“O, God increase my knowledge”
ISLAMIC BANKING
TRAINER MANUAL
RIBA MODULE
ISLAMIC BANKING
• ECONOMIC PHILOSOPHY OF ISLAM
– no concept of Riba because it encourages
• concentration of wealth in few hands
• creation of monopolies
• greed and selfishness leading to injustice and oppression
ISLAMIC BANKING
• ISLAMIC MODEL OF DISTRIBUTION
OF WEALTH
• Based on two underlying principles
– Importance of economic goals
– Real nature of wealth and property
ISLAMIC BANKING
• ISLAMIC MODEL OF DISTRIBUTION
OF WEALTH
• economic activities of man are lawful, meritorious
and at times obligatory and necessary
• however economic activity is not the basic problem
and therefore economic progress is not the be-all
and end-all of human existence
ISLAMIC BANKING
• IMPORTANCE OF ECONOMIC GOALS
• according to materialistic economics
– Livelihood is the fundamental problem of man and
economic development is the ultimate goal of human
life
• according to Islamic economics
– Livelihood may be necessary and indispensable but
cannot be the true purpose of human life
ISLAMIC BANKING
• REAL NATURE OF WEALTH AND
PROPERTY
• wealth in all its possible forms is created by Allah
• therefore wealth is the property of Allah
• the right of property which accrues to man is
delegated to him by Allah
• therefore Allah has the right to demand that
man subordinate his use of wealth to the
commandments of Allah
ISLAMIC BANKING
• REAL NATURE OF WEALTH AND
PROPERTY
• whatever wealth man possesses has been received
from Allah
• it should be used in such a way that it ensures
success in the world hereafter
• since wealth has been received from Allah it’s use
by Man should also be subject to the
commandment of Allah
ISLAMIC BANKING
• REAL NATURE OF WEALTH AND
PROPERTY
• Allah may command man to give a specified part
of his wealth to another man.
• Allah may forbid use of wealth in a particular
way
Hud 87
OBJECTIVES OF DISTRIBUTION OF
WEALTH
1. Establishment of a practicable Economic
system
Islam accepts the following thing within a certain limits:
a. laws of demand and supply
b. motive of personal profit
c. market forces
d. natural relation of employer and employee
2. Enabling every one to get what is rightfully
due to him:A: Elementary level of deserving wealth:
Factors of production
B: Secondary level of deserving wealth: poor
In the second verse:
3 Eradicating the Concentration of
Wealth through:
Prohibition of hoarding, interest,
gambling, speculation, Uqood Fasidah,
and Gharar
Holy Quran Says in Al Hashr 7:
The Factor of Production in Conventional System
• Capitalism has four factors of production
1. Capital - the produced means of production"
Compensation: Interest
2. Land -'natural resources'' (that is to say, those things
which are being used as means of production without
having previously undergone any process of human
production). Compensation:: Rentals
3. Labour -that is to say, any exertion on the part of man.
Compensation: Wages
4. Entrepreneur, or Organization - the fourth factor which
brings together the other three factors, exploits them and
bears the risk of profit and loss in production.
Compensation:Profit
The Factors of Production In Islam
• 1. Capital —That is, those means of production which
cannot be used in the process of production until and
unless during this process they are either wholly
consumed or completely altered in form, and which,
therefore, cannot be let or leased (for example, liquid
money or food stuffs etc.)
• Compensation: Profit
• 2. Land —that is, those means of production which are
so used in the process of production that their original and
external form remains unaltered, and which can hence be
let or leased (for example, lands, houses, machines etc.).
• Compensation: Rentals
• 3. Labour -that is, human exertion, whether of the bodily organs or
of the mind or of the heart. This exertion thus includes organization
and planning too.
• Compensation: Wages
ISLAMIC BANKING
• DIFFERENCE BETWEEN CAPITALISM,
SOCIALISM AND ISLAM
• CAPATILISM affirms an absolute and
unconditional right to private property
• SOCIALISM totally denies the right to private
property
• ISLAM admits the right to private property but
does not consider it to be an absolute and
unconditional right which can be used to cause
disorder on earth
ISLAMIC BANKING
• RIBA
– Riba means excess, increase or addition
– Riba in banking implies any excess
compensation without due consideration
First Revelation about Riba
– “That which you give as interest to increase the
peoples' wealth increases not with God; but that which
you give in charity, seeking the goodwill of God,
multiplies manifold.” (Surah Rome, Verse 39)
Second Revelation
– “And for their taking interest even though it was
forbidden for them, and their wrongful appropriation of
other peoples' property. We have prepared for those
among them who reject faith a grievous punishment ”
(Surah al-Nisa', verse 161)
Third Revelation
– “Believers! Do not swallow riba, doubled and
redoubled, and be mindful of Allah so that you
may attain true success” ( Al Imran, Ayat 130)
Fourth Revelation
Surah Al
Baqarah
Verses 274-281
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: 274281)
Prohibition of Riba in Hadith
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.
