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For the Architects' Institute (RIBA) see Royal Institute of British Architects
Riba (Arabic: ربا, ) means usury and is generally forbidden in Islamic economic jurisprudence fiqh.

There are two types of riba discussed by Islamic jurists: that prohibited by the Qur'an (an increase in capital without any services provided), and that prohibited in the Sunnah (comprising commodity exchanges in unequal quantities).

Background

Riba was forbidden in the Medinanmarker society of the Prophet, as it had been in the medieval Christian world. Historically, the consensus of Muslim jurists understood that any loan which involved an increase in repayments was forbidden, and as such, the Islamic state prohibited it.

With the advent of European enlightenment, the prohibition of usury was questioned resulting in allowing it for trade. With unrivalled economic growth in the West, the Muslim world began to debate the prohibition of Riba in the 19th century.

Riba is considered amongst the Seven Heinous Sins (Al-Saba al-Mubiqat - السَبعَ الموبِقاتِ), namely:Al-Saba al-Mubiqat (السَبعَ الموبِقاتِ): Narrated Abu Huraira: The Prophet said, "Avoid the seven great destructive sins." The people enquire, "O Allah's Apostle! What are they? "He said, "To join others in worship along with Allah, to practice sorcery, to kill the life which Allah has forbidden except for a just cause, (according to Islamic law), to eat up Riba (usury), to eat up an orphan's wealth, to give back to the enemy and fleeing from the battlefield at the time of fighting, and to accuse, chaste women, who never even think of anything touching chastity and are good believers. [Sahih al-Bukhari, Sahih al-Muslim]


أخرج البخاري ومسلم وأبو داود والنسائي عن أبي هريرة رضي الله عنه أن رسول الله صلى الله عليه وسلم قال { اجتنبوا السبع الموبقات , قيل يا رسول الله وما هن ؟ قال الشرك بالله , والسحر , وقتل النفس التي حرم الله إلا بالحق , وأكل مال اليتيم , وأكل الربا , والتولي يوم الزحف , وقذف المحصنات الغافلات المؤمنات


  • Believing in Gods other than Allah.
  • Magic.
  • Murder.
  • Riba/usury.
  • Unlawfully taking orphans' money.
  • Fleeing the battlefield.
  • Accusing chaste, pious women.


The Qur'an states:

3:130 O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful.


2:275 Allah has permitted trade and has forbidden interest


Mohammad said in his farewell sermon: “God has forbidden you to take Riba, therefore all riba obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer inequity. God has judged that there shall be no riba and that all the riba due to `Abbas ibn `Abd al Muttalib shall henceforth be waived.”.Last Sermon of Mohammad given on 10 Dul-hajj 10 hijra, mentioned in all book of Hadith. Sahih Bukhari mentions parts of it. Musnad Imam Ahmed recorded the longest and complete speech.

أَلَا إِنَّ كُلَّ رِبًا كَانَ فِي الْجَاهِلِيَّةِ، مَوْضُوعٌ عَنْكُمْ كُلُّهُ، لَكُمْ رُؤُوسُ أَمْوَالِكُم لَا تَظْلِمُونَ وَلَاتُظْلَمُونَ، وَأَوَّلُ رِبًا مَوْضُوعٍ، رِبَا الْعَبَّاسِ بْنِ عَبْدِالْمُطَّلِبِ مَوْضُوعٌ كُلُّه


Quran explicitly prohibits Riba, and since Quran is an undisputed source of guidance, all Muslims unanimously agree on prohibition of Riba. There is no difference of opinion among any school of thought on prohibition of Riba in Islamic Shariah.

Qur'an mentions that the person who deals with Riba (ربا) will stand (on judgment day) as one who is being beaten by Satan into insanity. Here Qur'an makes it clear that “trade” and “riba” are not same, and that God forbade “riba” and allowed “trade”. It further states that whoever accepts guidance of God must immediately stop dealing in Riba, and those who return to Riba after God’s guidance has reached are dwellers of fire, because God destroys “Riba” and he will reward those who give to charity.

Mohammad cursed the one who deals with Riba. From Jabir: Mohammad cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: "They are all alike [in guilt]." [Sahih al-Muslim, Sahih Al-Bukhari, Tirmidhi, Ibn Majah, Bahiqi and Musnad Ahmad]

Islamic Shariah considers Riba as tool of oppression and a means to unjustly take others money by exploiting their needs and circumstances. Hence it forbids a Riba based system altogether and it promotes Charity as an alternative. Therefore, Mohammad said: “God has judged that there shall be no riba” [Last Sermon]

The crimes of dealing in Riba are so serious that God has declared war against those who deal in Riba. Mohammad has cursed anyone who deals with Riba, the one who takes it, one who pays it and one who records it, they are all “equal”.

