Riba Gharar Islamic Finance

Riba, Gharar and
Islamic finance
Islamic Cultural Centre of India New Delhi May 04 2008
AUSAF AHMAD
ISLAMIC NORMS OF BUSINESS TRANSACTIONS
Should not indulge in
Riba
Should not involve in
Gharar
Should not indulge in fraudulent behavior Should not coerce Should not deal in prohibited goods.
Should not take advantage of anybodys needs Should not withhold supplies to raise prices Should not withhold information to take advantage of ignorance.
Prohibition of Riba in Quran

FIRST REVEALATION: That which you give as Riba (interest) the peoples wealth increases not with God; but that which you give in Charity, seeking the goodwill of God, multiplies manifold. [ 30 : 39]
Prohibition of Riba in Quran [contd.]

SECOND REVEALATION: And for their taking interest even though it was forbidden for them, and their wrongful appropriation of other peoples property, We have prepared those among them who reject faith a greivous punishment. [4: 161]
THIRD REVEALATION:
o believers, take not doubled and redoubled interest, and fear God so that you prosper. Fear the fire which has been prepared for those who reject faith, and obey God and the Prophet so that you may receive mercy [3: 130-2]

FOURTH REVELATION Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the Devil; that is because they say: Trade is like interest while God has permitted trade and forbidden interest. [2: 275]
God deprives interest of all but blesses Charity. He loves not the ungrateful sinners (276)
O believers ! Fear Allah and give up interest that remains outstanding, if you are true believers. [2: 278]
If you do not, then be sure of being at war with God and His messenger. But if you repent, you can have your principal. Neither you should commit injustice nor you be subjected to it. (279) If the debtor is in difficulty, let him have respite until it is easier, but if you forego out of charity, it is better for you if you realize.(280)
Riba in Hadith
From Jabir: The Prophet (pbuh) cursed the receiver, the payer of interest, the one who records it and the two witnesses of the transaction and said: They are all alike (in guilt)
[Reported
Ahmad]
by Muslim, Tirmidhi and
Riba in Hadith [contd.]

Jabir b. Abdallah said: The Prophet (pbuh) said, All of the riba of Jahiliyah is annulled. The first riba that I anul is our riba, that accruing to Abbas b. Abd al Muttalib; it is being cancelled compeletely.
[ Reported by Muslim and Ahmad : Last Sermon of the Prophet (Pbuh)]
Meaning of Riba
Meaning: Derived from Riba yarbou Literal meaning: to grow Technical meaning: interest, usury Illah: two considerations: (1) Excess of Amount (2) delay in delivery Example: gold for gold: (i) equal amount (2) on the spot. Implies No Riba.
TYPES OF RIBA
RIBA OF DEBT (Riba al Diyun) RIBA OF TRADE (Riba al Fadl) Both types of Riba are prohibited in Islam. Riba al Diyun is also known as Riba al jahiliah. It is prohibited by the Quranic injunctions. Riba al Fadl is prohibited by Hadith of the Prophet (pbuh).
RIBA OF Debt [Riba al diyun]
Riba of the period of Jahiliyah: Prevailing in Arabia before the advent of Islam The debt is linked with time. Any extension in time is granted only by raising the price of debt (interest). Prohibited on the strength of Quranic injunction.
RIBA OF TRADE [ Riba al fadl]
The Prophet (pbuh) said: Gold for Gold, Silver for Silver, Wheat for What, barley for barley, dates for dates, salt for salt - like for like, hand to hand. Whoever pays more or takes more, indulges in Riba. The taker and giver are alike (in guilt).

Narrated by : Abu Saeed Khudri Reported by: bukhari
Meaning of Riba al Fadl
It is related with the exchange of one good with the same good. Some experts consider it to be a form of Bay al fasid (illegal sale) Barter between different goods is allowed.
RIBA, INTEREST AND USURY
No distinction between interest and usury i.e. between low and high rates. No distinction between consumption and production loans No distinction between individual and institutional loans
AVOIDANCE OF GHARAR
Definition of Gharar Uncertainty / Ambiguity Ambiguity of Quantity [Gharar fil Miqdar] Ambiguity of Attributes [Gharar fis sifah] such as
Ambiguity in time or place of delivery Ambiguity in price etc.
TYPES OF ISLAMIC CONTRCTS

Islamic Contracts
Muwadat
Musharakat
Tabarruat
Fixed Payment
Ratio is determined
Nothing is determined
No Gharar
Some Gharar
Gharar is allowed
TYPES OF ISLAMIC CONTRCTS [contd.]
Contracts of Sale / Lease are Muawadat. Gharar is not allowed in such contracts. Mudarabah and Musharakah are contracts of Musharakat. Some amount of gharar may be tolerated in such contracts. Sadaqat and Hadaya are Tabarruat. No objection to Gharar in these type of contracts.
DEBT FINANCE Vs. PARTICIPATORY FINANCE
Participatory finance, in comparison, to debt finance is:

More just More equitable More efficient More growth oriented.
DISADVANTAGES OF RIBA BASED FINANCE
Riba based finance is inefficient. Riba based finance is unjust Riba based finance discourages
growth. Riba based finance leads to economic instability. Riba based finance leads to economic inequalities.

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Riba, Gharar and

ISLAMIC NORMS OF BUSINESS TRANSACTIONS

Should not indulge in

Should not involve in

Prohibition of Riba in Quran

Prohibition of Riba in Quran [contd.]

Prohibition of Riba in Quran [contd.]

Prohibition of Riba in Quran [contd.]

Prohibition of Riba in Quran [contd.]

Prohibition of Riba in Quran [contd.]

Prohibition of Riba in Quran [contd.]

by Muslim, Tirmidhi and

Riba in Hadith [contd.]

[ Reported by Muslim and Ahmad : Last Sermon of the Prophet (Pbuh)]

RIBA OF Debt [Riba al diyun]

RIBA OF TRADE [ Riba al fadl]

Narrated by : Abu Saeed Khudri Reported by: bukhari

Meaning of Riba al Fadl

RIBA, INTEREST AND USURY

TYPES OF ISLAMIC CONTRCTS

TYPES OF ISLAMIC CONTRCTS [contd.]

DEBT FINANCE Vs. PARTICIPATORY FINANCE

Participatory finance, in comparison, to debt finance is:

DISADVANTAGES OF RIBA BASED FINANCE

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