RIBA, ITS PROHIBITION

& CLASSIFICATIONS
Course instructor: Sana Shaikh
 What is riba??

• The word “Riba” means excess, increase or addition, which

correctly interpreted according to Shariah terminology,
implies any excess compensation without due consideration
(consideration does not include time value of money).
TYPES OF RIBA
There are two types of Riba, identified to date by these scholars namely
• Riba An Nasiyah
• Riba Al Fadl
RIBA AN NASIYAH
• Riba An Nasiyah’ is defined as excess, which results from
predetermined interest (sood) which a lender receives over and
above the principal (Ras ul Maal)
RIBA AL FADL
• ‘Riba Al Fadl’ is defined as excess compensation without any
consideration resulting from a sale of goods.
• During the dark ages, only the first form (Riba An Nasiyah) was
considered to be Riba. However the Holy Prophet also classified the
second form (Riba Al Fadl) as Riba.

• Islam has categorically made a clear distinction between the excess in

capital resulting from sale and excess resulting from interest. The first
type of excess is permissible but the second type is forbidden and
rendered Haram.
Riba An Nasiyah
• Riba An Nasiyah refers to the addition of the premium which is paid
to the lender in return for his waiting as a condition for the loan and is
technically the same as interest.
• the giving and taking of any excess amount in exchange of a loan at an
agreed rate is included in interest irrespective whether at a high or
low rate.
• It has been proven through hadith that the Holy Prophet paid excess
at the loan repayment time but since this excess was not paid through
an agreed rate, it cannot be called interest
 Wisdom behind the
prohibition of Riba An
Nasiyah??
Riba Al Fadl
• Riba Al Fadl actually means that excess which is taken in exchange of
specific homogenous commodities and encountered in their hand-to-hand
purchase & sale as explained in the famous hadith:
• The Prophet said, "Sell gold in exchange of equivalent gold, sell silver in
exchange of equivalent silver, sell dates in exchange of equivalent dates,
sell wheat in exchange of equivalent wheat, sell salt in exchange of
equivalent salt, sell barley in exchange of equivalent barley, but if a
person transacts in excess, it will be usury (Riba). However, sell gold for
silver anyway you please on the condition it is hand-to-

hand (spot)
and sell barley for date anyway you please on the condition it is hand-to-
hand (spot).
This hadith enumerates 6 different commodities namely:
• 1) Gold
• 2) Silver
• 3) Dates
• 4) Wheat
• 5) Salt
• 6) Barley

These six commodities can only be bought and sold in equal

quantities and on spot. An unequal sale or a deferred sale of
these commodities will constitute Riba
 Wisdom behind the
prohibition of Riba Al Fadl??
 The laws of Riba Al Fadl
• The exchange of any of these six commodities with itself, but differing
in types/quality (which is called barter in modern terminology), even
when considering market rate, is prohibited in unequal amount. The
reason being that by exchanging these commodities in unequal
amounts there is a fear of developing the rationale in a person
eventually leading to interest (sood) based earnings and illegal
benefits. Such transactions might also lead to defrauding

• For example, a shrewd trader may claim that a kilogram of a specific

brand of wheat is equivalent to 3 kilograms of the other kind because
of the excellence of its quality, or this unique piece of gold ornament
is equivalent in value to twice its weight in gold; in such transactions
there undoubtedly is defrauding of people and harm to them.
As a step to prevent this state, the Shariah has made it a law that
exchange of any of these six commodities with itself but differing in
quality, is allowed in only one of the following forms:

• Any difference in value/quality should be ignored and the

commodities should be exchanged in equal amounts (equal weight
and volume).
• Instead of direct exchange of commodities of the same kind, a person
should sell his commodity against cash at the market value and buy
someone else’s commodity in exchange of cash proceeds at the
market value.
One of the ways of transacting commodities of the same kind is that a
person has a raw material and someone else has a product made of
that material and both decide to exchange their product. In this case,
one has to see whether:

a) The characteristics of this product has been totally changed by the

industry:

