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) The verse 2:279 is the strongest condemnation of Riba.

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 by Muslim, Tirmidhi and Ahmad]

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 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 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 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 Nothing is determined Fixed Payment Ratio is determined No Gharar 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.