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Riba Representations in Modern Economic System

Manal Kandel

Fiqh of Transactions

Sh. Abdul Wahab Saleem

2 December 2017

Manal Kandel

Fiqh of Transactions

Sh. Abdul Wahab Saleem

2 December 2017

Riba Representations in Modern Economic System


Even though ‘Riba' or interest is considered the backbone of the modern economic system, it is clearly prohibited by consensuses with supporting evidence from Qur'an and Sunnah. There is no difference of opinion among Muslims regarding this point. It's the basic principle of the Islamic economic system. However, questions have been always raised about the actual meaning and different types specially in the modern economic system where there are many different applications that were not available during the time of the Prophet (ﷺ) and the early Muslim era. This paper is an attempt to clarify the meaning, evidences of prohibition from both Qur'an and Sunnah, in addition to different kinds and applications from the modern economic system.

Definition of Riba:

“Riba” is an Arabic word that literally means growth, excess, addition, or increase. From Islamic perspective, it refers to earning money on money through a predetermined and conditional rate on a loan, this is commonly used in context with ‘interest' charged for lending money.  Although making profit is allowed in Islam, but earning money on money is not allowed because there is no productive or trade activity creating additional wealth which will cause a social injustice because lenders requiring interest on loans tend to profit from the weak position of borrowers.

Prohibition of Riba:

Riba is condemned by Allah in many verses of the Qur'an. Among them is what Allah mentioned in Surah Al-Baqara:

يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُواْ ٱتَّقُواْ ٱللَّهَ وَذَرُواْ مَا بَقِىَ مِنَ ٱلرِّبَوٰٓاْ إِن كُنتُم مُّؤۡمِنِينَ (٢٧٨) فَإِن لَّمۡ تَفۡعَلُواْ فَأۡذَنُواْ بِحَرۡبٍ۬ مِّنَ ٱللَّهِ وَرَسُولِهِۦ‌ۖ وَإِن تُبۡتُمۡ فَلَڪُمۡ رُءُوسُ أَمۡوَٲلِڪُمۡ لَا تَظۡلِمُونَ وَلَا تُظۡلَمُونَ (٢٧٩)

O ye who believe! fear Allah and give up what remains of your demand for usury, if ye are indeed believers. (278) If ye do it not, take notice of war from Allah and His Messenger: but if ye repent ye shall have your capital sums; deal not unjustly and ye shall not be dealt with unjustly. (279) [Yusuf Ali 2:278-279]

Riba is also forbidden by many statements of the Prophet Muhammad (ﷺ) such as:

قَالَ لَعَنَ رَسُولُ اللَّهِ صلى الله عليه وسلم آكِلَ الرِّبَا وَمُوكِلَهُ وَكَاتِبَهُ وَشَاهِدَيْهِ وَقَالَ هُمْ سَوَاءٌ‏.‏

Allah's Messenger (ﷺ) cursed the accepter of interest and its payer, and one who records it, and the two witnesses, and he said: “They are all equal”. [Sahih Muslim 1598]

Different Types of Riba:

Muslim Scholars have identified two kinds of Riba:

1. Riba An Nasee'ah (deferment): It's defined as predetermined extra amount on deferred payments due to the inability of the borrower to pay its debt on time such as extending the period for payment by charging more than the principal value. Also known as “Riba al-Qur'an” because it was clearly prohibited in the Qur'an 2:278-279.

2. Riba Al Fadl (Increase): It's defined as an unlawful excess in the exchange of two counter-values where the excess is measurable through weight or measure. Also known as “Riba al-Hadeeth” because it was clearly prohibited in the following Hadeeth of the Prophet (ﷺ):

عن عُبَادَةَ بْنِ الصَّامِتِ وَمُعَاوِيَةَ حَدَّثَهُمْ عُبَادَةُ، قَالَ نَهَانَا رَسُولُ اللَّهِ صلى الله عليه وسلم عَنْ بَيْعِ الذَّهَبِ بِالذَّهَبِ وَالْوَرِقِ بِالْوَرِقِ وَالْبُرِّ بِالْبُرِّ وَالشَّعِيرِ بِالشَّعِيرِ وَالتَّمْرِ بِالتَّمْرِ - قَالَ أَحَدُهُمَا وَالْمِلْحِ بِالْمِلْحِ وَلَمْ يَقُلْهُ الآخَرُ - إِلاَّ مِثْلاً بِمِثْلٍ يَدًا بِيَدٍ وَأَمَرَنَا أَنْ نَبِيعَ الذَّهَبَ بِالْوَرِقِ وَالْوَرِقَ بِالذَّهَبِ وَالْبُرَّ بِالشِّعِيرِ وَالشَّعِيرَ بِالْبُرِّ يَدًا بِيَدٍ كَيْفَ شِئْنَا قَالَ أَحَدُهُمَا فَمَنْ زَادَ أَوِ ازْدَادَ فَقَدْ أَرْبَى ‏.‏

"Ubadah bin As-Samit and Muawiyah met at a stopping place on the road. 'Ubadah told them: 'The Messenger of Allah forbade selling gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates"'- one of them said: 'salt for salt,"' but the other did not say it-"unless it was like for like, hand to hand. And he commanded us to sell gold for silver and silver for gold, and wheat for barley and barley for wheat, and to hand, however we wanted."' And one of them said: "Whoever gives more or ask for more has engaged in Riba."' [Sunan an-Nasa'i 4560]

Riba Representations in Modern Economic System:

In general, Riba Al Fadl is not commonly used nowadays. However, Riba An Nasee'ah is extensively used in the modern economic system.  There are several applications that considered Riba An Nasee'ah, and the common characteristic between them is selling money now for a higher amount of money later.

