Download Dr. Ausaf Ahmad - Indian Centre For Islamic Finance

Riba, Gharar and
Islamic finance
AUSAF AHMAD
Islamic Cultural Centre of India
New Delhi
May 04 2008
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
anybody’s needs
Should not withhold
supplies to raise prices
Should not withhold
information to take
advantage of
ignorance.
Prohibition of Riba in
Qur’an
FIRST REVEALATION:
That which you give as Riba (interest)
the people’s 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
Qur’an [contd.]
SECOND REVEALATION:
And for their taking interest even though
it was forbidden for them, and their
wrongful appropriation of other
people’s property, We have prepared
those among them who reject faith a
greivous punishment. [4: 161]
Prohibition of Riba in
Qur’an [contd.]

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]
Prohibition of Riba in
Qur’an [contd.]
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]

Prohibition of Riba in
Qur’an [contd.]

God deprives interest of all but
blesses Charity. He loves not the
ungrateful sinners (276)
Prohibition of Riba in
Qur’an [contd.]

O believers ! Fear Allah and give up
interest that remains outstanding, if
you are true believers. [2: 278]
Prohibition of Riba in
Qur’an [contd.]


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



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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


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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



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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
Fixed Payment
No Gharar
Musharakat
Tabarruat
Ratio is determined
Nothing is determined
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.