CONCEPT OF RIBA

Since the early years, Riba has been regarded as any extra amount demanded by a borrower above the capital given. Definition of Riba is not expressly spelt out in the Qur’an but the term as used in the Qur’an denotes “increase”, “swelling”, “growth”.  Islamic scholars have defined Riba has the doubling or quadrupling of the sum lent. Abu al A’la al Mawdudi defined riba as “a predetermined excess or surplus over and above the loan received by the creditor conditionally in relation to a specified period”. The question that arises is “Is every increase over principal riba?” The only acceptable form of growth (increase in capital) is that which is tied to productive engagement in lawful trade and activities involving tangible assets.

  "...whereas Allah has permitted trading and forbidden Riba...  (2:275)

While attempts have been made by those trying to justify interest charging to define Usury as unreasonable and exorbitant rates of interest, and interest as an extra amount charged over and above money lent, it is worthy to note that Islam has forbidden the excess charge on money lent in its entirety. It makes no distinction on what is moderate and what is deemed excessive. Therefore, there is no distinction between Usury and Interest. Islam has not only forbidden Interest, it has condemned it has a major sin liable to a great punishment in the hereafter:

O ye who believe! Observe your duty to Allah, and give up what remaineth (due to you) from usury, if ye are (in truth) believers. And if ye do not, then be warned of war (against you) from Allah and His messenger. And if ye repent, then ye have your principal (without interest). Wrong not and ye shall not be wronged.

(2:278-279)

Riba has been prohibited because it instills miserliness, self-centeredness, callousness, lack of concern and heartlessness. It eradicates all form of human sympathy and mutual love. It encourages idleness and under-utilization of human skills and intellect. Economically, it leads to hoarding of money, negatively upsetting its circulation among the wider society. It also leads to creation of monopolies and concentration of wealth in few hands.

TYPES OF RIBA

Although Qur’an makes no distinction as to the types of Riba, Islamic Jurists have attempted to classify it into 2 main types on the basis of practice as at the time of emergence of Islam and based on Hadith of the Holy Prophet.

RIBA AL-FADL

This can be described as selling a type of item for the same type of item but which is better in quality or more in quantity. It basically the type of Riba found in barter transactions.

Hazrat Al-Khudri reported that the Prophet (SAW) said:

Gold in exchange for gold, silver in exchange for silver, wheat in exchange for wheat, barley in exchange for barley, dates in exchange for dates, salt in exchange for salt is in the same category and (should be exchanged) hand to hand, so whoever adds or demands increase he has practiced usury. The giver and taker are the same.

Care should be taken not to commit Riba al-fadl in barter transactions. The prophet (SAW) advised that rather than exchange superior quality goods with more quantity of the inferior ones, the superior quality goods should rather be sold and the money used to purchase the inferior ones. The later is acceptable while the former is considered forbidden.

Barter transactions involving different products are allowed at different quantities e.g one kilogram of wheat against two kilograms of maize, provided they are concluded on the spot. Concluding the transactions on the spot ensures that they are executed at the prevailing market rate as it is impossible to rule an element of interest in determining the value of the products should the transaction be carried out on credit basis.

RIBA AL-NASIAH

Riba Al-Nasiah derives its name from Nasiah which means to postpone or to defer.  It is defined as excess, which results from predetermined interest which a lender receives over and above the principal. It refers to the compensation given for the use of funds. This type of riba is prevalent in loan and credit transactions and is the basis of the modern day conventional banking. Islamic banks should be careful not to inculcate riba into any aspect of their transactions both asset and liability.