Abstract
The Prophet warned against riba in all of its manifestations in his sermon at the end of the
pilgrimage. The Holy Qur'an and the Prophet's Sunnah both provide examples of riba, and this
article explores its principles and how they relate to Islamic economics. The page also
illustrates consecutive Qur'anic verses and their interpretations based on Prophetic hadiths. The
authors boldly rejected the logic, stating that any increase over and above the principal should
be riba and as such it is illegal, in response to a debate in which modernists claimed that what
is forbidden in the al-Qur'an is the form of riba, which was the then-dominant lending practice
in the pre-Islamic era. The modernists also brought up certain contentious topics, such as the
distinction between riba and usury and riba on an individual vs institutional level. With enough
Shari'ah references, all of these assertions are refuted. The writers thoroughly examined the
inherent virtues of Islamic banking while replying to the preceding difficulties, and they also
revealed the differences between Islamic and conventional banking. In this work, the authors
emphasize that any kind of riba must be scrupulously avoided in the Islamic Banking System.
1.Introduction
Islamic banking's primary goal is to perform interest-free operations in accordance with
Shariah regulations and to participate solely in halal transactions (permitted). The most
significant component of Islamic banking is the consolidation of risks among investors,
institutions, and borrowers. With an emphasis on justice and independence, the Islamic Bank
is run in accordance with Allah Almighty's directives and is both centrally and independently
controlled. Islam is a Whole Way of Life because it is based on the teachings of the Almighty
Allah and the acts of the Holy Prophet Muhammad (PBUH). Humanity has received the
guidelines contained in the Holy Quran from Allah Almighty. It encompasses every facet of
everyday life as well as all attempts (religious, social, and economic) to prosper in this life and
the next. There are specific guidelines for halal. Halal and haram foods must follow certain
rules. Islam is a universal religion that encourages goodwill, social justice, and fairness in
business dealings for the benefit of humanity (Chapra, 1985). The rewards promised in the
future would be revoked since Allah forbade you from engaging in usury (usury), according to
the Prophet (peace be upon him). Save your cash for yourself. You won't encounter or instigate
any prejudice. Since it has been decreed by Allah, there won't be any interest. The foundations
of riba are examined in this article along with its connection to Islamic banking and economics,
as taught by the Prophet in his Sunnah and outlined in the Holy Quran.
2. Riba is a forbidden thing in Shariah
The Arabic word "riba" may mean "increase," "expand," "increase," "inflate," or "excess" when
translated literally. Sharia really has a variety of connotations, despite being often translated
into English as "usury" and "interest." According to sharia, "riba" is defined as "premium"
since the borrower is required to pay it. There has been no extension of the initial duration of
the loan obligation to the lender. Fiqh defines riba as the difference between two equal values
that are traded for the difference but are not repaid. However there are two distinct ways that
the term "riba" is used in Sharia. First place went to Riba al-Nasi'ah, while second place went
to Riba al-Fadl. Islamic scholars have made an effort to define riba in a manner that is more in
line with the context of the verses of the Quran and associated mantras. As a consequence of
the acquisition or sale of products, they define riba as an increase or excess that goes to the
owner (lender) without the need to repay any money to a third party.
Arabs living in pre-Islamic and pre-Islamic times are used to being paid for their debts before
receiving a set sum that maintains a positive balance. When the loan is due to be repaid, the
borrower must make the appropriate payments. If the borrower is unable to do so, the loan's
amount and term will be increased. As a result, trade entails stable circumstances, the payment
of interest, and other types of speculation, all of which were significant components of the preIslamic trading system.
Dear Believers, To succeed, refrain from usury and fulfill your obligations to Allah (3:10). The
major justification for its prohibition is the notion that riba makes the wealthy wealthier and
the poor poorer. Islam discourages inequality in economic dealings between partners. It is
believed that loan sharking often and persistently widens the wealth divide in society. It has
been shown that centralized decision-making offers a larger possibility for improved returns
thanks to the advantage of equity involvement (Wiltzman, 1984; 1985). Riba-based finance is
accessible to borrowers who have the financial means to pay back the loan, regardless of how
successful or productive the underlying company is.
3. The prohibition of riba in the Al Quran with reference
The prohibition of riba (usury or interest) is mentioned in the Quran in several places. Here are
some references:
Surah Al-Baqarah, verse 275: "Those who consume interest cannot stand [on the Day of
Resurrection] except as one stands who is being beaten by Satan into insanity. That is because
they say, 'Trade is [just] like interest.' But Allah has permitted trade and has forbidden interest.
So whoever has received an admonition from his Lord and desists may have what is past, and
his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the
companions of the Fire; they will abide eternally therein." Surah Ali Imran, verse 130: "O you
who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may
be successful." Surah An-Nisa, verse 161: "And [for] their taking of usury while they had been
forbidden from it, and their consuming of the people's wealth unjustly. And we have prepared
for the disbelievers among them a painful punishment." Permissible transactions: The Quran
encourages legitimate business transactions and trade that are based on mutual benefit and
fairness. It allows for profit sharing, where both the investor and the entrepreneur share in the
profits or losses of a business venture, as well as sales transactions where goods and services
are exchanged at a fair price. Importance of justice: The prohibition of riba is based on the
principle of justice and fairness in economic transactions. The Quran emphasizes the
importance of treating others fairly and warns against exploiting people through usury and
unjust enrichment. In summary, the prohibition of riba in the Quran is a central principle of
Islamic finance and economics. It is based on the principle of justice and fairness in economic
transactions and encourages legitimate business transactions and trade that are mutually
beneficial and free from exploitation.
4. Prohibition of Riba in the Sunnah with reference
The prohibition of riba (usury/interest) is mentioned in several places in the Sunnah (the
collection of the sayings, actions, and approvals of the Prophet Muhammad, peace be upon
him). One of the most well-known hadiths on this topic is:
"Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt,
like for like, equal for equal, hand to hand. If different types are exchanged, it must be done in
equal quantities and on the spot. Whoever pays more or demands more has engaged in riba.
