By Yousuf Ibnul Hasan, Program Consultant, Faculty of Islamic Banking & Applied Finance, Iqra University, Karachi, Pakistan
We gladly publish this article Mr. Yousuf Ibnul Hasan sent us and which is taken from his book Magnificent of Islamic Finance. Islamicworld.it believes the riba issue is particularly significant, and intends to devote to it subsequent articles, with special reference to current experiences and specific applications in countries where Islamic finance is used.
Riba is the most hateful system, which eradicates human contentment and obstructs its civilized and impartial developments.
Riba, since the origination of human interaction for socio economic aspect, has been strictly prohibited, dispirited and detested in all faiths and mythologies. The three massively worshipped, Creed i.e. Islam, Christianity, and Judaism condemn the novel construal of Riba. The twentieth century had seen a flourishing research on the adversities of Riba comprehensively and economists agree on the view that religious restrictions should be imparted back for society’s wide-awakening.
The foremost reason for the prohibition of Riba was to safeguard the financial transactions or money matter that formulates extra liability, demand, exploitation or injustices. Any act, affair or transaction that has any kind of vagueness is treated as fraud with forgery, in reality that does not exist in its ethical condition, physically and theoretically. Such artificiality leads to unlimited liability, or demand that ultimately turns into a kind of scarcity of the useable in the society, discriminatorily building -up equally in surplus for little hands.
Riba in the form of methods, affairs and system is a the dangerous attack on peaceful mankind in a way that serves powerful, influential and cruel minded groups in ultimately making them get hold of the assets, properties and a wealth of people, organization or nations through dishonest means. Therefore, such as movements are seen and taken as totally inequitable and against the nature. This is the reason due to which Almighty Allah prohibited Riba with force and in strict words. Islam treats Riba as illegal acts and a social crime that leads to lethal crimes and incurable results in the community.
The practice of Riba in monetary affairs is prohibited due to many reasons which could be justified and explained by stating that Riba involvement in any human act for monetary benefit or commercial or business transaction develop liability and unusual demands on account of exploitation and selfishness on the part of the owner of the wealth. Additionally, this extra liability, or demand does not exist physically, thus taken as artificial that develops scarcity of utilities and recourses in the society.
Riba practices in the financial affairs, discriminatorily builds up surplus wealth and possessions for few hands. Riba can be classified as a dangerous method that acts as a weapon that clutches the assets and possessions of people and businesses through creed authority faithlessly. It can be supported with a saying that, “Power corrupts and absolute power corrupt absolutely”. Having unfairness in the practice of Riba, that crate injustice and selfishness, is against the principles for better communities, therefore, Almighty Allah forbidden Riba strictly to stop the birth of criminal
actions.
It is a universal truth that the “Nature is the limit in Islam” so any act or transaction being unnatural is regarded dejected and illegal. Riba, stemming in the socio economic skeleton, is restricted in Islam. The economic reasons have the bases for the Riba, which is prohibited in Islam. Almighty Allah has allowed the declaration of wars to remove acts, deeds and system that practices in an unnatural way and means that lead to Riba.
What is RIBA?
Any pay packets, revenues or reimbursements that are attained through sinful, immoral or depraved practices falls under Riba and such earnings are considered unjust and discriminatory for the society, which leads to human exploitation and criminal inclination.
What is Interest?
Any amount, earning or income that are taken, above and beyond to the principal amount, without any risk factor, efforts and activity for the sake of earning profit exclusive of loss sharing. This compulsory return, income, earning on a fixed term & fixed percentage, upon the principal amount, is an interest. We can also define interest as the price of the money, whereas money is just an intermediary between the exchanges of the transaction. Further to the above interest is guaranteed by the borrower to the lender along with the principal borrowing amount which is Shirk and not only the Sin. Reason is the guarantee that is given without knowing the future outcome of the transaction. The guarantee is only and only the power of Almighty Allah and any such act or deed that confirm the future action with commitment is direct encroachment in the jurisdiction of Almighty Allah which is in no case acceptable.
Fundamental Facts on Riba
The bases of Islamic thoughts have a conflict directly with the Riba based system having involvement of Riba being practiced in the life of people, in their imagination and in their morals. In other words: “No Islam exists in a place where there is Riba based system”.
