The Art of Islamic Banking and Finance: Tools and Techniques for Community-Based Banking

eventually burst after his retirement, causing the huge damage of financial
markets worldwide. Unfortunately, in the 2008 experience we have seen
that such alaissez-faireapproach invites corruption and fraud (witness the
persistent regulatory and legal violations of many of the investment bankers
and mortgage bankers). The outcome can be devastating in depth and
extent, as we saw in 2008.
The big question is, how can an average citizen or an RF financial insti-
tution avoid participating in this bubble behavior? The answer is that the
bubble can be avoided by applying the following two important RF finance
rules:

1.Use commodity indexation

2.Apply the mark-to-market concept

These RF finance rules make certain that we are investing prudently and
not participating in a bubble. True, we may be premature in quitting a cer-
tain market, and we do not participate in some spectacular speculative
(gambling) returns, but as RF bankers we are certain that we deliver the
most important value of RF banking to our customers: the preservation of
capital and the realizing of prudent returns that, in the long run, will be
much higher than such ‘‘bubble’’ and gambling-based returns.

THE PROHIBITION OF RIBA/RIBIT: RULINGS ON
RIBA IN FIQH, THE SCIENCE OF SHARI’AA

There are two types or classes of riba:

1.Riba al nassee’ahis defined as the increase over the original value of

capital given, usually by putting a condition in the loan agreement indi-

cating that the lender would be entitled to an increase over the original

value if the borrower asks for an extension of the term of the credit.

This type of riba is prohibited by the Qur’aan, the Sunnah (tradition of

Prophet Muhammad [pp]), and all scholars, without exception.

2.Riba al fadlis defined as selling [real] money for [real] money, com-

modity for commodity (e.g., food for food) with an increase over the

original value except under special rules as will be explained later.

This practice is also prohibited by all sources (the Qur’aan, the

Sunnah, and all the scholars), because it can lead to riba al nassee’aah.

It is given the label of riba as a way to attach it to the real reason for

prohibiting it, because it leads to riba al nassee’ah. Prophet Muham-

mad (pp) said^18 :

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