ISLAMIC BANKING
• CLASSIFICATION OF RIBA
– Riba-un-Nasiyah or Riba-al-Jahiliya
– Riba-al-Fadl or Riba-al-Bai
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)
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)
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
ISLAMIC BANKING
• CLASSIFICATION OF RIBA
– Riba-al-Fadl
• excess taken in exchange of specific commodities
which are homogeneous
• legal definition defers in every fiqh
ISLAMIC BANKING
• CLASSIFICATION OF RIBA
– Hadith prohibiting Riba-al-Fadl
• ‘sell gold in exchange of equivalent gold
• sell silver in exchange of equivalent silver
• sell dates in exchange of equivalent dates
• sell wheat in exchange of equivalent wheat
• sell salt in exchange of equivalent salt
• sell barley in exchange of equivalent barley
ISLAMIC BANKING
• CLASSIFICATION OF RIBA
– Hadith prohibiting Riba-al-Fadl
• sell barley in exchange of equivalent barley but if a person
transacts in excess, it will be riba.
• However sell gold for silver anyway you please on the condition
it is hand-to-hand(spot sales) and sell barley for date anyway
you please on the condition it is hand-to-hand(spot sales)
ISLAMIC BANKING
• CLASSIFICATION OF RIBA
– Imam Abu Hanifa on Riba-al-Fadl
• commodities must have two common characteristics
– Weight
– Volume
• includes all commodities having weight or volume
and are being exchanged
ISLAMIC BANKING
• CLASSIFICATION OF RIBA
– Imam Shafi on Riba-al-Fadl
• commodities must have two common characteristics
– be a medium of exchange
– be edible
• includes all commodities that are edible or can be
used as a medium of exchange(currency)
ISLAMIC BANKING
• CLASSIFICATION OF RIBA
– Imam Maalik on Riba-al-Fadl
• commodities must have two common characteristics
– can be preserved
– be edible
• includes all commodities that are edible and can be
preserved
ISLAMIC BANKING
• CLASSIFICATION OF RIBA
– Imam Ahmad Bin Hanbal on Riba-al-Fadl
• first citation conforms to the opinion of Imam Abu
Hanifa
• second citation conforms to the opinion of Imam
Shafi
• third citation includes three characteristics at the
same time i.e. edible, weight and volume
ISLAMIC BANKING
• CLASSIFICATION OF RIBA
– Present day Islamic scholars on Riba-al-Fadl
• if two characteristics i.e. weight and use as medium
of exchange is present then the following
transactions are not allowed
– a deferred sale of goods having weight and homogeneous nature
– a sale of unequal goods having weight and homogeneous nature
ISLAMIC BANKING
• THE LAWS OF RIBA AL FADL
– First law
• Exchange of any of the six commodities with itself
but differing in quality, is allowed only under
certain conditions
ISLAMIC BANKING
• THE LAWS OF RIBA AL FADL
– First Law
• CONDITIONS OF EXCHANGE
• Any difference in value/quality should be ignored
• The commodities should be exchanged in equal amounts
(equal weight and volume).
• No of direct exchange of commodities of the same kind
• A person should sell his commodity against cash at the market
value and buy someone else’s commodity in exchange of cash
proceeds at the market value.
ISLAMIC BANKING
• THE LAWS OF RIBA AL FADL
– Second law
• Exchange of a product with its raw material is
allowed under certain conditions
ISLAMIC BANKING
• THE LAWS OF RIBA AL FADL
– Second law
• Exchange of a product with its raw material is
allowed under certain conditions
ISLAMIC BANKING
• THE LAWS OF RIBA AL FADL
– Second Law
• CONDITIONS OF EXCHANGE
• If the characteristics of the product has been totally
changed by the industry, then different amounts can
be exchanged.
• If little difference has been made
– either the exchange should be in equal weights
– or one of the commodities should be sold in the market
and the cash proceeds used to buy the then one.
ISLAMIC BANKING
• THE LAWS OF RIBA AL FADL
– Third Law
• Exchange of any of the six commodities with one
another is allowed in unequal amounts but the
payment should not be deferred
– Provided that the general conditions of a sale contract are
fulfilled
ISLAMIC BANKING
• TYPES OF RIBA
– Riba al Nasiah is classified in two types:
• Sood-e-Mufrad( Simple Interest)
– interest calculated only on the initial investment
• Sood-e-Murakkab(Compound Interest)
– reinvestment of each interest payment on money invested to earn
more interest
ISLAMIC BANKING
• TYPES OF RIBA
– Quranic verses on absolute prohibition of Riba:
• “O believers fear God and give up the interest that remains
outstanding (i.e. whether it is simple interest or multiplied
interest) if you are believers” (Surah Al-Baqrah, verse 278)
ISLAMIC BANKING
• TYPES OF RIBA
– Quranic verses on absolute prohibition of Riba:
• “If you do not do so then be sure of being at war with God and
His Messenger. But if you repent, you can have your principal(
only not any kind of interest or premium). Neither should you
commit injustice nor should you be subjected to it”
Al-Baqrah, verse 278)
(Surah
ISLAMIC BANKING
• TYPES OF RIBA
– 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
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.
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
c: The Commercial interest was not in vogue in Arab
Ans. History shows that it was in vogue.
d: Doctrine of necessity and wisdom requires to allow
it
Ans. (i) It does not, it is not at all a necessity in Shariah.
Even from economic point of view, the modern interest
has brought more harm to the humanity than the
premature forms of usury.
(ii) The Principles of Shariah are binding, even
though their wisdom is not visible in a particular
transaction. They are based on Illat.
ISLAMIC BANKING
An Nur 33
Yaseen 71
Az Zukhruf 32
Al Ma’arij 24-25
Al An’aam 141
Al Hashr 7