equal in volume against value by making effort, utilization and participation in gaining the purpose. 24 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  25. 25. Islam for Money Matter Islam guides the point of origin and limit of destination of monetary transaction. Islam defines duties and responsibilities between money owner and money user. The combination and participation of money and effort brings the result which is share according to the pre-agreed terms of understanding is the creation of Profit 25 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  26. 26. Profit How it is Describe? Income is determined not on financing amount, but Principal amount taken out from Sales Proceeds , realizing Gross Profit which is subtracted with Cost on the transaction which end into Net Profit which is the aim of financing with “Acceptance” of loss. To work out the profitability in the transaction APPRAISAL, PRECAUTION, TRUST, CONFIDENCE, EXPERIENCE, KNOWLEDGE, PURPOSE, WILL & SPRIT are the factors of BUSINESS ETHICS that result in realizing PROFIT on the transaction. 26 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  27. 27. Profit Mechanism Profit is an amount appreciate over & above to the principle amount in acceptability of profit & loss sharing between two partners of the transaction upon the maturity as GROSS RETURN. This gross return over to the principal amount of investment then be deducted with applicable and agreed Cost on the transaction which realize the NET INCOME on the transaction. This Net Income which is to be shared in an agreed RATIO instead of confirms and guaranteed rate is the Profit. PROFIT is sharing in RATIO of investment and not realize through RATES applied on principle amount. 27 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  28. 28. Now the question arises If Interest is eliminated from monetary system, would it be possible that system & transactions would become transparent and clear? Answer is simple and straight: “Filth remains in its hard and powerful grip irrespective of other factors”. Interest alone cannot be eliminated without eliminating categories that fall under term called Riba. 28 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  29. 29. Some of the categories of Riba are mentioned and clearly defined in Islamic Economics System . Islam strictly prohibits these acts as well as society disregards them as Social Crimes due to their dreadful effect on social, moral, cultural, economical, financial, commercial and lawful life styles of the society. 29 YousufIbnulHasan, usufhasan@hotmail.com Categories of Riba 14/03/2014
  30. 30. The main classes of RIBA  Exploitation by taking advantage of status and position,  Irregular weight & measures for profitability,  Wrong declaration for higher return,  Misconduct (misbehavior),  Crime & Law breaking,  Mistrust,  Commit a breach  False commitment, 30 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  31. 31.  Manipulation of affairs for benefits at a cost and efforts of other,  Gambling in all form,  Promising to secure the benefit by covering honorable, nearest, dearest  Falsehood and Lies  Betting and gambling  Speculation, Conjecture, unfounded information,  Trading in commodities prohibited by Islam and law of the land,  Income from the practices or activities that are prohibited by Islam, 31 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  32. 32.  Breaking and abuse of state law for self benefit or for any purpose that is declared as punishable act.  Disobedience to the state law by declaration and submission of wrong information for self- benefits.  Disturbing peace of community by using force.  Committing and involving in the illegal acts.  Paying and receiving Interest that is declare as price of money using act of cruelty, exploitation, wrong means, false declaration, and advantage based on weak or wrong calculation,  Taking and giving return on loans or fixing amount without appraising the use of funds that are given to user. 32 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  33. 33.  Keeping deposit with person or institution having involved in Riba practices,  Using deposits as investments and declaring non-transparent results that lead to discrimination of sharing in accordance with investment percentage,  Holding and storing of currency that affects economic activities negatively.  Holding commodities that lead towards scarcity in the supplies against market demand.  Monopoly and monopolization of activity, transaction and business to taking sole benefit, stopping the growth of employment and earnings 33 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  34. 34.  Grabbing the wealth,  Illegal encroachment on the property that is not owned by encroacher. Like construction of pray area on the property not lawfully purchase, legally gifted or transferred to occupant  Using public money for luxuries & self-usage,  Misuse of rights belonging to minors, orphans, widows and women,  Misappropriations among share division on inherited wealth  Miscalculation of share for inherited wealth under law of inheritance,  Income by power and cruelty,  Misuse of power and status, 34 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  35. 35.  Theft,  Burglary,  Smuggling,  Adultery,  Human trading,  Pressurizing and influencing of earning situation and taking benefits,  Misuse of public representation and obtaining benefit through status as Public Representative,  Trade and Sale of commodity by charging over and above to the prevailing price and avoiding payment to state toward revenue, hiding such earning and income on transactions  Abuse of labor, specially child and women. Above classes differentiate Interest vis-à-vis Riba 35 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  36. 