Accounting for Islamic

Banks (Lecture Week

2)
Part 1
Islamic Prohibition of Riba

The Prohibition of Riba and

Ghararof Riba
Meaning

Literally: excess, increase, expansion or

growth

Definitions of Riba
Ibn al-Arabi: every excess in return of which no
reward is paid
Mawdudi: predetermined excess or surplus over
and above the loan received by the creditor
conditionally on relation to a specified period
Haque: an increase or excess which, in an
exchange or sale of commodity, accrues to
the owner (lender) without giving in return
any equivalent counter or recompense to the
other party

Prohibition of Riba
In the Quran - 4 Stages:
1.
Surah al-Rum: 39

compare riba with Zakat and charity

praising Zakat but not riba

2. Surah al-Nisa: 160-161

attaching the practice of riba with the

Jews

Consider the practice as an inequity

3. Surah ali-Imran: 130

Prohibiting the practice of charging double

and multiple riba

Prohibition of Riba
4. Surah al-Baqarah: 275-281
Conclusively prohibiting all forms of riba
Any excess over the capital is disallowed
they say: trade is like riba, but Allah has
permitted trading and forbidden (haram) riba
(usury)
Example in the Sunnah:
From Jabir the Prophet s.a.w cursed the
receiver and the payer of riba, the one who
records it and the two witnesses to the
transaction: they are alike in guilt

Types of Riba
Riba al-Buyu (exchange transaction)
Riba al-Fadl (due to excess)

Riba al-Nasiah (due to delay)

Example:
(a) Trading commodities of the same
commodities (gold gold; dates dates)

Both commodities must be equivalent

Prompt delivery
(b) Trading commodities of the same group but
different kinds (gold - silver; wheat barley)

Equality not a condition

Prompt delivery
(c) Trading commodities of different groups and
kinds (gold wheat; silver barley)

No conditions imposed i.e. free trading

1.

Types of Riba
2. Riba al-Duyun (loan/debt transaction)

Riba al-Nasiah (due to delay)

Characteristics of Riba al-Nasiah
3 Elements:
1.
Excess or surplus over and above the loan
capital;
2.
Determination of surplus in relation to
time; and,
3.
Stipulation of surplus in the loan
agreement.

Riba vs Trade
Wisdom behind prohibition of riba

Elimination of injustice and encourage

cooperation

Spirit of brotherhood
Riba is not trading:

Money loaned for self-generating or selfexpanding value is not sale

Growth or increase in money is inequitable

One party receives an increase without

equivalent return to the other party

In sale, there is productive exchange such

as goods for goods and money for goods

Part 2
Islamic Prohibition of
Gharar

Meaning of Gharar
Literally: In Arabic means negative
elements e.g. deceit, fraud,
uncertainty, danger, risk, hazard etc.
that might lead to destruction and loss
Technically: uncertainty and ignorance of
one or both parties of a contract over
the substance or attributes of the
object of sale or doubt over its
existence and availability at the time
of contract

Gharar in the Quran

The word Gharar appeared 27 times in the
Quran
Refer to the need of believers to be aware of the
deceptive character of the worldly pleasures,
and not to be deceived by such temptations
Example in Surah al-Nisa (4:29):
O you believe! Eat not your property among
yourselves unjustly (bil batil i.e. by falsehood
and deception) except in a trade amongst you
by mutual consent
Most jurists agreed that al-Batil refers in the
above verse includes illegal and deceptive
elements in commercial contracts

Gharar in the Sunnah

In commercial transactions, the

Prophet s.a.w in many of his sayings
prohibited the sale involving gharar
Examples: The prohibition of sale of
fish in the sea, bird in the air, unborn
animals, etc.
Gharar is prohibited by consensus of
the jurists (ijma) since the time of the
companions, their followers (tabiin)
and subsequently until now.

Reasons for prohibition of

Gharar

To ensure full consent and satisfaction of

all parties in a contract
Without full consent and satisfaction the
contract is null and void
Full consent can only be achieved
through certainty, full knowledge, full
disclosure and transparency, and zero
deceit or fraud
Gharar also results in the risk being built
into the contract at its inception which
may result in a profit for one party and
corresponding loss to other party (zerosum game or gambling)

Factors for Gharar in Contracts

None or incomplete ownership (do not

sell if you do not have or cannot
legally guarantee delivery
Non-possession or cannot guarantee
physical delivery to avoid manipulation
by the seller and protect the interest of
buyer
Uncertainty in the contract or
conditional sales

Exceptions of Gharar

The uncertainty is too trivial or too slight

and tolerable by both or all parties
Charitable contracts (tabarruat i.e. Waqf
etc.)
The real public need for the transaction
or contracts even gharar is excessive
e.g. bay al-Salam (advance purchase),
al-Istisna (manufacturing contract )
To satisfy peoples immediate need and
removal of hardship makes Gharar an
exception and need takes priority

Exceptions of Gharar
Gharar is averted if:
Both the price and the subject matter are
proved to be in existence at the time the
transaction concluded
The qualities are known and the
quantities are determined
The contractual parties have control over
them so as to ensure the exchange can
take place
Term of time can be precisely determined