The taker and the giver are equally guilty." (Narrated by Muslim). This hadith highlights the
importance of exchanging goods of equal value in a transaction, and prohibits the exchange of
different types of goods in unequal quantities. It also makes clear that both the borrower and
lender are equally responsible for engaging in riba.
Another hadith that emphasizes the prohibition of riba is:
"The Prophet, peace be upon him, cursed the one who consumes riba, the one who gives it to
others, the one who writes it down and the two who witness it, saying they are all alike [in
guilt]." (Narrated by Muslim). This hadith makes clear that riba is not only prohibited, but it is
a serious sin in the eyes of Allah, and all those who participate in it are equally guilty.
a few more hadiths from the Sunnah that emphasize the prohibition of riba:
"There are seventy-three categories of riba, the least of which is equivalent to a man committing
adultery with his own mother." (Narrated by Ibn Majah). This hadith highlights the severity of
riba, equating it to one of the gravest sins a person can commit. "A dirham of riba that a man
receives knowingly is worse than committing adultery thirty-six times." (Narrated by
Ahmad).This hadith again emphasizes the seriousness of engaging in riba, equating it to
committing adultery multiple times. "The Messenger of Allah, peace be upon him, said: 'Allah
has cursed the one who consumes riba, the one who gives it, the one who writes it down, and
the two who witness it. They are all the same.'" (Narrated by Muslim). This hadith reiterates
the curse on all those who participate in riba, including the borrower, the lender, the scribe who
writes down the transaction, and the witnesses who attest to it. "On the night of the Ascension,
I came across people whose bellies were like houses with snakes visible from the outside. I
said, 'Who are these, Gabriel?' He replied, 'These are people who consumed riba.'" (Narrated
by Ibn Majah). This hadith uses a vivid metaphor to illustrate the spiritual consequences of
consuming riba, depicting those who engage in it as having snakes in their bellies. These and
other hadiths from the Sunnah make it clear that riba is a grave sin that is strictly prohibited in
Islam.
5. Modernists’ versus conservatives’ views on Riba
Prior to and throughout the lifetime of the Prophet Muhammad, interest was not permitted
(SAW). Interest, which is effectively a rent payment for money, quantifies the cost of a loan.
Islamic principles, laws, and regulations (Shariah) unequivocally restrict all transactions,
including the payment of interest (Hasnuddeen, 2009). Two other religions, Judaism and
Christianity, officially forbade the gathering and sharing of interest (Kareem, 2017). The debate
over riba between modernists and traditionalists has its roots in early Islam and centers on the
issue of whether or not certain types of riba are indeed forbidden by the Qur’an. Was this a
case of buying and selling (riba al-fadl) or lending and borrowing? One argument holds that
the Qur’anic prohibitions against riba were first thought to apply solely to loans of money and
food, with everything else being seen as a later development. Another reasonable argument is
that riba al-fadl originated in the hadith and claims that no viable definition of riba using the
hadith has been found. A relatively modern interpretation holds that the Qur’an explicitly
mentions the existence of riba in sales and loans prior to the advent of Islam. The fundamental
idea of the Qur’an is elaborated and explained in hadith and legal formulations. Additionally,
because money may always be changed into a good, it is thought that riba al-fadl follows
directly from riba al-nasi’ah. In its current form, the argument centers on the concept of riba,
namely whether riba refers to all loans or just interest-bearing loans that benefit the powerful
and wealthy at the expense of those who are economically disadvantaged. Whether the
objective prohibition pertains to a loan for spending or investment in a business venture,
whether it prohibits nominal or real interest, whether it applies to compound or simple interest,
and whether it applies to an individual or an institution as the borrower. It also depends on
whether it prohibits usury but not interest or whether it prohibits the charging of interest
altogether. When they are utilized, additional costs are allowed:
1. For objectives other than the dominant community’s exploitation of the weak;
2. For loans like to those that were common before the advent of Islam;
3. For current interest-based banking transactions but not for interest transactions;
4. For business investments but not for loans for consumption;
5. For loss to the creditor owing to inflation; and
6. For simple interest.
The conservative perspective is opposed to any type of fixed or preset interest, in contrast to
this pragmatic outlook. They are forbidden by the Qur’an from taking a fixed charge on top of
the principal loan amount. This viewpoint holds that because interest is added to the main debt,
it constitutes riba and is thus forbidden by the Qur’an. Hence, riba is defined as any definite
anticipated return on the use of money. Three crucial elements form the foundation of Islam’s
vehement rejection of riba. Riba encourages the propensity for money to concentrate in the
hands of a select few, which lessens interpersonal empathy. Islam outlaws financial
transactions profits unless the recipient is exposed to the risk of possible loss; a legal guarantee
of at least minimal interest would be seen to be a guaranteed profit. Islam holds that acquiring
riches by interest or usury is more arrogant than succeeding through hard work and
determination.
Here, a variety of modernist and conservative viewpoints and justifications for the riba are
provided.

Riba is unlawful since it is unjust and exploitative. Modernists want to draw attention
to the moral implications of the riba’s ban, claiming that the Al-reason given in the
Qur’an for this prohibition was injustice and suffering. The writings of early
philosophers like Imam Razi and Ibn Qayyim, who appear to denounce the exploitation
of the poor rather than interest, also lend some credence to their stance. Several
proponents of this movement attempt to draw a line between what is legitimate inside
the conventional financial system and what is not.

Some modernists assert that the pre-Islamic practice of riba is forbidden by the Qur’an.