For eg. the remarkable changes that transform raw cotton into cloth or
iron into machinery. In this case, it is permissible to transact lesser
amount of cloth against greater amount of raw cotton or raw iron
having more weight against machinery having lighter weight.
Little difference has been made to its original form after its
formulation:
• For eg. gold which changes its shape in the form of jewelry. In this
case, the Shariah’h holds that such a transaction should not happen in
the first place or if it does, the exchange should be in equal weights in
order to discourage unfair deals.
• Another alternative would be to sell gold against cash and the cash
proceeds are used to buy the needed jewelry.
Different commodities can be unequally exchanged but deferred payment
is not allowed.
• For eg. one kg wheat can be sold against 2 kg date or one gram of gold can
be exchanged against 4 grams of silver on the condition that they are spot
transactions reason being that such a transaction will surely be carried on
the market rate.
• For eg. a person who wants to exchange silver for gold on spot will only
transact as per the market rate. However, if the transaction is on credit,
there is a possibility, no matter how minor, of stepping into interest that
cannot be ignored.
• Like a buyer who has traded 80 tolas silver on credit today on the
understanding that it will be exchanged against 2 tolas gold after a month
has in fact no means to find in advance that 40 tolas silver will be
equivalent to one tola gold after a month. Therefore this ascertaining of
value in advance actually signifies its roots in interest and gambling
• The general conditions of sale, however, should be borne in mind
while making a trade transaction so that the goods are specified in
addition to the cash aspect of the transaction.
• The correct way of specifying is that gold and silver should be under
the possession of the sellers or delivered at the place of contract
because both goods have the original (natural) price, which cannot be
specified until they are delivered.
• This rule applies to only exchange of gold and silver. Other goods can
be exchanged against each other without delivery and can be
specified any other way but will be restricted to cash transaction.
• For eg. Zaid made a spot sale of one kg wheat to Bakar with 2 kg salt
against future delivery after having identified their goods, this
transaction is allowed in Shariah since it meets both conditions:
a) The transaction is on spot.
b) It is also specified.

• However, if Zaid was selling one tola gold to Bakar against 40 tola
silver, then it is necessary that both take delivery of their purchased
goods at the place of contract because without delivery, goods cannot
be specified.
COMMERCIAL INTEREST AND
USURY
In the 17th century, two new technical terms of interest emerged after
the establishment of banking system, namely:

• Tijarti Sood (Commercial Interest): Interest paid on loan taken for

productive & profitable purposes.
• Sarfi Sood (Usury): Interest paid on loan taken for personal need and
expenses.
Background:
• In modern world, people say that only usury is haram (illegal) but not
commercial interest because rendering commercial interest haram
would pose irresolvable problems to their way up to industrialization
and economic progress.
• They only included usury in the term “Riba” as categorically
prohibited in Qura’n and sunnah and freed commercial interest from
it calling it totally different from the western concept of interest.
Therefore, it was concluded that the prohibition of Riba was restricted
to usury while commercial interest was perfectly Islamic.
Commercial and usury with respect to
two different school of thoughts!!
Argument 1 “Riba as practiced
during the days of the Prophet
was only Usury”
Counter argument

• This claim is groundless, since Islam when prohibiting

something does not only prohibit one form of it that is
prevalent, but all forms that might erupt in future. The
changed state does not change the ruling for eg. Qura’n has
prohibited liquor, pork and corruption/immorality (fahasha).
 Argument 2 “Commercial
interest did not exist in the days
of Prophet
Counter argument
This claim is also wrong. If one glances through the Islamic and pre Islamic history of
Arabia, it will be evident that the interest type at that time was not restricted to usury
but loans were granted for commercial and profitable purposes.e.g

“The tribe of Umro bin Aamir used to take interest from the tribe of Mughairah. At
the advent of Islam, Mughairah owed heavy interest to Umro bin Aamir.”
In this narration, the transaction of interest between 2 tribes of Arabia have been
pointed out who actually operated as trading companies; both tribes were very
wealthy. Could it be that 2 wealthy tribes transacted interest just for personal need
and expenses? The interest was simply commercial!
ANOTHER CLEAR ARGUMENT!!
Syedna Abu Hurairah narrated that the Prophet said,

“He who does not abandon Mokhabara, will be caught in a war

against Allah & His Prophet.”