The Riba based system is a misery on humanity as the faith, the morals or the imagination of life, but also in the every core of economic and practical life. It is the most hateful system, which eradicates human contentment and obstructs its civilized and impartial developments.
Islam has a complete ethical system that is supported by the realistic system as interlink. Ethics and reality cannot be separated in Islam and cannot be practiced alone. Islam has clearly stated the benefits of the following of ethics and reality that is to be followed by the followers in daily life. The successful Islamic economics does not ascend without ethics, which cannot be separated to the reality of life and its rational approach. As a result, practical life of the people cannot prosper without proper ethics.
Riba practices corrupt the individual’s ethics, behavior, and feelings towards the 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.
Today, investing the capital at minimum risk based over guaranteed return is commonly practiced for the funds received as deposit, and investing in risk and return. Thus, the interest (Riba) is repaid at lower to the depositor’s investment and higher to investment managers or vice-à-vies. Money lent on higher Interest (Riba) does not grow useful projects, but seeks the most lucrative opportunity, even if profit comes from the lower nature and the meanest tendency.
Islam is a connected system as it prohibits the dealing with Riba. It also defines all its systems based on providing the need for it. It organizes the aspects of social life of giving out the means of dealing without touching the growing human, social and economic development.
A true Muslim should have a firm belief that whatever Almighty Allah has prohibited, can develop human life in better and fairways. 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. Almighty Allah is the Creator of this life and makes man custodian to all the blessings for humanity. Mans determination towards the Almighty Allah overcome 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, if going against the prohibitions of Almighty Allah.
It is impossible to increase the economy of the world under current scenario or in a near future by treating Riba as an essential factor and considering Interest as a basic part of financial practices. This is done through making Riba, or interest as the myth or treated as a benefit for those who benefit from these are really gigantic organizations. The true intention to remove Riba from the practice of financial matters in an Islamic nation, decides to restoration of freedom from myth of these international player’s factions. When it is actually applied, it seeks decency, happiness, blessings, and cleanliness of morals and purity of the community; besides, the arena is open to the other rationalized system according to Allah’s will for humanity.
Riba was known before Islam, in which verses came to make it unlawful, had here main forms the three factors of production of a socioeconomic system that are Man, Money and Commodity are seen in the economic transaction as Riba Al Garrar (Act of Man), Riba Al Nassau (Compounding on Money lending) Riba Al Efadal (Commodity in barter).
Riba Al Nassiah:
Usamah Bin Zeid’s read between the lines that the Prophet Muhammad (Sallal La Ho Wa Aly Wasallam), “No Riba is legal except Al Nassieah”.
Ibn-Qatadah said with regards to Riba before Islam as, if a man makes a commodity and gives a time for payment, but if the purchaser fails to pay back then the seller charges more money over and above the sales price that holds up repayment.
Mujahid said, before the birth of Islam, if the man had to pay someone but delays the payment, then, the lender delays the time of repayment.
Abu Bakr Al Gases said that it was known that Riba before Islam was the deferred loan on a conditional increase in the principal. The increase fixes the basis of the terms for repayment. Almighty Allah prohibited such dealings.
Imam Al Razi said: Riba al Nassieah roots earlier than Islam because the monetary transactions used to take place on pre agreed basis. In return, he took from him a certain amount every month without taking the principal amount. When a date of payment came, he asked him for his capital, and if he was unable to repay, he increased in his fund and the term of repayment.
Usamah Bin Zeid‘s read between the lines that the Prophet (May, peace and blessings be upon him), “No Riba is legal except Al Nassieah”.
“You shall not lend upon Riba to your brother, Riba on money, Riba on virtual, Riba on anything that is lent for Riba”, Versus 23rd of the Deuteronomy.
“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”, The 22nd versus of the Exodus.
Riba Al Fadi could be seen when a man sells an article in exchange of another article having the
same quality and nature with an increase or decrease as like gold sold for gold, rupee for a rupee, corn for corn and barley for barley. This kind is considered as Riba as the 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.
Abu Saeed Al Qadri said, “Gold is in return for gold, silver for silver, maize for maize, barley for barley, dates for dates, salt for salt, like for like, hand by hand, he who increases or asks for increase, the giver and receiver both are making Riba”.
