ISLAMIC BUSINESS TRANSACTION


CHAPTER THREE

RIBA

MAHYUDDIN KHALID  emkay@salam.uitm.edu.my

 CONTENT
 INTRODUCTION
INTRODUCTION
 DEFINITION
 CATEGORIES OF RIBA
DEFINITION  ISLAMIC RULINGS ON RIBA IN TRADE
 THE RATIONALE BEHIND THE PROHIBITION OF RIBA
CATEGORIES

EVIDENCES

RATIONALE

2
 INTRODUCTION
 Riba was gradually prohibited through 4 stages in 4 different
INTRODUCTION verses in the Quran
 Practice of giving and taking riba has been widely practice in
DEFINITION Arab society and regarded as part and parcel of the business
society
CATEGORIES  To eliminate something that have been accustomed for so long is
not an easy task
 This approach also adopted in the prohibition of liquor
EVIDENCES
 Arab society had been given ample time to gradually adjust
themselves
RATIONALE

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 RIBA IN THE QURAN

INTRODUCTION

DEFINITION

CATEGORIES Stages Of Moral

Legal Al-Bay’ as the
Riba & the Prohibition of alternative to
Prohibition denounciation
Jews Riba Riba
of Riba
Of Riba In (An-Nisa : 61) (Ali-Imran: (Al-Baqarah:
(Al-Rum : 39)
EVIDENCES The Quran 130-132) 275-281)

RATIONALE

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 PROHIBITION OF RIBA
STAGES VERSES

INTRODUCTION 1st

DEFINITION

CATEGORIES

2nd
EVIDENCES

RATIONALE

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 PROHIBITION OF RIBA
STAGES VERSES

INTRODUCTION 3rd

DEFINITION

4th
CATEGORIES

EVIDENCES

RATIONALE

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 DEFINITION
 Literally:
INTRODUCTION  Riba is an Arabic word, derived from the verb raba that literally
means „to grow‟ or „expand‟ or „increase‟ or „inflate‟ or „excess‟
 Excess quantity, addition, an increase of a thing over and above
DEFINITION
its original size or amount
 It is generally translated into English as “usury” or “interest”, but in
CATEGORIES fact it has a much broader sense in the Shari`ah.
 Riba in the Shari`ah, technically refers to the „premium‟ that must
be paid by the borrower to the lender along with the principal
EVIDENCES amount as a condition for the loan or for an extension in its
maturity.
RATIONALE  In fiqh terminology, riba means an increase in one of two
homogeneous equivalents being exchanged without this increase
being accompanied by a return.
 Technically (2 definition depending on the nature of transaction):
 Trade Transaction
 Loan Transaction

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 DEFINITION
 Definition 1:
INTRODUCTION
 Trade transaction:
 Unlawful gain derived from the quantitative inequality of the
DEFINITION counter-values in any transaction purporting to effect the
exchange of 2 or more species which belong to the same
CATEGORIES genus(category) and are governed by the same efficient
cause(illah)
 Definition 2:
EVIDENCES
 Loan transaction:
RATIONALE
 A predetermined excess or surplus over and above the loan
received by the creditor conditionally in relation to a
specified period

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 CATEGORIES OF RIBA
 Debt Riba
INTRODUCTION
 Riba Qardh
 Riba Jahiliyyah
DEFINITION  Trade Riba
 Riba al-Fadl
CATEGORIES  Riba al-Nasiah

EVIDENCES

RATIONALE

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 DEBT RIBA
 Riba Qardh
INTRODUCTION
 Any predetermined benefit for the owner of debt stated in the
contract, which the debtor need to fulfil
DEFINITION  E.g.: interest stated in loan contract
 Riba Jahiliyyah
CATEGORIES  The surplus or excess payment above the original debt as a
penalty to the debtor due to his inability to service the loan
EVIDENCES
repayment within the stipulated time
 Real and primary form of riba
RATIONALE  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
 E.g.: interest in credit card transactions due to the delay in the
repayment

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 TRADE RIBA
 Riba al-Fadl
INTRODUCTION
 Any additional quantity or inequality in the exchange of
goods from the similar type of the ribawi items
DEFINITION  (Quantity Factor)
 Riba al-Nasiah
CATEGORIES  Any delay in the exchange of the ribawi items from the same
type and category
EVIDENCES  (Time Factor)

RATIONALE

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 EVIDENCE
 Al-Quran
INTRODUCTION
 Al-Baqarah: 275

DEFINITION

CATEGORIES

EVIDENCES

RATIONALE

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 EVIDENCE
 Hadith:
INTRODUCTION
 From Jabir: The Prophet saw cursed the receiver and the
payer of usury, the one who records it and the two witnesses
DEFINITION to the transaction and said: “They are all alike (in guilt and
sin).
CATEGORIES  From Abi Said al-Khudri: The Prophet saw said: gold for
gold, silver for silver, wheat for wheat, barley for barley,
dates for dates, salt for salt, like for like, and hand to hand.
EVIDENCES
Whoever pays more or takes more has indulged in riba. Take
taker and the giver are alike (in guilt).
RATIONALE

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 RIBAWI ITEMS
 Commodity Money/ Currency:
INTRODUCTION
 Gold
 Silver
DEFINITION  Currency
 Foodstuff:
CATEGORIES  Wheat
 Barley
EVIDENCES
 Dates
 Salt
RATIONALE