Muslims around the world traditionally avoid eating pork and alcohol, whereas, Riba is considered much worse than that. Mohammad declared consumption of Riba worse than adultery: worse than “to a man committing adultery with his own mother”.

Etymology

The word riba was linguistically used by the Arabs prior to Islam to refer to an increase. In commercial practice, it referred to the increase on loans, namely, interest.

The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart." When currencies of base metal were first introduced in the Islamic world, no jurist ever thought that paying a debt in a higher number of units of this fiat money was riba" as they were concerned with the real value of money (determined by weight only) rather than its numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight of gold (i.e., the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight) - therefore having the same real value.

Prohibition of Riba

The Quran deals with riba in 12 verses, the word appearing 8 times in total, 3 times in 2:275, and once in 2:276, 2:278, 3:130, 4:161 and 30:39.

The Mekkan verse in Surah al-Rum was the first to be revealed on the topic:And whatever Riba you give so that it may increase in the wealth of the people, it does not increase with Allah (Quran 30:39)

The others are Medinan verses:And because of their charging Riba while they were prohibited from it (Quran 4:161)Those who believe do not eat up Riba doubled and redoubled (Quran 3:130)

Culminating with the verses in Surah Baqarah:Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the Devil; this is because they say: "Trade is like interest" while God has permitted trade and forbidden interest…God deprives interest of all blessings but blesses charity…O believers, fear God, and give up the interest that remains outstanding if you are believers. 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... (Quran 2:275-280)

The jurists do not consider the first two verses as clear prohibitive verses on the matter, whereas the latter two have been understood to prohibit Muslims from riba.

Tabari quotes a number of Tabi’een who state the verse from Surah al-Rum refers to a gift whereas al-Jawzi quotes Hasan al-Basri as stating it refers to riba. Either way, there is insufficient indication from this verse that riba is prohibited, if it does indeed refer to riba.

The second verse refers to the Jews and their taking of riba , which leaves it unclear if such a prohibition applies to the Muslims.

The next verse is seen by many as prohibiting riba, including Ibn Hajar al-Asqalani. However it appears that recourse to some traditions relating to Amr ibn Aqyash are required for the prohibition as the verse itself could be interpreted as expressing a preference against interest.

The verses from Surah Baqarah are seen as categorically forbidding riba. The backdrop to these verses was the dispute between Banu Thaqif and Banu Amr ibn al-Mughirah over riba due on loans between them. As such, the jurists historically agreed on the prohibition of riba from these verses and termed it riba al-nasia, distinguishing it from the interest in exchanging like goods in different quantities, mentioned in a number of narrations, riba al-fadl.

As such, some jurists saw riba forbidden early in Mecca, some in the year 2 AH and some after the opening of Mecca, but the majority agreed on its prohibition.

Some of the modern jurists, like Abduh, Rashid Rida, Shaltut, Sir Syed Ahmed, Fazl al-Rahman, Tantawi and Qardawi have tried to legitimize bank interest. The earlier amongst them legitimised it for awqaf and state investment schemes during the late period of the Ottoman rule. They were the first to introduce the notion that riba al-nasia was permitted. Those that followed them remained minority voices whilst the vast majority of modern jurists prohibit it. The modernists proposed a number of legal arguments that have been heavily criticised for using false legal reasoning, mixing hikma and illah, selective historical readings of the commercial contracts at the time of the Prophet, and mis-application of principles (e.g., mafhum al-mukhalifah). They also advanced non-legal rational arguments such as the necessity of modern finance, necessary for efficient allocation of resources, commercial interest not being the riba prohibited in Islam, no violation of justice or exploitation these days and interest rates are not very high to name but a few. Most of these arguments have criticised by modern writers, including Siddiqi, Zarqa, Khan & Mirakhor and Chapra, a good case in point being the published Supreme Court of Pakistan Judgement on the matter.

Rationale of the Prohibition

The main reason advocated by Siddiqi and Ganameh as to the rationale of prohibition is that it is oppression involving exploitation. In matters of consumption loans, it is necessary that those who have wealth should assist those without, and in productive loans, a guaranteed return on capital is unjust given the uncertainty surrounding entrepreneurial profits, whereas a return to both parties as a rate of profit would be more equitable.