Riba is unique to the Arab region and the pre-Islamic era. The debtor was required to
pay a set amount to the creditor in addition to the principal in order to borrow money
for a specified period of time. This supplementary payment, which may be more than
the underlying duty, was prohibited by a Quranic injunction. This decision maintains
the legality of the first term loan increase. Therefore, it would be illegal to postpone the
maturity date in exchange for a second increase at maturity. This perspective appears
to be based on Ibn Jarir al-tafsir Tabari’s (al-Qur’an commentary) assessment of riba
as a pre-Islamic practice; yet, it does not state openly and publicly that riba is acceptable
without limitation. The Qur’anic prohibitions against riba, commonly known as
“interest” or “usury,” have also influenced the discussion. Modernists argued that riba
is not “usury,” but rather “interest” when it equals or surpasses the principal. Diverse
interpretations of this divine prohibition date back to the first century of Islamic history,
when ‘Umar Ibn al-Khattab was quoted as saying, “The final verse to be revealed was
the verse against usury, and the Prophet died without issuing a definitive verdict on the
issue of usury. Oppose usury and similar behavior.

Some modernists make the distinction between “consumption loans” and “investment
loans,” contending that riba is not allowed on consumption loans but is allowed on
investment or production loans. The Qur’anic prohibitions against riba are said to be
based on the idea that people borrow in order to sustain a minimal level of life. AlQur’an discouraged excessive consumerism in order to prevent exploiting
economically vulnerable parts of society. It is thought that the main justification for the
riba prohibition in the context of loans for business investments is that it produces
income without the lender’s involvement. They back up this claim with historical data,
showing that borrowing for business or commercial reasons was common in the early
Islamic period and that the only means of accumulating wealth were via sharing and
cooperation. Furthermore, it is thought that most loans in seventh-century Arabia were
for consumption or urgent needs rather than for productive purposes; hence, riba
interest on commercial loans is not prohibited in Islam. Contrarily, orthodox writers
make a great effort to disprove this notion. They contend that riba-based transactions
are still covered by the law even if they weren’t being used when the legislation was
being written. To support their argument, they assert that many of the drinks used today
did not exist when the Qur’anic ban on khamr and alcoholic beverages came into effect.
Nonetheless, everyone concurs that they will remain illegal. More historical proof
indicating the prevalence of commercial loans in early Islamic civilisation is also
provided by those who support this position and dispute the historical information
provided by modernists. The Egyptian scholar Shaikh Abu Zahrah stated, “There is no
evidence to substantiate the idea that al-Jahiliyyah riba (pre-Islamic riba) was on
consumption loans.” In support of this claim. Production loans are the loans for which
a historian really finds justification. The location of Makkah, the conditions of the
Arabs, and the commercial activity of the Quraish all lend credence to the claim that
the loans were for production rather than consumption.
6. Principles of Islamic Banking and Finance
The foundation of Islamic finance is the idea that money shouldn't have any intrinsic value. It
merely serves as a means of exchanging goods and services that are valuable. The belief that
you shouldn't make money from money is connected to this way of thinking about money. This
implies that engaging in interest-related activities, such as paying or receiving it, should be
avoided wherever possible. (What Is Islamic Finance? n.d.).Islamic finance is also based on
the principle that it should not hurt anyone. Islamic financial services should refrain from
investing in things like alcohol, tobacco, and gambling because of this.
Islamic financing also promotes collaboration. This means that it is best practice to share both
the rewards and the risks. This might happen between two people, between a person and a
business, or between a business and another business.
Islamic banking, Islamic finance, or Shariah-compliant finance are terms used to describe
financial transactions that adhere to the Shariah (Islamic law). Two fundamental tenets of
Islamic banking include sharing in profits and losses and prohibiting lenders and investors from
obtaining and disbursing interest. All of the social and economic needs of human life are met
by the values and objectives put out by Islam. Islam is a religion that not only organizes a
person's life properly, but also places a strong emphasis on the success of the hereafter. Sharia,
which means "clear way," is the name given to Islamic law. The foundation of the current
financial system is illegal and goes against Islamic banking principles. Below, we go through
some of the key principles of Islamic Banking and Finance:
(Trinidad, 2023)
1) Collecting interest payments from creditors(Ban on Riba):
The precise meaning of Riba has several diverse meanings. It is a word from Arabic
that approximately translates as "exceeding" or "growing" in English. It is frequently
associated with interest and usury, which is the practice of charging excessive interest
rates. Interest is viewed as a serious sin in the Qur'an because it encourages inequity.
Anybody who receives interest is supposed to donate the money to a charitable
organization since it is believed that interest widens the social gap between the rich and
the poor. Islamic scholars mention two types of riba:
 Rifa in a loan agreement (Riba al-Nasiyah)
 Riba in a purchase or selling agreement (Riba al-Fadl)
Allah forbids the consumption of riba and declares it to be a form of selling
Islam views interest-bearing loans as an abusive practice that benefits the lender at the
expense of the borrower. Interest is considered usury (riba) under Sharia law, which is
absolutely forbidden. The explicit justification for this prohibition can be found in the
Quran which also gives shape to the fundamental principle that underpins the Islamic
economic system. This principle states that there can never be profit without the
acceptance of the associated risks, and that profit must always be the direct result of
human activity. So, regardless of the investment's type or outcome, any positive, fixed,
and/or guaranteed return rate is strictly prohibited. In specifically, ribà arises when an
interest rate, whether positive or negative, is fixed and is linked to the time factor and
to the loan amount, regardless of the economic outcomes achieved through the usage
of the borrowed funds.
Loans (s. qard) have been specifically designated by Allah as a type of charity, sadaqah,
which must be provided freely in goodness (hasan) to someone in need for the benefit
of Allah or to someone who is entitled to your obedient support, such as parents or
family members. In addition, Allah has set the payment of debts as the sixth of the eight
divine causes for which He has commanded every Muslim with sufficient money to
give the Zakat alms every year. It is a payment that is overdue for the beneficiaries He
Himself has designated as qualified.
