57CHAPTER
3Riba vs. Rate of Return
A
s set out earlier, the Islamic economic system is a rules - based system
founded on the preservation of property rights and the sanctity of con-
tracts. Beginning from the notion of property as a sacred trust, the Shari’ah
ensures its protection from any exploitation through unjust and unfair deal-
ings. The prohibition of riba (interest), the elimination of contractual ambiguity
(gharar) and other forms of exploitation are some of the implications of these
core principles.
The signifi cance of contracts and the related obligations cannot be over-
stated. In this context, fi nancial transactions are no different from any other set
of contracts that are subject to compliance with Shari’ah principles. Primarily,
a fi nancial transaction is considered valid if it fulfi lls the basic requirements
of a valid legal contract and does not contain certain elements such as riba
(interest), gharar (lack of information disclosure), qimar (gambling) and
mysir (games of chance involving deception). While the prohibition of riba
is the most critical and gets the most attention, the importance of gharar and
other elements should not be underestimated. Historically, jurists or Shari’ah
scholars did not cause unnecessary interference in economic activities and
gave various economic agents full freedom to contract, providing that certain
basic requirements, such as the prohibition of riba, were met.
The prohibition of riba is not confi ned to Islam alone, but has a long
history spanning several traditions and civilizations (see Appendix A). The
prohibition does not arise from any formal economic theory as such, but
stems from a Divine order in the Qur’an. However, riba was not precisely
defi ned at the time of the revelation, an omission often attributed to the
fact that since the concept was not in vogue at the time there was no need
to provide a formal defi nition. Defi ning the term in modern times in any
language other than Arabic adds further complexity. For example, unfor-
tunately, there is no single word in contemporary English that serves as an
equivalent and accurate translation of the term.
For our purposes, a simple defi nition of riba could be “the practice of
charging fi nancial interest or a premium in excess of the principal amount
of a loan.”
An Introduction to Islamic Finance: Theory and Practice, Second Edition
by Zamir Iqbal and Abbas Mirakhor
Copyright © 2011 John Wiley & Sons (Asia) Pte. Ltd.