Taji al-Din argues the reason appears to be the restriction in circulation of wealth amongst those who already have it. Lenders would not provide loans to those they believe are unable to repay, thus such wealth would be restricted to those able to service the debt. This is something forbidden categorically by the Quran and the effects on society result in the accumulation of wealth amongst those who have it and increase the divide between the rich and poor.

Mawdudi believes the cause relates to the undesirable resulting effect of an imbalance between production and consumption. This is caused by the transfer of purchasing power from those with a high propensity to consume to those with a low propensity to consume. The latter group reinvests its income in production, increasing production and decreasing consumption demand. Cost of capital results in increased prices of consumption goods, accentuating this process. Mawdudi believes this is the source of evils in the economy such as stagnation, depression, monopoly and ultimately imperialism. Interest free loans and prohibition of return on capital along with zakat, wages, profit and profit-share recreates this balance. The focus shifts to the entrepreneur whose activity becomes the only source of income along with wages, giving him the upper hand in society. Siddiqi and Ganameh cite the hadith of “income devolved on liability” in this context.

Some argue that interest allows the creation of a group of people who contribute nothing to society, simply generating income from capital. This starves society of their contribution and the rationale of prohibition is to reverse this.

Ibn Rushd argued the rationale relates to the possibilities of cheating that exists in riba which is clearly visible in riba fadl. Other arguments which some writers try to extract from indications on the divine texts include the rationale being corruption , unjust acquisition of property rights, destruction and a detrimental personality.

Hameedullah believes the reason is the unilateral nature of the risk born in these agreements. The Islamic principle is for a reward, there must be some liability incurred – without this a return is prohibited.

References to Riba in the Quran and Sunnah

Qur'an

The Qur'an states the following on Riba:

Ahadith

Riba is mentioned in a number of Ahadith:

Additional ahadith exist regarding usury.

Relevance to modern times

Siddiqi suggests the key to whether the idea of prohibition of riba is effective is whether it can produce stability and efficiency in the economy, if it is conducive to growth and development and increase justice and fairness.

The model of profit-sharing on the liability side of the banking system, would make the financial system more stable than using riba. The sharing arrangements between suppliers and users of resources for producing wealth improves business cycles and stability in the economy.

Entrepreneurship

With the abolition of interest, Siddiqi argues that the economic focus becomes attached to entrepreneurial activities, using the vehicle of mudarabah, resulting increasing economic activity. Although it may be thought that without interest propensity to save drops, Keynesian analysis indicates that savings are a function of income and interest is minor. As such if income can be increased, savings should increase even in the absence of the interest.

Mannan argues that interest holds back investment in production, whereas Mawdudi points out that projects that could be socially useful, generating a small return and prevented as interest rates prevent capital being utilised on such projects.

Without interest, capital can be more efficiently allocated to productive projects based on the rates of profit rather than more credit-worthy individuals. A system based on profit-sharing also harmonizes the interests between investors and entrepreneurs increasing efficiency.

Trade Cycles

Many writers see the destabilizing effects that interest has on trade cycles. The basic idea is that different interest rates and their variations allow for speculative institutions. Speculators hoard capital for the purpose of chasing higher rates, which in turn deprives the deployment of capital for productive purposes. It is argued that these vast movements of funds contribute to the fluctuations in the trade cycles and make economic planning and organisation problematic.

With the absence of interest, writers argued there will be less speculation due to the absence of the interest rate and the reduced levels of debt that will result. That is not to say there will be no debt – the non-interest modes of finance allows debt, but lower levels. Decreased levels of speculation would thus result in a more stable environment.

Financial Intermediation

Writers like Fazl al-Rahman say the interest rate is like price in the modern economy. It is used to regulate the demand of finance, and if the interest rate is taken to zero, we will be faced with limited supply and infinite demand. How would credit be allocated?

The main response to this question by writer is that finance for productive projects can be provided through profit-share, sale on a cost-plus basis or leasing.

Writers like Siddiqi suggest a two-tier mudarabah model as the basis of a riba-free banking system. This involves the bank acting as the capital partner in a back to back mudarabah contract with the depositor on one side and the entrepreneur on the other side. This model can be supplemented by a number of fixed return models (like Ijara, Istisna, Murabaha etc). In practice the Murabaha model is the bank’s favourite, bearing results most similar to the interest based finance models. However, it has been criticised as not following the possession by bank/seller requirements and risks taken by the financier are non-existent (being insured or guarantees provided by the customer). Additionally Khattab has criticised the whole two-tier mudarabah system as having no basis in Islamic law, as there are no instances where the mudharib passed funds onto another mudharib, and as such is questionable.