2) Profit and Loss sharing:
One of the fundamental tenets of Islamic finance is that partners should split profits and
losses based on how much of a role they had in the company. On the rate of returns,
there will be no assurance that Muslims will act as partners rather than creditors. Islamic
banking encourages risk sharing in business transactions. According to the principles
of Islamic banking, when two or more parties share the risk, the burden of the risk is
decreased and split among the parties. Hence, it will boost the state's economic
activities. In Islamic finance, parties to contracts share in the transaction's gains, losses,
and dangers. Nobody can gain more from the deal than the other party.. It is based on a
system whereby a group of people pool their risks collectively, and their payments
resemble premiums that an Islamic banking institution invests in a mudarabah
arrangement on their behalf. Islamic banks and their customers are partners, and
because both sides of financial intermediation are based on sharing risks and rewards,
the transfer of cash from customers to the bank (depositing) is based on revenue-sharing
and is typically computed ex post on a monthly basis. A mutually agreed-upon fixed
rate or a mutually agreed-upon ratio, like in the case of mudarabah, is used to move
cash from the bank to its clients based on profit-sharing (loan, financing). Instead,
Islamic finance mandates that financing be given under the profit-and-loss sharing
basis. Finance can be made available through a variety of transactions under sharia law.
Each kind outlines how risk is distributed between the company and the financier.
3) Putting money into companies that engage in illegal or Haram activities:
In Islam, it is forbidden to engage in any business that threatens societal obligations or
is damaging to society such as pornography, prostitution, alcohol, pork, and drugs.
Investments in these sectors are prohibited, as is participation in the mutual funds that
would support their growth. The idea of haram, which from the perspective of the sharia
means "unlawful," serves as the foundation for prohibitions. Therefore, it is forbidden
to use, consume, trade, or (directly or indirectly) invest in certain products or activities,
such as the production and sale of alcoholic beverages, the raising of pigs for food
production, the processing and sale of foods containing pork, the use of weapons,
tobacco, pornography, gambling, and placing bets. The restriction on investments in
shares of businesses that are directly or indirectly engaged in the trading or production
of the aforementioned items, whether they are publicly traded or not, is another
significant derivation from this principle.
4) Risk and ambiguity (Gharar) & Gambling (Maisir).
Muslims are prohibited from taking part in ambiguous and doubtful transactions,
according to Islamic financial norms. Islamic law stipulates that both parties must
exercise sufficient control over the business. Also, all information should be disclosed
to all parties so that the profit and loss are split fairly. As a result, Islamic financial
institutions are prohibited from participating in contracts where the ownership of goods
depends on a future event that is unclear. Profit based on uncertainty is expressly
forbidden in the Quran (ghàrar). The primary subject of the ghàrar ban is the nature and
intent of contracts in Islamic financial instruments. Contracts must not include any
elements of ambiguity in them, such as the uncertainty about the contract's nature or its
purpose, or the uncertainty of the price of the products that are the subject of the
transaction, for them to be legally binding. As a result, these type of contracts, which
are characterized by the uncertainty of their implications, are not accepted in Islamic
finance.
Any type of speculation or gambling, known as Maisir, is categorically forbidden by
Sharia. In Islam, it is forbidden to use unethical ways to acquire wealth or engage in
gambling. Because traditional insurance products are a kind of gambling, they will be
shielded from Muslims. On the other hand, Islamic banking practices in Takaful
incorporate shared risks and reciprocal responsibility. As a result, transactions that
depend on chance to decide enrichment (like as gambling and placing bets) and involve
speculative components (such as so-called derivative financial instruments and hedging
transactions like swaps) are prohibited.
5) The requirement that all financial transactions be underwritten by real assets
Islamic banking does not finance speculative investments like margin trading or
derivatives trades; rather, it finances only actual transactions with underlying assets.
Collateral is used to support lending or financing; lending without collateral would
typically be viewed as having a speculative component or posing a moral hazard.
Similar to this, only investors with several years of successful company experience are
often sponsored in order to avoid speculation and moral hazard. All financial
transactions must be supported by actual activities rather than just the exchange of
money or the buying and selling of financial obligations (as it is in the case of swaps
and derivatives in general).
6) Islamic Finance's Corporate Social Responsibility & Zakat
Islamic finance is an economic theory founded on religious principles that aims to
promote social harmony through the equitable distribution of income. As such, it is an
economic theory focused on social responsibility. As a result, academics have been
concentrating more and more on themes like Corporate Social Responsibility (CSR)
and the development of a business management strategy based on medium- to longterm sustainability.
In accordance with Islamic law, there is a property tax called zakat, which enables a
fair distribution of wealth. Muslims' accounts during the holy month of Ramadan have
a reasonable amount of Zakat taken out of them in accordance with Islamic banking
regulations. Islamic banks support this social responsibility and give the money to the
less fortunate. A bank that practices Islamic banking must fully comprehend the goals
of Islamic economics and conduct its business in accordance with Islamic law. Islamic
banking is believed to be more socially conscious than traditional banking since Islam
places a strong emphasis on social justice. Islamic financial institutions view social
responsibility as a combination of generosity and ethics. Organizations and people all
around the world support Islamic financial institutions because they are thought to be
more morally and ethically fulfilling according to sharia law. The eternal and
unchanging divine revelation is the source of ethics and morality. Thus, morality and
ethics serve as stronger guidelines for businesses as they implement their business and
social responsibility tasks. Islamic ethics and sharia banking are related in a number of
ways, such as those that concern CSR or the welfare of persons and communities.
Islamic banking places a strong emphasis on moral ideals and social responsibility, and
it is underpinned by sharia law's tenets. Usury, gharar, environmental destruction, and
a greater emphasis on moral and ethical behavior are all prohibited by Sharia law.
Islamic banking practices include zakat, qard al hasan (interest-free loans), waqaf,
sadaqa (charity), and staff CSR initiatives.
According to Islamic banking principles, we should invest in economic sectors that will help
us reach the monetary and social objectives outlined by Islam. They were developed with the
intention of fostering economic growth. So, it stops our money from being used improperly.