In this narration Prophet has rendered Mokhabara illegal just like riba
and has declared a war against those who indulge in it just like riba.
What is Mokhabara?
• Its actually a division of the crop by agreement between the landlord
and cultivator in which the landlord gives his land to cultivator for
cultivation purposes in order to get his preagreed amounts of the
crop irrespective whether the production is low or high.
• For eg. “A” lends his land to ‘B’ for cultivation on the condition that
he will get a predetermined portion on each crop eg. 5 mounds. Such
a transaction is called Mokhabara.
• To sum up, Prophet included Mokhabara in riba that has no similarity
with usury, rather with commercial interest.
Argument 1
• The factor leading to prohibition of Riba (Interest) is that if a borrower
faces a loss, he still has to pay an excess amount over the principal,
which is basically an exploitation of his need whereas the lender on
the other hand gets an increase on his surplus capital without any
effort which is unjust.
• But this factor is not found in commercial interest since both the
borrower as well as the lender gets profit; the borrower on the
amount he has circulated in business and the lender in shape of
interest over his principle amount. Therefore, no one faces unfairness
or injustice in this transaction.
Counter argument
This argument is quite appealing and attractive at the face
value, as it is based on the assumption that no one suffers in
case of commercial interest. But after analysis, it is proven
that Quran has not only prohibited that one party faces a
loss and the other gets profit but has also prohibited one
party getting confirmed profit and the other party
unconfirmed profit from the same investment as we have
studied above in the case of Mokhabara.
 Argument 2
• This argument is based on the Qura’nic verse
“O believers do not devour one another’s possession wrongfully; rather than
that, let there be trading by mutual consent” (Al Nisa verse 29).

In the above verse, Qura’n has prohibited “Wrongful devouring” which will
only arise if the consent of one of the parties is absent and naturally the party
who is devouring consents, the other party never consents; he only gives in
since he has no other option. So we come to the conclusion that if the consent
and satisfaction of both parties is present in a deal, it cannot be called
“Wrongful devouring”. According to this logic, commercial interest is
permissible since the mutual consent is present of both parties whereas riba is
prohibited only when one party is getting the excess out of his selfishness and
the other party is encountering the loss, as he has no other alternative.
Counter argument:
• This argument is of superficial nature. Mutual consent is not the
criteria to render anything prohibited or not in Islam
• Would the act of adultery be allowed if the condition of mutual
consent is fulfilled? Similarly, there are many transactions in business,
which are rendered illegal even with mutual consent.
• For reference see forms of Bai where the mutual consent and
satisfaction is present and is prohibited by Prophet . Similarly, mutual
consent is present in commercial interest and gambling too but in
spite of that, it has been prohibited.
SIMPLE AND COMPOUND
INTEREST
Riba an Nasiyah can be classified into two types:
• Simple Interest ( Sood-e-Mufrid)
Definition of Simple Interest: Interest calculated only on the initial
investment.

• Compound Interest (Sood-e-Murakkab)

Definition of Compound Interest: Reinvestment of each interest
payment on money invested, to earn more interest.
• During the pre-Islamic era, when a borrower used to fail to pay back the
principal and interest charged on him, then the lender used to extend the
loan on the condition that the interest will also become part of the loan
(essentially Compound Interest).

• The following verses of Quran were revealed in order to stop the people
from such practices:

“O believers, take not doubled and redoubled interest, and fear God so that
you may prosper.” (Surah Al ‘Imran, verses 130-1)
• Since the aforementioned verse prohibits the compound interest only,
some people misinterpret it even today that compound interest alone
is forbidden in Islam, not the simple interest. They fail to see that
there is absolute prohibition of simple interest in a number of other
Quranic verses.
• It does not mean that if there is no doubling and redoubling (i.e., if
there is simple interest, in today's jargon), then it is lawful. No. In
Surah Al Baqarah and Surah An Nisa the prohibition of interest in its
entirety and in absolute terms is clearly mentioned, whether or not
there is doubling and redoubling.
Verses on absolute prohibition
of Simple and Compound
Interest
• “O believers, fear God and give up the interest that remains
outstanding (i.e. whether it is simple interest or multiplied interest)
if you are believers.” (Surah Al-Baqarah, verse 278)

• “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 (only -
not any kind of interest or premium). Neither should you commit
injustice nor should you be subjected to it.” (Surah al Baqarah, verse
279)