Banks have demand deposits in the nature of loans to the bank and investment deposits. Some offer guaranteed savings accounts with permission to use the funds and a discretionary reward to the depositor as in the case of the Bank Islam Malaysia Berhad. Initially demand deposit accounts were in the majority, but over time the majority of accounts are now investment accounts, reflecting the confidence of depositors in the ability of banks to generate a return. Islamic banking operations are successfully operating in many Muslim countries, including Pakistan, Bangladesh, Malaysia, Iran, Sudan, Turkey and Bahrain.

Insurance operations commencing in Sudan 1977 have now been successfully implemented in a number of countries from Malaysia to Jordan. The takaful mudarabah model is used compensating premium paying subscribers in case they incur losses/damages without any interest based activities.

International Finance

Third world countries are crippled with servicing foreign debt. Often countries are badly managed, and given state assets financial institutions readily lend to incompetent governments regardless of the project, knowing a guaranteed return on capital is available. This results in poor projects receiving funding, funds siphoned away with the lenders taking no responsibility or involvement in the project or the debtors – simply requiring repayments be made. The resulting debt, which has benefited the receiving society very little, leads to limited spending on developing their infrastructure and human capital as large amounts of future revenue are spent on debt servicing.

Replacement of interest bearing debt with interest free debt and public sector projects financed through profit-sharing mechanisms would alleviate many of these problems. Debt provided on a profit-share basis would evaluate the projects and the governments borrowing the monies to ensure there is a return. This would increase accountability and efficiency.

With regards to concerns that interest free banking would cause problems interacting with the international financial system this appears to be an undue concern. Countries adopting interest free financing have no problems interacting with the IMF or other international financial institutions.

Accounting Concept of Interest

Some writers argue for an accounting concept of interest to evaluate projects and investments. As a tool for comparing projects with countries where the interest rate is operated, it is however argued that it is hard to see why a profit rate cannot be used.

Others argue the need of a bank rate for monetary policy. Siddiqi suggests two variables that can alternatively be used – mark-up in sales with deferred payment and ratios used in sharing modes of finance. These ratios can be used to manipulate the rates of profit. They can be determined through market forces or set by governments in public interest, as is legislated in Sudan and Pakistan.

See also



Notes

  1. http://learndeen.com/jm/deen-islam/shariah-law/42/102-riba-in-islam.html
  2. Quran 2:275.[al-Baqarah]
  3. Quran 2:275 [al-Baqarah]
  4. Quran 4:161 [an-Nisa]
  5. Quran 2:278 [al-baqarah]
  6. Recorded in Sahih al-Muslim
  7. Recorded in Sunan Ibn Majah
  8. Siddiqi, M N, Riba, Bank Interest and the Rationale of its Prohibition, Islamic Development Bank Islamic Research and Training Institute, Jeddah, Saudi Arabia, p. 35
  9. Usmani, M T, The Historic Judgment on Interest Delivered in the Supreme Court of Pakistan, Idaratul-Ma’arif, Karachi, Pakistan, p. 21
  10. Ibid pp. 23-24
  11. , M N, Riba, Bank Interest and the Rationale of its Prohibition, Islamic Development Bank Islamic Research and Training Institute, Jeddah, Saudi Arabia, pp. 55-56
  12. Ibid. p. 57
  13. Usmani, M T, The Historic Judgment on Interest Delivered in the Supreme Court of Pakistan, Idaratul-Ma’arif, Karachi, Pakistan
  14. Siddiqi, M N, Muslim Economic Thinking – A survey of contemporary literature, The Islamic Foundation, Leicester, p. 63
  15. Ibid pp. 63-64
  16. Ibn Rushd, The Distinguished Jurist’s Primer, Garnet Publishing Ltd, Lebanon
  17. Ibid. p. 64
  18. Sahih Bukhari, Volume 3, Book 034 "Sales and Trade" http://www.usc.edu/dept/MSA/fundamentals/hadithsunnah/bukhari/034.sbt.html
  19. Additionally, the USC-MSA website has a searchable database of ahadith in which a user can type "usury" as a search term. http://www.usc.edu/dept/MSA/reference/searchhadith.html
  20. Al-Rahman, F, Riba and Interest, Islamic Studies, Karachi, pp. 37-38
  21. Siddiqi, N M , Riba, Bank Interest and the Rationale of its Prohibition, Islamic Development Bank Islamic Research and Training Institute, Jeddah, Saudi Arabia, p. 66


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