Questions On Riba

COURSE: ISB542 FIQH MUAMALAT
CLASS: BA249 3A
LECTURER: DR. ‘ISMAH BINTI OSMAN
STUDENTS:
MUHAMMAD SHAZWAN BIN BASIRON (2019311821)
SYED MUHAMMAD NAZHIFUDDIN BIN SAID KHAIRANI (2019563773)
1. Discuss the explanation provided by the videos on the prohibition of Riba’.
Based on the video, the speaker provided an example of a situation that shows why Riba’ are
prohibited in Islam. There is a group of houses worth 100k each, and the total of all houses
combined worth 1 billion. Bank A provide 1 Billion loans to the customers to purchase those
houses. Bank A give duration of 20 years for the repayment of the loan to the customers, with
the imposition of interest causing Bank A to make 2 Billion of profit in the next 20 years.
We can assume that Bank A provide loans to the customers as a contract.
Later, Bank A sold the contract to Bank B for 1.3 Billion. Bank B buy a contract which is not
a physical thing. Bank A assures Bank B that this contract is profitable because Bank B will
generate 2 Billion of profit over the next 20 years.
After selling the contract, Bank A insures the contract, in the event that it loses and does not
reach a profit of 2 Billion, the insurer will pay to the Bank A. After that, Bank A seeks
customers with low income, provide them with loans to buy the houses in the contract. Bank
A is looking for a large number of low-income customers to convince Bank B that a 2 Billion
profit will be achieved.
To a certain extent where low-income customers were unable to repay the loan on a monthly
basis, this forced Bank B to resell the homes and start demolishing the price of the home so
the prices started going down rapidly. And then many more people started getting caught up
in this because most of them could not afford the loan, more of them foreclosing and
defaulting on their loan, thus dragged down the whole housing industry down.
Bank B's expected profit of 2 billion is decreasing and potentially become less than the
amount they bought the contract at 1.3 Billion, due to the customers do not want to continue
repayments. Bank A knows this event will happen. That is why they take insurance earlier to
cover their losses.
That’s why Riba’ is prohibited because Bank A benefitting from every single disaster that
happened. Bank A get benefit while customers were unable to repay the loan, Bank B
suffered losses as well as insurance companies, and also dragged down the whole housing
industry down. Therefore, when people start exploiting and applied Riba’, it goes against the
whole mutual cooperation of other societies where a person created incentive that can put
people in such unfortunate position, take advantage of them and exploit those people who
need to be protected. Thus, the whole system destroy partnership and mutual cooperation.
2. Explain the reason for the prohibition of Riba’
Riba’ has both negative effects socially and negative effects economically. First,
exploitation not partnership. Riba’ conflicts with the spirit of brotherhood and sympathy,
and is based on greed, selfishness and hard heartedness. Rather than sharing in the risks of a
business or investment, Riba’ sets up a lender/borrower relationship. The lender has a
financial incentive to squeeze the borrower as much as possible to get the loan back with
interest, regardless of the borrower’s situation.
Second, Riba’ retards economic growth and development. In legalizing trade and
condemning interest, Islam considers that there are fundamental differences between the
nature of profit resulting from interest charges and that earned by trade. In interest-based
transactions, there may be no equitable division of profit between the buyer who makes a
profit on the sale of good purchased, and the seller who derives a profit in consideration of
the labour and time spent in procuring the goods. Moreover, there could be no end for an
interest-based transaction, since there could always be interests of unpaid interests as long as
the principle amount loaned is not fully returned. This could, in extreme cases, create un-
repayable debt for generations.
Third, Riba’ is a sure gain without any possibility of loss, hence all the risk is taken by
the borrower, rather than sharing the risk and the profits. Islam considers even interest-
based loans taken for investment in a productive activity as not equitable because in the
profits that may accrue from it is not required to be known forehand and if there is a loss, the
entrepreneur has to bear the entire loss in spite of all the risk and engagement he took,
whereas the money lender, who did less sacrifice than the entrepreneur, gets an effortless
profit determined by a positive rate. In Islam both risks and rewards should be shared by the
different parties.
Finally, Riba’ is one of the major contributors of inflation. Since the unrestricted power of
the creditor to make profit from interest has no regard to the financial ability of the debtor to
repay indebtedness, middle-class consumers, as well as the developing countries, could be
caught up in a never-ending debt-trap. And because the Riba system encourages living
beyond one’s means for both individuals and governments, it results in an accentuation of
macroeconomics, inflation and external imbalances in addition of squeezing the resources
available for development. This leads some poorer countries to the over-exploitation of their
earth’s resources and thus to the destruction of the ecological system.

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COURSE: ISB542 FIQH MUAMALAT

LECTURER: DR. ‘ISMAH BINTI OSMAN

MUHAMMAD SHAZWAN BIN BASIRON (2019311821)

SYED MUHAMMAD NAZHIFUDDIN BIN SAID KHAIRANI (2019563773)

1. Discuss the explanation provided by the videos on the prohibition of Riba’.

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