7. Islamic And conventional Banking: A Comparison:
The present state of banking is a very recent development. Yet, before modern banking was
invented, the typical way of transferring money from savers to investors was direct finance, in
which the owner of the capital could deal with the user of the capital directly. As commerce
and industry developed, funding needs for productive enterprises expanded. As direct financing
was found to be an inadequate tool for such transfers, banks emerged on the scene to act as a
financial intermediary between savers and investors. Moreover, in recent years, they have
evolved into companies that engage in any or all of the different banking operations, including
collecting, receiving, paying, investing, trading, servicing, and replacing and claiming to
money in both local and foreign ways. The word "bank" refers to organizations that provide
the general public deposit services in a more narrow definition. Nonetheless, the employment
of institutions for recognizing amassed wealth may be the most notable aspect of the
organization of contemporary banking and finance. Loans Based on deposits, financial
assistance is provided for various commercial and industrial ventures that include men.
Banking systems not only make the actual value of their deposit services available to society,
but they have also increased the effective use of such funds by a system of discount and reserve
which is of a moderately current origin. This is true even though credit, the accretions of wealth,
represented by bank deposits, have become a powerful force in the modern world. Commercial
banks carry out all these functions and are regarded as the main output of this phase.
As a result, banks succeed at a crucial point in the contemporary economy. The process of
financial intermediation between savers and investors, however, makes extensive use of
employment and income-generating assets, which ultimately promotes social welfare and
economic growth. The ability to repay deposits to depositors, who are mostly small serve and
include such weaker sectors of society as widows, incapacitated orphans, and the elderly who
might otherwise make no money-making use of their assets, is another aspect of banks that
promotes social welfare. Also, banks are manufacturers for credit. This benefits the general
population and keeps business and industry moving. By providing opportunities for investment
and secure deposit handling, they encourage the habit of saving and the growth of capital. A
sound banking policy may help to mitigate the effects of an economic crisis, but a poorly
designed or managed banking system can have a significant negative impact on commerce and
industry and potentially the whole economy. The intellectual underpinnings of an Islamic
financial education go beyond how production variables and financial conduct interact, with
banking being the most established aspect of this process. The Islamic financial system accords
equal weight to the moral, moral, social, and mystical dimensions in order to improve parity
and fairness for the benefit of development as a whole, in contrast to conventional financial
procedure, which focuses primarily on the economic and financial structures of deals. The two
systems are comparable in that, although being governed by Shari'ah law, banks in an Islamic
system perform the same tasks as those in a traditional one, such as acting as financial
intermediaries and administrators of the economy's payment system. They are required in both
systems for the same reason—to take advantage of inadequate financial claims, incomplete
information, and transaction expenses associated with searches and purchases. diversification
by the existence of knowledge and economies of scale in transaction monitoring, as well as
surplus and deficit units. Financial intermediaries that act in accordance with the Sharia in an
Islamic system, as do their counterparts in a conservative society, may rationally be expected
to display Economics of gage with regard to these costs. The Islamic depository financial
intermediaries turn business liabilities into a range of obligations to meet the preferences and
circumstances of the surplus units, exactly as in the latter system. On the other hand, there are
many differences between Islamic and conventional banking because of the way that they
operate. Contrary to Islamic banking, conventional banking is defined as accepting "deposits
of money from the public for the purpose of loaning or investing, repayable on demand or
otherwise and withdrawable by cheque, draft, order or otherwise." The Islamic Bank essentially
implements a new banking concept in that it firmly complies with Islamic Shari'ah in the realms
of finance and other dealings. Also, the Bank's operations in this manner must represent Islamic
society. Hence, fostering religious fervor among the populace is one of its main objectives. “
Consequently, it is clear that Islamic banking has distinct tasks and goals than traditional
banking. The following factors make Islamic banking more necessary than traditional banks in
close proximity to society.
a) The goals of Islamic finance are good ones from a philosophical standpoint. In other
words, since Allah is the owner of all resources and the one who created them,
organizations or people have a vicegerent function to perform in society. Islamic banks
cannot, however, do business as usual; instead, they must balance moral principles with
economic principles.
b) to provide loans to people who possess the necessary skills but lack the resources to
provide collateral to traditional financial institutions, strengthening the social fabric at
the base.
c) to come to social agreements based on the Islamic principles of giving and caring in
order to create stability on the economic, financial, and political fronts.
The debtor-creditor relationship between depositors and the bank on the one hand, and between
and the bank on the other, is the essential foundation of conventional banking. Interest is
calculated as the cost of borrowing, which reflects the risk associated with using credit.
Contrarily, in Islamic banking, the creditor should not take unfair advantage of the borrower
since a loan is designed to be provided or taken, free of charge, to meet any situation. The first
Islamic principle guiding these sorts of transactions is "Deal not Unjustly," which states that it
often occurs when money is loaned out on the basis of interest that it results in some kind of
injustice. And you won't experience unfair treatment. The debtor-creditor relationship is not
the foundation of commercial banking in an Islamic context in this instance.
The second rule of Islam's financial transactions is that no reward should come without a
corresponding risk. Both labor and capital are suitable uses of this idea. There is no
compensation for money unless it is exposed to business risk, just as no remuneration for labor
is permitted until it is put to use. As a result, the two aforementioned principles have led to the
advancement of financial intermediation within an Islamic framework. As a result, Islamic
financial relationships are participatory in character. Hence, participation in profit and loss
takes the place of the institution of interest. In other words, a variable rate of return based on
actual economic activity has replaced a fixed rate of interest. The distinct characteristics that
distinguish Islamic banking from the traditional interest-based commercial banking system are:
A) the Islamic banking scheme is fundamentally a profit and loss sharing system rather than an
interest banking scheme; and B) investment loans and advances under this structure of banking
must simultaneously serve the benefit of the investor and the benefit of the local community as
we see fit.
