An Introduction to Islamic Finance: Theory and Practice

(Romina) #1

58 AN INTRODUCTION TO ISLAMIC FINANCE


THE CONCEPT OF RIBA IN ISLAM


Literally, the Arabic term riba refers to excess, addition and surplus, while
the associated verb implies “to increase, to multiply, to exceed, to exact
more than was due, or to practice usury.”^1
Early Muslim scholars considered money to be a medium of exchange,
a standard of value and a unit of account, but rejected its function as a
store of value. Lending on interest was prohibited because this was an act of
ingratitude and considered to be unjust, since money was not created to be
sought for its own sake, but for other objectives. The Qur’an (2: 275) makes
a clear distinction between engaging in trade and commerce, and earnings
through riba: “However, God permits commerce, and prohibits usury (inter-
est).” The concept of riba was clear in the minds of early jurists, scholars and
practitioners. For a long time, and before the introduction of paper currency,
the majority of Shari’ah scholars always considered the question of riba
in the context of an exchange contract (sarf) — that is, as a sale or exchange
of currency or money — or as a sub - heading under trade. Only a few scholars
discussed the subject under the heading of loan (qard).
Riba was interpreted variously by classical scholars as increase which
has no wealth (mal) corresponding to it; or as reward for waiting; or that
which accrues to the lender on account of a deferred payment from an
extension in the actual period of loan. At the time of the prohibition, it
was a common practice for people to lend money on the condition that a
specifi c amount would be payable periodically as interest and that the prin-
cipal amount would remain to be paid. At the expiry of the loan, if for any
reason the borrower was unable to meet the obligation, the lender would
offer to extend the lending period subject to an increased rate of interest.
The concept of riba is not confi ned to money - lending, however, but extends
to include the exchange of goods as well. Shari’ah recognizes two forms of
riba, as follows:


■ (^) Riba al - nasiah deals with riba in money - to - money exchanges, where
the exchange is delayed or deferred and gives rise to an additional
charge, as practiced in today’s fi nancial transactions. The prohibition
under the Shari’ah applies regardless of whether the return is a fi xed or
variable percentage of the principal, or an absolute amount to be paid
in advance or on maturity, or a gift or service to be received as a condi-
tion for the loan.
■ (^) Riba al - fadl is more subtle and deals with hand - to - hand or barter
exchange. The prohibition is derived from the sayings of the Prophet
(pbuh), who required that commodities be exchanged for cash rather
than through barter since there may be differences in the quality of goods,
which may give rise to an unjust increase. The concept of riba al - fadl is
remarkably similar to the prohibition of increase in lending victuals in the

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