Abu Saeed Al Qadri further said that Bilal came to the Prophet, Sallal La Ho Wa Aly Wasallam with good superior quality dates. The Prophet Sallal La Ho Wa Aly Wasallam said, “From where did you bring that?” Bilal said, “We have badly some inferior dates that I exchange with two quantities from them in return for one quantity. The Prophet Sallal La Ho Wa Aly Wasallam) said, “Ah, it is the same like Riba; it is the same like Riba. Do not do it and if you want to buy, sell dates in return for another article, then buy in return for it”. Bilal did that and found the quantity of the dates after completing the exchange transaction were less than before.
Riba Al Gharar is the form of Riba, which can be of any type and any means that has ambiguity, vulnerability or chances or risk, fraud and forgery is involved. Like any sale or purchase of a commodity which is not present at the spot and the transaction is confirmed by the seller for an unknown unrealized or unseen commodity with just simply convinced to the buyer with word of mouth. The act of buyer is fraud and fall under the act of Garrar.
We can give another example to clear the concept by declaring the documents of transaction fabricating, changing in the originality to complete the transaction in self favor or declaring as genuine are fraud and forgery which is clear Gharar. In such cases, declaration of invoice as “over and undervalue” is just simple Gharar. It can also clear that the will of disease change for self benefit. Such acts, sale or declaration involves risk or hazard of one party of the transaction. It is also an act of dishonesty by either member of the contract.
Gharar has different forms and all considered Haram in Islam. Some of which are as follows:
1. Gambling.
2. Sale in which seller is unable to deliver.
3. Fake transaction or transaction in hope.
4. Sale against an unknown price without showing the transaction, commodity or kept hidden that buyer cannot examine.
5. Sale of goods without description and specification such as products with no specification of ingredients.
6. Sale of goods that do not have priced mentioned.
7. Agreement or contract for unknown work or unknown wages or salaries.
8. Sale or act or trying to convince the buyer or partner on false descriptions
9. Sale or act without allowing the buyer or partner to examine or appraise the transaction and put condition that stop the other party to calculate the risk.
The roots of Gharar refer to cheating and the Bay’ Al-Gharar refers to fraudulent exchange of goods either in the course of blurred pricing, deficient description of goods or insufficient data of product specifications. Bay’ Al Gharar therefore is a manipulative trade contract for either or both parties, lacking an imperative aspect of trading.
Today, some of the pessimistic scholars, by the influence of western capitalist, approached capitalist systems for the sake of confining prohibition only in the form of Riba-Al-Nassau, depending on what Usman had said, and on the description of ancestor regarding Riba transactions in a time of ignorance. They insisted that it should be allowed as it was permissible in a period of ignorance (before Islam). This trial is nothing but a feature of spiritual and mental defeat. Thus, Islam is not a Deen of formalities, but it is really a system based on original imagination. When it prohibits Riba, it does not forbid one class while allowing the others. Islam is against any kind of means of Riba that can be seen by visualization. It is very sensitive to the extent that it prohibits Riba Al Fadal that prevent the spirit of Riba and its feelings from far away. Therefore, any usurious operation is certainly unlawful as it came in the forms that were seen in the period of ignorance, if it includes the essential elements of Riba operation, or it has the description of Riba mentality. This is the mentality of selfishness, greed, individualism and gambling as long as it is dressed by this cunning feeling of gaining profit by any means. We must know this fact methodically and must have a firm belief that is taken as “proclaimed war from Allah and His Messenger against the person or community following Riba practice”.