The distinguishing features of the conventional banking and Islamic banking may be shown in
terms of a box diagram as under:
Conventional Banking
Islamic banking
1. The role and operating modes and 1.The structure and operating
modes of
structure of conventional banks are Islamic banks are based on the principles of
based on man- made values.
Islamic Shari”ah
2. The investor is guaranteed of a 2.In constraint , it encourages risk sharing
determined rate of interest.
between providers of capital (Investor ) and
the user of funds (entrepreneur)
3. It goals at maximizing profit without 3. It also goals at exploiting profit but subject
any limit.
4. It does not transaction with zakah
to Shariah restrictions.
4. In the modern Islamic Banking system . it
has become one of the service – oriented
roles of the Islamic banks to accumulate and
distribute zakah.
5. Lending money and getting it back with 5. Participation in partnership business is the
interest
is the important function of the essential functions of the Islamic Banks.
conventional banks.
6.Its possibility of activities is narrower when 6. Its opportunity of activities is wider when
compared with an Islamic bank.
compared with a conventional bank. It is in
consequence, a, multipurpose institution.
7. It can charge extra money (compared rate 7. The Islamic banks have no providing to
of interest) in case of defaulter.
charge any extra money from the defaulters .
8. Throw base on interest, commercial banks 8. it gives due position to the public interest
, borrowing from the money market is . its final aim is to ensure growth with equity.
comparatively easier.
9.
Conventional
banks
give
greater 9.Islamic banks , on the other hand , give
importance on credit-worthiness of the greater importance on the feasibility of the
clients
projects.
10. The position of a conventional bank, in 10. The status of Islamic bank in relation to
relation to its client for the creditor and its clients is that of partners , investors and
debtor.
agent.
11. A conventional bank has to assurance all 11. Severely speaking ,an Islamic bank can
its deposits.
not guarantee all its deposits.
Islamic and conventional banks share a trait despite the distinctions mentioned above. Islamic
banks do not rent out money, for this reason. As a consequence of not charging interest, they
have improved a number of investing strategies, including bai" murabahah, Musharakah, and
Mudarabah, to let investors put money into the market and generate a range of returns. Either
of these strategies identifies profitability and payback installments sooner. Also, certain Islamic
banks provide training in specific forms of leasing. Many services, including letters of credit
and collections, foreign exchange, financial advising, etc., are handled by conventional banks
and are not interest-related. are the result of Islamic banks. A significant amount of the money
managed by certain Islamic banks are invested in the commodities markets. If banks and other
financial institutions are forbidden from quantifying their succession term of Return on Assets,
the commodities transaction may be constructed to satisfy the goals of the parties involved—
the Islami Bank, the conventional bank, and the customer of the conventional bank (ROA).
8. Socio-economic consequences of Islami Banking
Islamic banking has become increasingly popular in Bangladesh, and it has had a number of
positive consequences for the country’s economy. This response will examine the
consequences of Islamic banking in Bangladesh, with a focus on Bangladeshi Islamic Banking
Sector.
1. Reducing Poverty and Inequality:
One of the most significant impacts of Islamic banking on Bangladeshi economy has been its
contribution to poverty reduction and income inequality. Islamic banking operates on the
principle of profit and loss sharing (PLS), which means that the bank and the borrower share
the risk and rewards of the investment. In Bangladesh, Islamic banks have played a critical role
in supporting the growth of small and medium enterprises (SMEs) and helping low-income
individuals access financing.
For example, Al-Arafah Islami Bank Limited (AAIBL) offers a range of Islamic finance
products that cater to the needs of low-income customers, such as microfinance and SME
financing. These products have helped thousands of individuals and small businesses in rural
areas to access financing and improve their economic well-being. Similarly, Shahjalal Islami
Bank Limited (SJIBL)has developed a range of innovative financial products to support microentrepreneurs and SMEs in Bangladesh. SJIBL offers Shariah-compliant microfinance
products, such as Murabaha, Musawamah, and Ijarah, which are based on profit and loss
sharing principles. These products have helped to reduce poverty and promote economic
inclusion in Bangladesh.
2. Impact on Allocative Efficiency:
Islamic banking’s profit and loss sharing model has also had a positive impact on allocative
efficiency in Bangladesh. Unlike conventional banks that rely on interest-based financing,
Islamic banks focus on investments that generate real economic value. This focus on real
economic value has made Islamic banks more resilient to financial crises and speculative
bubbles.
For instance, Islami Bank Bangladesh Limited (IBBL) has prioritized investments in the
manufacturing sector, which has contributed to the growth of the sector and created job
opportunities. IBBL has also invested in the agriculture sector, which has contributed to
improving the livelihoods of farmers and reducing poverty. Similarly, Shahjalal Islami Bank
in Bangladesh has developed a range of products that promote investment in the real sector of
the economy, such as agricultural finance, industrial finance and SME finance.
By avoiding speculative or high-risk investments, Islamic banks have been less exposed to the
negative effects of market volatility and systemic risks, which can lead to financial crises or
speculative bubbles. As a result, they have been able to weather financial shocks better than
conventional banks and maintain stability in their operations,
3. Shifting Tides of Traditional Banking:
Islamic banking’s ethical principles have also led to a shift in traditional banking practices in
Bangladesh. Conventional banks have recognized the need to adopt more responsible practices,
such as offering green loans and social investment products. The adoption of these practices
has been driven by customer demand and regulatory pressure.
For example, the Social Islami Bank Limited (SIBL) has launched a green banking program to
promote sustainable development. The program includes green loans, solar home systems, and
energy-efficient lighting products. Similarly, Union Bank Limited in has introduced a range of
social investment products, such as education finance, health finance, and disaster management
finance. These products are designed to promote social welfare and improve the lives of
marginalized communities.
