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RIBA AND PROHIB IN IE (After MID TERM Exams 2)
RIBA AND PROHIB IN IE (After MID TERM Exams 2)
PROHIBITIONS IN ISLAMIC
ECONOMY
TOPIC CONTENT
05/01/2024 7
• “Gold is to be paid for by gold, silver by silver,
wheat by wheat, barley by barley, dates by
dates and salt by salt, like for like and equal for
equal, payment being made hand-to-hand. If
classes differ, then sell as you wish if payment
is made hand-to-hand.”(related by muslim, no.
4039)
05/01/2024 8
Rationale for Prohibition of Riba (1)
• Discourages innovation
-Interest obligations act as disincentive for experimenting with new, unproven
methods of production, especially for small-scale enterprises and agriculture
Rationale for Prohibition of Riba (5)
5. Negative effects on production (continued)
• Leveraged financing favors large-scale businesses
-Domination of big businesses over smaller entrepreneurs will curtail/ decrease
competition and in turn will affect product variety and innovation
• Anti-productive
-Inflexibility: in a loss situation leads to bankruptcies – loss of productive
potential and unemployment
• 2 types:
• Riba an-nasi’ah - delay in paying or delivery of one or two sold items
• Riba al-fadl - exchanging one ribawi commodity for same commodity but
unequal in amount
Riba an-nasi’ah
• Trading or exchanging of 2 usurious items of the
same kind in deferment (i.e transaction is not
completed on the spot)
• Example:
– 5grams gold being sold at RM2000 in deferment
– 10kg rice being exchanged with 15kg wheat in
deferment
• Riba exists when the above transaction takes place
in deferment. In present context, when women
purchase gold through a deferred payment system.
05/01/2024 18
Riba al-fadl
• Trading or exchanging 2 usurious items of the SAME
KIND with different weight (if being sold by weight) or
quantity (if being sold by quantity)
• Example:
– Exchanging 5grams gold (grade 916) with 6 grams gold
(grade 750). Haram because both item should be of equal
weight. The grade or quality does not effect the hukm.
– Exchanging or selling 10 grams of basmathi rice with 15
grams of A1 graded rice. Haram because both item should
weight 10grams.
– Transaction must be concluded on the spot.
05/01/2024 19
Riba al bay’(2)
• Summary of rules
Exchange Condition
(Amount & Time)
Money1 + Money1 Equality
Hand-to-hand (spot)
• Addressing Misconception
– Including prohibition of riba in his last sermon/ talk does not mean that
prohibition was only introduced at that time
• Emphasizing importance, last sermon was attended by most of his
followers, reiterate/ retell prohibition of riba
– Prohibition of riba comes in 5 stages
– Other prohibitions were also not given elaborate definitions
• E.g. prohibition of pork, liquor, gambling, adultery, etc.
• Impacts well known to its immediate audience
M1b: “Modern day interest is not riba”
• Addressing this Misconception
– Mutashabihaat: verses of Qur’an which correct meaning is not known clearly to
anybody/ambiguous
• E.g. “Alif Lam Mim”; “hand of Allah” (3:73)
– For these examples, ignorance of correct meaning does not affect the lives of
Muslims because no precept of Shari’ah is revealed through them
– However, riba has substantial affects on well-being - relates to prevalent
economic and social practice
– It is not imaginable that Allah would wage war against a practice where the
correct nature is not known to anybody
M2: “If it is not excessive, it is not riba”
• Misconception
– Al-’Imran (3:130) - “O those who believe, do not eat up riba doubled and
redoubled”
– If rate of interest is not excessive (e.g. doubled), then it does not constitute riba,
therefore not prohibited
• Rationale for making application of law based on illat and not hikmat
– Human reason, despite its wide capabilities, cannot claim to have
unlimited power to reach absolute truth
– Reason often confused with desires, leading to disguised/ concealed
justice
– Thus humans need guidance of divine revelations
M5: “Inflation justifies interest”
• Misconception
– Interest represents compensation for erosion of value of money (due to
inflation) during period of borrowing
– Loans should be indexed so that there is no injustice to creditor
Common day Risks of trading, doing business, Not stipulating price or product
example making investments specification in a sales contract
• “Satan intends to excite enmity and hatred among you with intoxicants and
gambling, and hinder you from remembrance of Allah, and from prayer…”
(5:90)
• “They ask thee concerning wine and gambling. Say: ‘In them is great sin and
some benefits for people; but the sin is greater than the benefits’” (4:219)
Prohibition of maysir/qimar
• Injustice elements in gambling:
• Winner:
-Does not lawfully earn what he has won
-Consume/enjoy other’s property unlawfully/unjustly
• Looser losses his money without a fair compensation
Counter-argument
• In event of default, bank has recourse (collateral, punitive/
disiplinary measures by authorities)
• Different from market risk associated with trading
– Risk is inherent in trading activity itself
– e.g. (cannot sell goods at profit)
Is there ‘iwad in conventional banking?
2. Effort (ikhtiyar)
Argument
• Bank expends effort to act as financial intermediary, evidenced by its costs of
operation (wages, overheads)
• Bank charges for, and earns profit from, bringing together deficit and surplus
units
• Bank is providing a service
Counter-argument
• Bank’s efforts do not value-add the product itself
• If bank is charging for service of matching deficit-surplus units, its return should
not be a function of amount of financing
• At most, bank can justify fee-based revenue but not interest-based revenue
• Bank does not act as agent for both deficit and surplus units but contracts
separately with them
• Effort cannot validate an underlying transaction/activity which is prohibited
Is there ‘iwad in conventional banking?
3. Liability
– The product in a conventional loan contract is money
– Physical defects in currency do not permanently diminish its value
as legal tender
• E.g. a torn or badly-soiled note can be exchanged at central
bank
– Therefore, product liability is not relevant
2.
Islamic Business Ethics and
Norms
1. Justice and Fair Dealings
• Fair dealing with all and keeping a balance
• Various evidence from al-Quran, e. g., 5: 8 and 4: 135
• Equal rights and obligations of every market player:
business rules are equally applied
• Ensure justice and fair play that result in harmony in the society
• Norms and good practices include:
• Honesty and gentleness: truthfulness and care for others
• Prohibition of najash (bidding up price without intention to take
delivery)
• Prohibition of khalabah (misleading marketing): over-projecting
quality of commodity
• Disclosure, transparency and facilitating inspection: role of
information
TRANSPARENCY AND DOCUMENTATION