36. FUNDAMENTAL FACTS ON RIBA BASIS OF ISLAMIC THOUGHTS CONFLICT DIRECTLY WITH THE RIBA BASED SYSTEM. AS “NO ISLAM EXISTS IN A PLACE WHERE THERE IS RIBA BASED SYSTEM”.  Riba based system is a misery not only on humanity, faith, morals or imagination of life, but also in every core of economic and practical life.  It is the most hateful system, which eradicates human satisfaction and frustrates its civilized and neutral developments.  Islam has complete ethical system supported by realistic system as interlink.  Ethics & reality cannot be separated in Islam & cannot be practiced alone. 36 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  37. 37. FUNDAMENTAL FACTS OF RIBA  Islam has clearly stated benefits of following of ethics and reality that followers follow in daily life.  Successful Islamic economics does not rise without Ethics which cannot be separated to reality of life and its rational approach.  Practical life of people cannot prosper without proper ethics.  Riba practices corrupt the individual’s ethics, behavior, and feelings towards community and the society.  It also corrupts the human life, culture and the relationship by spreading the spirit of greed, selfishness, sneakiness and gambling in general. 37 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  38. 38. FUNDAMENTAL FACTS OF RIBA  Today investing capital on minimum risk basis over guaranteed return is commonly practiced including funds as deposit, invested on no risk with guaranteed return.  Interest is paid at lower to the depositor’s investment and higher to investment managers and shareholders.  Money lent to somebody on higher return or interest does not grow useful projects but seeks the most lucrative opportunity even if profit comes from the lowest nature and the meanest tendency. 38 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  39. 39.  Islam is a connected system; it prohibits the dealing with Riba.  It also defines all its systems based on providing the need to it.  It organizes the aspects of social life on giving out means of dealing without touching growth of human, social & economic development.  A true Muslim should have a firm belief that whatever Almighty Allah has prohibited, can develop human life in better and fair way.  It must be kept as a firm belief to restrain from false and evil acts for the betterment of life with its development and growth in harmony. 39 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  40. 40.  Almighty Allah is the Creator of this life and makes man, custodian to all the blessings for humanity.  Mans determination towards the Almighty Allah overcomes all and guides the man to the right path.  It is also impossible for the Muslims to raise the community in prosperity or the perception that wickedness can show the way to advancement, going against the prohibitions of Almighty Allah. 40 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  41. 41. RIBA AL NASSIEAH  Riba al Nassieah practiced before Islam as man paying his money to another for a pre agreed period.  In return, he took from him a certain amount every month without taking the principal amount.  When date of payment came, he asked him for his capital and if he was unable to repay would increase in his fund and the term of repayment.  41 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  42. 42. RIBA AL FADI  A man sells an article in exchange of another article having same quality and nature with an increase or decrease like gold sold for gold, rupee for a rupee, corn for corn and barley for barley.  This kind is considered as Riba, as commodities are similar to each with different values not ascertain.  Such transaction has the involvement of exploitation and injustice on any one’s part of the two.  Riba system emerges initially on a rule that there is no relationship between the determination of Allah and the life of man. 42 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  43. 43.  Riba creates the false feeling in the mind of men that wealth ownership would bring the power to become the master of this earth. It instructs the men to not to get bound by a pledge himself from Allah and to ignore the importance of following the commandments of Allah.  Riba establishes a feeling of liberty among humans for ways and means of obtaining wealth, encouraging to adopt more unfair means to multiply it.  Riba provides an individual a feeling that he is free to enjoy his wealth without abiding the contract of faith and trust in Almighty Allah or obeying any condition as holder of wealth, for which he is not bound to keep the interest of others. 43 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  44. 44. GHARAR  Gharar is uncertainty, hazard, chance or risk and technically it is sale of a thing which is not present at hand or the sale of a thing whose consequence or outcome is not known or a sale involving risk or hazard in which one does not know whether it will come to be or not. Such as fish in water or a bird in the air which are dishonesty through ignorance by one or more parties to a contract. There are several types of Gharar, all of which are Haram. The following are some examples: 44 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014
  45. 45.  Selling goods that the seller is unable to deliver  Selling known or unknown goods against an unknown price  Selling goods without proper description  Selling goods without specifying the price  Making a contract conditional on an unknown event  Selling goods on the basis of false description  Selling goods without allowing buyer to properly examine the goods  Gambling is a form of Gharar because the gambler is ignorant of the result of his gamble 45 YousufIbnulHasan, usufhasan@hotmail.com 14/03/2014

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