Islamic banks use a profit-and-loss sharing system, where the bank and the customer share the
risks and rewards of an investment, rather than using interest-based loans. This approach helps
to mitigate the negative impact of interest-based financing, such as the risk of excessive debt
and financial instability. In addition, Islamic Microfinance and Zakat based charity funds helps
rural segments and low-income household. As a result, many conventional banks have
recognized the potential benefits of offering Islamic banking products and services, and have
opened dedicated Islamic banking windows within their institutions. This has allowed them to
tap into a growing market and diversify their revenue streams.
4. A Tool for Economic Stability and Resilience:
Islamic banking has acted as a tool for economic stability and resilience in Bangladesh. The
profit and loss sharing model reduces the risk of default and insolvency, while strict risk
management procedures make Islamic banks less susceptible to financial crises. Additionally,
Islamic banking provides an alternative source of financing that is less dependent on global
financial markets, which can be unpredictable.
For example, Bangladesh’s Islamic banks weathered the global financial crisis of 2008 better
than conventional banks. The profit and loss sharing model protected Islamic banks from the
risks associated with the subprime mortgage market. Similarly, during the COVID-19
pandemic, Islamic banks provided support to customers and businesses affected by the
economic downturn. Islamic banks offered loan restructuring and moratoriums to support
customers, while also increasing financing to the healthcare sector and SMEs.
5. Enhancing Sustainable Development:
Finally, Islamic banking has contributed to enhancing sustainable development in Bangladesh.
Islamic banks are guided by ethical principles that promote social responsibility, environmental
sustainability, and economic development. This focus on sustainability has made Islamic banks
more attractive to socially responsible investors and customers.
For example, the Social Islami Bank Limited (SIBL) in Bangladesh has developed a range of
sustainable finance products, such as green finance, social finance, and ethical finance. These
products are designed to promote sustainable development and support Bangladesh's
commitments to the United Nations Sustainable Development Goals (SDGs). Similarly, EXIM
bank limited has introduced a range of green banking products, such as renewable energy
finance, energy efficiency finance and climate finance. These products are designed to support
the transition to a low-carbon economy and reduce carbon footprint.
6. Expansion of SME and Microfinancing
Microfinancing is essential to assisting SME (Small and Medium Businesses) in Bangladesh,
which constitute an important component of the country's economy. One of the top banks in
the nation that offers SMEs microfinancing services is Islami Bank Bangladesh Ltd. (IBBL).
With its Small and Medium Business Investment and Support (SMES) program, IBBL
provides microfinancing services. The initiative makes it simpler for firms to get credit by
offering loans to SMEs without demanding collateral. The bank also provides these companies
with assistance and training to help them manage their finances and operate more effectively.
IBBL further provides SMEs that follow Islamic principles and values funding choices that are
in accordance with Shariah. This comprises Musharaka finance, in which the bank collaborates
with the SME to provide funding for a project while sharing profits and losses, and Murabaha
financing, in which the bank makes purchases of commodities or assets on behalf of the SME
and resells them to the company at a profit.
In general, IBBL's SME assistance programs and microfinancing services are essential in
fostering economic development and progress in Bangladesh. The bank assists SMEs in
growing and creating employment by giving them access to funding and assistance, thus
promoting the general economic development of the nation.
7. Acknowledging Empowerment through Education.
An established bank in Bangladesh, Islami Bank Bangladesh Limited, has been actively
supporting empowerment and education via a number of programs. The bank has taken a
number of actions to boost education in Bangladesh because it understands that it is a potent
weapon for development and empowerment.
The "Islami Bank Scholarship Program," one of the bank's programs, offers deserving but
financially disadvantaged students financial support so they may continue their study.
Thousands of students have benefited from the program's assistance in pursuing further
education and realizing their objectives.
Several Bangladeshi educational institutions, including colleges, universities, and schools,
have received financial support from Islami Bank Bangladesh Ltd. The bank is of the opinion
that through aiding educational institutions, it will be possible to improve both the future of the
nation's students and that of the whole population.
To sum up, Islami Bank Bangladesh Ltd has been actively supporting Bangladesh's efforts to
empower women and advance education. Several students have benefited from the bank's
efforts, which have also assisted the country's growth and thousands of students finish their
studies and accomplish their objectives.
8.1 The analysis of the Consequences and Implications of Interest (Riba) on
the Economy
The first is how Riba affects savings and investments. A higher interest rate would result in
more savings, and traditional economists believed that greater savings would lead to more
investments. It's true, however higher interest rates raise the cost of investments, which may
have an impact on overall economic investment as well as raise the price of products and
services. Keynes (1936) also said that rising interest rates discourage investment since fewer
people would borrow money for investments due to the increasing interest rates. Low
investment may result, which would then have an impact on overall economic growth. For
instance, since 2011, the economy in Nigeria has spent more in interest as a result of debt
service than it has invested. Between 1981 and 2015, the amount of money needed to pay
Nigeria's debt commitments increased dramatically. This caused low savings and poor
investment, which in turn increased unemployment and poverty among Nigerians and
negatively impacted the country's economic growth and development (Kareem 2017). Instead
of taking out a loan with interest, money could be set aside for joint ventures where everyone
shares in the gain or loss. The Islamic financial institutions engage in it. More company
operations will result from this kind of investment, which will boost the economy. Even while
the current funding supplied by Islamic banks is more focused on debt than what the concept
of Islamic finance offered, which was equity financing. Yet, the profit or loss split between
investors and borrowers is becoming important, and instead of hindering the development of
investments, it is increasing the prospects for investments via the plowing back of profit.
Second, interest is a tool employed by affluent people to increase their income at the cost of
the poor, encouraging the unequal allocation of wealth. The haves lend their excess riches to
the have-nots and demand greater payment in return. The less fortunate will utilize the money
they raised for their own businesses or personal needs. If utilized for business and is successful,
they may be able to repay the principle together with the extra sum as interest, increasing the
riches of the affluent at the expense of the poor's little resources. Yet, if it failed, they would
forfeit the collateral they had acquired via other means, which would increase the fortune of
the wealthy. When the money is being returned after being used for personal expenses, more
money must be paid as interest. It implies that the little that the poor person saves from his
living expenses will be given to the wealthy in the form of interest. It denotes that there is an
unfair wealth distribution brought on by interest. The gap between the affluent and the poor is
widening rather than narrowing, since it makes the rich wealthier and the poor more unlucky.
