Accounting for Islamic
Banks (Lecture Week 2)
Part 1
Islamic Prohibition of Riba’
The Prohibition of Riba’ and Gharar
Meaning of Riba’
 Literally: excess, increase, expansion or growth
Definitions of Riba’
Ibn al-Arabi: every excess in return of which no
reward is paid
Mawdudi: predetermined excess or surplus over
and above the loan received by the creditor
conditionally on relation to a specified period
Haque: an increase or excess which, in an
exchange or sale of commodity, accrues to the
owner (lender) without giving in return any
equivalent counter or recompense to the other
party
Prohibition of Riba’
In the Qur’an - 4 Stages:
1.
Surah al-Rum: 39

compare riba’ with Zakat and charity

praising Zakat but not riba’
2. Surah al-Nisa’: 160-161

attaching the practice of riba’ with the Jews

Consider the practice as an inequity
3. Surah ali-Imran: 130

Prohibiting the practice of charging double
and multiple riba’
Prohibition of Riba’
4. Surah al-Baqarah: 275-281
 Conclusively prohibiting all forms of riba’
 Any excess over the capital is disallowed
“…they say: trade is like riba’, but Allah has
permitted trading and forbidden (haram) riba’
(usury)”
Example in the Sunnah:
“From Jabir the Prophet s.a.w cursed the
receiver and the payer of riba’, the one who
records it and the two witnesses to the
transaction: they are alike in guilt”
Types of Riba’
Riba’ al-Buyu’ (exchange transaction)

Riba al-Fadl (due to excess)

Riba al-Nasiah (due to delay)
Example:
(a) Trading commodities of the same commodities
(gold – gold; dates – dates)

Both commodities must be equivalent

Prompt delivery
(b) Trading commodities of the same group but
different kinds (gold - silver; wheat – barley)

Equality not a condition

Prompt delivery
(c) Trading commodities of different groups and
kinds (gold – wheat; silver – barley)

No conditions imposed i.e. free trading
1.
Types of Riba’
2. Riba’ al-Duyun (loan/debt transaction)

Riba’ al-Nasi’ah (due to delay)
Characteristics of Riba’ al-Nasiah
3 Elements:
1.
Excess or surplus over and above the loan
capital;
2.
Determination of surplus in relation to time;
and,
3.
Stipulation of surplus in the loan agreement.
Riba’ vs Trade
Wisdom behind prohibition of riba’

Elimination of injustice and encourage
cooperation

Spirit of brotherhood
Riba’ is not trading:

Money loaned for self-generating or selfexpanding value is not sale

Growth or increase in money is inequitable

One party receives an increase without
equivalent return to the other party

In sale, there is productive exchange such as
goods for goods and money for goods
Part 2
Islamic Prohibition of Gharar
Meaning of Gharar
Literally: In Arabic means negative elements
e.g. deceit, fraud, uncertainty, danger, risk,
hazard etc. that might lead to destruction
and loss
Technically: uncertainty and ignorance of one
or both parties of a contract over the
substance or attributes of the object of sale
or doubt over its existence and availability
at the time of contract
Gharar in the Qur’an
The word Gharar appeared 27 times in the Qur’an
 Refer to the need of believers to be aware of the
deceptive character of the worldly pleasures, and
not to be deceived by such temptations
 Example in Surah al-Nisa’ (4:29):
“O you believe! Eat not your property among
yourselves unjustly (bil batil i.e. by falsehood and
deception) except in a trade amongst you by
mutual consent”
 Most jurists agreed that al-Batil refers in the
above verse includes illegal and deceptive
elements in commercial contracts

Gharar in the Sunnah



In commercial transactions, the Prophet
s.a.w in many of his sayings prohibited the
sale involving gharar
Examples: The prohibition of sale of fish in
the sea, bird in the air, unborn animals, etc.
Gharar is prohibited by consensus of the
jurists (ijma’) since the time of the
companions, their followers (tabi’in) and
subsequently until now.
Reasons for prohibition of Gharar




To ensure full consent and satisfaction of all
parties in a contract
Without full consent and satisfaction the
contract is null and void
Full consent can only be achieved through
certainty, full knowledge, full disclosure and
transparency, and zero deceit or fraud
Gharar also results in the risk being built
into the contract at its inception which may
result in a profit for one party and
corresponding loss to other party (zero-sum
game or gambling)
Factors for Gharar in Contracts



None or incomplete ownership (“do not sell
if you do not have” or cannot legally
guarantee delivery
Non-possession or cannot guarantee
physical delivery to avoid manipulation by
the seller and protect the interest of buyer
Uncertainty in the contract or conditional
sales
Exceptions of Gharar




The uncertainty is too trivial or too slight
and tolerable by both or all parties
Charitable contracts (tabarru’at i.e. Waqf
etc.)
The real public need for the transaction or
contracts even gharar is excessive e.g. bay
al-Salam (advance purchase), al-Istisna’
(manufacturing contract )
To satisfy people’s immediate need and
removal of hardship makes Gharar an
exception and need takes priority
Exceptions of Gharar
Gharar is averted if:
 Both the price and the subject matter are
proved to be in existence at the time the
transaction concluded
 The qualities are known and the quantities
are determined
 The contractual parties have control over
them so as to ensure the exchange can take
place
 Term of time can be precisely determined