Some of the classes are mentioned below, clearly defined in Islamic Economics. Islam strictly prohibits these as well as society disregard them due to their dreadful effect on social, moral, cultural, economical, financial and legal life styles of the society. The main classes of RIBA are as follows:
1 Income by exploitation of taking advantage of status and position,
2 Irregular weight and measures for profitability,
3 Wrong declaration for higher return,
4 Income by misconduct (Transgression, delinquency),
5 Felony & Law breaking,
6 Mistrust, commit a breach or false commitment for benefit.
7 Manipulation of affairs for benefits at a cost and efforts of other,
8 Betting and Gambling in all form,
9 Promising by covering honorable, nearest, dearest or lovable to secure the benefit,
10 Mendacity, (lies)
11 Speculation, and unfounded information,
12 Trading of commodities prohibited by Islam and law of the land,
13 Income from the practices or activities that are prohibit by Islam,
14 Interest that is the price of money taken in cruelty, exploitation, wrong means, false declaration, and advantage based on weak or wrong calculation,
15 Fix return on loan without appraising the usage of funds given to user of fund,
16 Keeping deposit with person or institution having involved in Riba practices,
17 Using deposits as investments and declaring non-transparent results that led to discrimination of sharing in accordance with investment percentage,
18 Holding and storage of currency or commodity that affects economic activities negatively,
19 Storage and holding of commodities that leads to scarcity in supply of any commodity against the market demand,
20 Monopoly and monopolization of activity, transaction and business to take sole benefit, stopping the growth of employment and earnings,
21 Grabbing the wealth,
22 Illegal encroachment on the property that is not owned by encroacher and that was not purchased, gifted or legally transferred to title made,
23 Using public money for luxuries and self-usage,
24 Misusage of rights belonging to minors, orphans, widows and women,
25 Misappropriations among share division incase of profit or inherited wealth,
26 Miscalculation of share for inherited wealth under law of inheritance,
27 Income by power and cruelty,
28 Misuse of power and status,
29 Theft,
30 Burglary,
31 Smuggling,
32 Bribery
33 Human trading
34 Adultery or marriage for seeking monetary benefit from either party or entering in extra marital act for greed, selfishness, lust or sex pleasure with or without money.
35 Misuse of status as public representative and obtain benefit as Public Representative.
36 Misuse of ownership right on the commodity by charging over and above the prevailing price, furthermore, avoiding payment to state, that is its right toward revenue, by hiding the earning to such transaction. (premium on commodity for extra benefit), &
37 Abuse of labor, especially child and women.
Profit
Profit is the ultimate purpose of financing with the exception and provision of loss in the transaction. Profit can be defined as:
“The return on investment after deducting principal, cost and expenses from the sales and services proceeds of the investment transaction. The balance between the principal investment and principal proceeds is the profit. Profit is distributed and not given or charged. Profit is ascertained on the basis of the results of the transaction by applying the below given formula:
Financing amount, less Sales or Services = Gross Profit, less Cost and Expenses = equal to Net profit divided according to pre agreed ratio of investment (ROI) to structure the capital of the project or the transaction.
In financial system when the equity or profit is sure it is shared in according to the Ratio of Participation whereas in conventional system Rate is applied on the principle amount no matter return on transaction is realized or not.
Conditions of financial transaction
Prior to entering into financial transaction the proposal is made by keeping the clear involvement of all expenses and obligation on the basis of estimation. Thus the profit that is derived from the transaction remains on the basis of accrued and estimated. Profit cannot guarantee, but time limitations of transaction can be fixed. The terms and conditions pertain to the transaction heads must be pre- agreed and amount of Gross profit and Net profit must be declared with distribution ratio details and every member of the contract should know individual share.
The profit is divided between the investor and the one who uses it on pre agreed terms, working and responsibilities for the financing purpose as profit offset the financing and develops ownership between financier and entrepreneur who is the user of financing. Thus Profit cannot be declared as one-side result but it must be transparent giving the detail of the transaction and its sharing including the shareholders because any transactions that have pre-assume or pre-declared profit is basically it is consider as debt base transaction and categorize as Loan instead of financing. Profit is divided by the way or ratio and rate cannot be applied.
Financing and not lending to avoid Riba in economic activities
Using the slogan of Islam or associating any transaction, project or activity with Islam without going into the actual guidance and requirement of Islamic teaching is just to use the name of Islam and its system for self benefit or to earn in means that fall into Riba classification. Financing is a simple way to use in participation from the beginning to the end and result which is the end of the financing is shared in participation and not by application of the rut. Financing is the method that stresses on the human capabilities and the unlimited power and abilities granted by Almighty Allah to man by declaring the man as Ashraf-Al-Makhlooqat, that confirm that without man nothing could be seen as an economic activity and any economic activity that do not benefit the mankind is not the financing.