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 RIBAWI ITEM

INTRODUCTION

DEFINITION

CATEGORIES

EVIDENCES

RATIONALE

 (1) Prompt delivery (time)

 (2) Prompt delivery with the equivalent quantity

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 ISLAMIC RULINGS ON RIBA IN TRADE
Category Type Exchange Quantity Items
INTRODUCTION
1 Same Same Spot Equal in Regardless of Gold with Gold,
category type exchange quantity quality Wheat with Wheat
DEFINITION

CATEGORIES 2 Same Different Spot Inequality Equality is not a God with Silver
category type exchange is condition Wheat with Rice
permitted Salt with Dates
EVIDENCES

RATIONALE
3 Different Different Delayed is Inequality Time and Gold with Wheat
category type permitted is Quantity Factor RM with Dates
permitted is not a
condition

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 ISLAMIC RULINGS ON RIBA IN TRADE
Category Type Exchange Quantity Items
INTRODUCTION

4 Ribawi Items and Non- Delayed is Inequality is Time and RM with vehicles
DEFINITION Ribawi Items permitted permitted Quantity UD with furniture
Factor is not a
CATEGORIES condition

EVIDENCES 5 Between 2 Non- Delayed is Inequality is Time and Bricks with Sands
Ribawi Items permitted permitted Quantity Cloth with Patrols’
Factor is not a
RATIONALE condition

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 THE RATIONAL BEHIND THE PROHIBITION OF RIBA

 Barter system is not so favourable from the Shariah point of view.

INTRODUCTION  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.
DEFINITION
 It is a clear burden on the borrower. In any circumstances, he is
obliged to repay the principal and interest charge (Money renting).
CATEGORIES 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.
EVIDENCES However, it could render to exploitation of deficit units by the
surplus units.
RATIONALE
 To prevent any form of injustice, exploitation and manipulation
among the parties.
 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.

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 THE RATIONAL BEHIND THE PROHIBITION OF RIBA

 Inequality in loan distribution makes the rich becomes richer

INTRODUCTION and the poor becomes poorer.
 Interest-based system impends the innovations amongst the
small-scale enterprises particularly.
DEFINITION
 Wealth creation and transfer: Riba activities do not create a new
stock of wealth.
CATEGORIES  Borrowers are not exposed to any risk (except credit risk - does
not commensurate the profit made).
EVIDENCES  Money is considered as commodity is an interest-based system
and subject to the law of demand and supply (Allowing
speculation on money).
RATIONALE
 Interest is a component of costs in an interest-based system.
 Case Studies:
 Bank interest
 Riba al-fadl
 Similarities between trade and riba

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 CASE 1
 Charging Interest In The Banking Sector
INTRODUCTION  Prohibition of riba would safeguard the interest of both financial
institution and customer
 In case of money deposits in savings accounts or fixed deposits, the
DEFINITION
interest is unfair because of:
 Banks:
CATEGORIES  Conventional Bank: Obliged to pay interest to the depositor which is
more than the principal amount deposited
 Islamic Banks: Profit would be given to the depositor only if bank
EVIDENCES make profit. If they are making losses, they are not compelled to pay
any amount of profit
 Customers:
RATIONALE
 Conventional Bank: Customers would be deprived from the high
profit gained by bank even though they are guaranteed some form
of fixed income (interest), it is rather small compared to the huge
profit gained by the banks.
 Islamic Bank: If bank making huge profits for a certain period,
depositor would be given a fair share of profit based on agreed
proportion

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 CASE 2
 Prohibition of Riba al-Fadl
INTRODUCTION  To ban any form of unfair trade practices from the business
society – unfair practice in barter transaction
DEFINITION  The Prophet saw was actually trying to discourage barter
trading and gradually eliminate barter system while suggesting
a better and just monetary system using currency
CATEGORIES  The answer to the question:
 Why any trader would like to trade 2 similar commodity of
EVIDENCES different quality without having gain from the differences in
quantity?
 No sensible trader would like to trade at loss, they would avoid
RATIONALE
any involvement of barter trading that might lead to either the
practice of riba or trade at loss.
 Islam suggested fairer alternative – utilize currency as a medium
of exchange that could facilitate a proper flow of trade and
accurate market value. This would avoid injustice due to
inability to determine fair value for the exchange in barter trade.

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 CASE 3
 Why Riba is Mentioned Together With Trade In The Quran
INTRODUCTION  Difficulties in distinguishing between these 2 concepts.
Similarity
DEFINITION Both seems to gain something extra from the original principal – through interest and
profit
Trade Riba
CATEGORIES
In trading, buyer will gain and retain In riba based transaction, debtor will not
something in possession in return for retain anything from the creditor even
EVIDENCES profit achieved by the seller. though he gets to utilize money in the
first place. He is required to pay back
more than principle. No value added in
RATIONALE riba based transaction.
In trade, traders always exposed to the In riba based transaction, the creditor
concept of profit and loss. always gain at the expense of the debtor
at all cost. It is confirmed gain on the part
of creditor

Trading is win-win situation. Interest always win-lose situation or

lose-lose situation
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 END OF CHAPTER

INTRODUCTION

DEFINITION

CATEGORIES

EVIDENCES 
RATIONALE

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