Third, interest abused the weak and dependent. In order to benefit from the interest on the loans
made to the needy debtors in the future, the affluent persons serving as creditors delayed
earning their current income. As a result, it raises the creditor's wealth in the future while
decreasing the debtor's potential income. It exemplifies an all-encompassing act of exploitation
and will make the poor and vulnerable more poorer. Borrowers are required to put forth more
effort to repay loans when interest is required to be paid on them. The debtors have the option
of working in any dangerous or risky vocation in order to increase their income and repay the
loan plus interest. It means that interest makes rich individuals avaricious and irresponsible;
they make easy money at the expense of the underprivileged. The high percentage charged as
interest on the principal indicates that there have been exploitations. Despite making no
contributions, the fund owner outperforms the borrower who struggles to ensure that the fund
is being used and yielded.
Finally, Riba or Interest causes volatility in the economy. According to Friedman's (1971)
association between economic ups and downs and changes in interest rates, interest to some
degree causes economic instability. There are also strong suspicions about interest rates and
other economic goals, according to Shajari and Kamalzadeh (1995). For example, using interest
rates as an inflation control mechanism is not sufficient. This is for many reasons. First of all,
inflation and stagnation often coexist. It is impossible to simply alter the inflation phenomena
during a downturn by changing interest rates. Due to the elasticity of demand, the extra cost of
the interest rate will simply be borne by the end user. The interest rate becomes an inflationary
variable in these circumstances. Ultimately, an increase in interest rates turns out to be more
inflationary in the long term due to a drop in investment and output (Shajari and Kamalzadeh)
(1995). When an interest rate fluctuates on a regular basis, the financial market is unstable.
Also, it contributes to inflation in the economy by forcing producers to charge more for the
products and services they create when they borrow money at a higher interest rate. Moreover,
it permits the transfer of money to the rich when the badly paid loans are repaid with interest
since inflation results from having more money in circulation.
Conclusion
Islamic banking complies with Islam's philosophical principles. As Allah is the universe's
creator and rightful owner, institutions and people both have important roles to play in society.
Banking organizations must thus combine economic activity with moral principles. So, money
and other resources are used as social instruments to maximize social welfare and good. Given
the above, the goals of Islamic banking are to encourage, develop, and promote the application
of Islamic principles, law, and tradition to the transaction of financial, banking, and related
business affairs services as well as to market goods built on Islamic principles. Islam, which is
a full rule of life, dictates how all of a Muslim's acts should be carried out, as was previously
explored in this study. As a result, it is a Muslim's duty to manage worldly activities, including
banking, in accordance with the Shari'ah, which is seen as an act of devotion. According to the
International Association of Islamic Banks (IAIB), which determined the functions of Islamic
banks, these goals have been accurately reflected in those roles: "The Islamic Bank basically
implements a new banking concept in that it adheres strictly to the rules of Islamic Shari'ah in
the fields of finance and other dealings. Moreover, the Bank's operations must be consistent
with Islamic ideals in everyday life. The building of an Islamic society should be a priority for
the Bank. Hence, one of its main objectives is to develop religious sentiment among the
populace. 93 As Islamic banking's goals and philosophy are in accordance with the revelations
in the Qur'an and the hadith, it is intended to be governed by these ideas. Every Islamic banking
or financial organization should establish the appropriate principles for two key reasons. The
management or decision-makers of Islamic banks will first apply these concepts to the process
of developing business goals and policies. Second, these ideas show if a certain Islamic bank
is adhering to genuine Islamic principles or not. In this regard, it is important to emphasize that
although the riba is forbidden in Islam, making a profit through commerce and business is both
acceptable and encouraged, so long as the risks and rewards involved are balanced rather than
one-sided. As an Islamic bank engages in legal commerce and paves the ground for conducting
financial operations in accordance with Shari'ah, it is seen from a religious standpoint as being
a good action. Islamic business ethics must include the abolition of riba in the financial sector.
Together with the usual goal of profit maximization, management and workers of this system
are required to operate their company in accordance with Islamic business principles. These
values include sincerity, equality, and justice as established by Allah and upheld by His
Messenger. In order to maximize societal benefit, Islamic banking aims to strike a balance
between earning and spending while doing business. The importance of income being legal in
Islam can not be understated. When it comes to how money is spent, it commands its adherents
to do it for the benefit of society and not to squander it or utilize it improperly. Islamic banks
see their customers as partners in business rather than as borrowers and lenders. Numerous
Muslim scholars have emphasized the idea that because Islamic banks are dedicated to
operating on the basis of an entirely different philosophy, they should have a strong focus on
allocating resources to the most economically disadvantaged members of society in order to
advance their economic well-being in line with Islamic socio-economic goals. Several of the
aforementioned goals and duties of the Islamic banking system might be compared to those of
the conventional banking system. While there may be an outward appearance of similarities,
there is really a substantial variation in focus due to the two ideologies' divergent commitments
to spiritual ideals, socioeconomic fairness, and human brotherhood, which are inviolable
components of Islam's ideology and religion.
In conclusion, Islamic banking has had a significant impact on the Bangladeshi economy,
particularly in terms of reducing poverty and income inequality, promoting allocative
efficiency, shifting traditional banking practices, enhancing economic stability and resilience,
and enhancing sustainable development. The profit and loss sharing model, combined with
strict risk management procedures and ethical principles, has made Islamic banks more resilient
to financial crises and better equipped to support economic development. While there are
challenges and limitations associated with Islamic banking, its positive impact on the
Bangladeshi economy is clear, and it has the potential to contribute to sustainable and inclusive
economic growth in the future.
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