Hassan Basarally1120020 FQH 606

Assignment

Course Name: Islamic Finance

Course Code: FQH 606

Instructor: Shaykh Dr. Sami Suwailem

Student Details

Name: Hassan Basarally

Student ID: 1120020

Batch: 3

Semester: 6- Fall 2016

Assignment Question

(a) In one sentence, summarize the main danger of Riba. No more than one

sentence.

(b) Explain the sentence in (a).

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Hassan Basarally1120020 FQH 606

a. Besides risking the punishment of Allah ( ) for all involved in

such a transaction, Ribaa ( )enables debt to multiply over time,

putting the borrower at risk of default and causing the economy to

collapse.
b. Whatever Allah ( ) has forbidden has no benefit for mankind,

Ribaa is an example of this. The dangers of Ribaa are debt replication,

lack of economic growth and national development, and encouraging a

lack of empathy and living beyond ones means.

With the self-replication of debt seen in Ribaa, over time debt will

increase at a faster rate that wealth creation. The inverted debt

pyramid created as a result will eventually collapse the economy

because the debt will not be serviceable. Also, with the multiplication

of debt it makes saving, on a personal or national level, increasingly

difficult as a large percentage of income has to be diverted to servicing

debt.
From a macroeconomic perspective, governments would spend a large

sum of its revenue servicing loans. As a result, resources that could be

invested in services to its citizens are reduced and national

development and quality of life hampered. This results in many nations

unable to provide services for its citizens and struggle with

development.
Ribaa is the trade of identical things for unilateral gain, while trade

promotes mutual gain and stimulates economic activity through

specialisation. With specialisation, a variety and high quality of goods

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and services can be produced in the economy to create wealth. Ribaa

does not result in anything being produced, so beside the gain to the

lender, it doesnt contribute to the economy by providing goods and

services.
From the social harms of Ribaa is that instead of fostering brotherhood,

it discourages empathy. Loans without Ribaa is a means of the wealthy

helping others achieve financial goals. Due to Ribaa being a profit

generating transaction, the lender is not motivated by empathy but the

desire for profit1. Another social harm is that it encourages individuals

to live beyond means. Loans with Ribaa are easy to get as it is a major

source of profit for banks. Financial institutions give loans based on

collateral and guarantee of repayment instead of the needs of the

client2. This does not promote fiscal responsibility on the part of the

individual as if he wants something he simply applies for a loan to get

it.

1 Hossain, Mohammad Zakir, Why is interest prohibited in Islam? A statistical

justification. Humanomics Vol. 25 No. 4, 2009, pp. 246.

2 Chapra, M. Umer. Why has Islam prohibited interest? Rationale behind the
prohibition of interest. In Interest in Islamic Economics: Understanding Riba. Ed.
Abdulkader Thomas. Routlege, London and New York, 2006, pp. 98.

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