(1) Selling checks and bonds:

When a person borrows money, and write checks or bonds in return as commitment from him that he will pay this debit on a specific date, the lender can't sell these checks or bonds for a lesser cash amount or same amount with extra benefit to another person, company or organization. This includes person-person transaction, companies, organizations, governments...etc. This transaction contains selling money now for a higher amount of money later which is considered clear Riba and it is haram.

(2) Investment Bonds:

Some banks offer bonds that provide investors a predictable income stream in a form of monthly, quarterly, or annually interest according to the contract. Then when the bonds are held to maturity, bondholders get back the entire principal. So, bonds are a way to preserve capital while investing. In Islamic economy, Investments shouldn't be committed to preserve the capital while gaining predictable income. Thus, this considered Riba and it is haram.

Islamic Fiqh Council has issued this statement regarding the investment bonds: “Bonds which represent a commitment to pay the face value plus interest, or conditional benefits, are haram according to sharee'ah, whether one is buying, selling or handling them, because they are considered to be interest-based loans. This applies whether they are issued by private companies or by public bodies run by the state. The fact that they are forbidden is not affected by giving them other names such as ‘certificates', ‘investment documents' or ‘savings', or calling the interest ‘profit', ‘commission' or ‘returns'”. [islamqa]

(3) Loans:

There are two general types of loans; one that the borrower is only committed to return the exact amount of money that he borrowed, and this is called ‘Qard Hassa' or ‘good loan'. The other one is the loan with interest which is commonly known in Fiqh as ‘Riba-based' loan. This is when banks, people or other organizations offer loans with a condition of additional deferred payment on the top of the principle. This is the exact description of the Riba that was widely spread during the time of the Prophet (ﷺ) and was clearly prohibited in the Qur'an. Therefore, it's haram by consensus.

(4) Selling deferred debt for a lesser amount:

Some people lend money to others with for a certain amount of time, then for some reason or another the lenders need his money now, so they sell the debits to other people, banks, or organizations for lesser cash value or extra benefit. Then this new debit's owner, collect the original amount of money from the borrower on the pre-agreed specific date. In this situation, there are two different seperate transactions, the first one was a regular ‘Qard Hassan'; which includes money now for same amount of money later and this was halal transaction. Then the second one includes money now for a higher amount of money later which is pure Riba and it is haram.

(5) Forex Margin Trading:

Forex is speculation with currencies that does not have any productive objective, or produce any benefit to society or humanity. It's a form of trading, where the investor buys large amount of money with only small amount as margin which called 'leverage' and another agent (bank or otherwise) pays the rest as a loan, provided that the purchase contract remains in the name of the agent as a pledge for the money that was loaned. Then the investor gets profits or losses regarding to his transaction; if he buys then the price goes down, then he will lose, and the agent will cut the loss from his trading account. Conversely, if he gets profits, the agent will credit it into his trading account.  This is a kind of loan that brings profit for the both the investor and the mediator.

The Islamic Fiqh Council of the Muslim World League, in its eighteenth session that was held in Makkah in April 2006, has explained that these transactions involve bonds, loans, interest (if there is a delay), agreed-upon commission, pledge (that gives the agent the right to sell these contracts and take back the loan if the customer's losses reach a specific percentage of the margin).  They believe that this transaction is not permissible according to sharee'ah for the following reasons:

1. It involves obvious Riba, which is represented by the addition to the amount of the loan which is called “paying fees for delaying the deal”.

2. The agent stipulates that the customer must deal through him, which leads to combining both giving a loan for something in return and paying commission, which is similar to combining giving a loan and selling at the same time, which is forbidden because the

Prophet (ﷺ) said: The proviso of a loan combined with a sale is not allowable, nor two conditions relating to one transaction, nor profit arising from something which is not in one's charge, nor selling what is not in your possession. [Sunan Abi Dawud 3504]

قَالَ رَسُولُ اللَّهِ صلى الله عليه وسلم ‏ "‏ لاَ يَحِلُّ سَلَفٌ وَبَيْعٌ وَلاَ شَرْطَانِ فِي بَيْعٍ وَلاَ رِبْحُ مَا لَمْ تَضْمَنْ وَلاَ بَيْعُ مَا لَيْسَ عِنْدَكَ"‏‏.

3. Dealings that are done in this manner in the global markets usually involve many contracts that are haram according to sharee'ah, such as dealing in bonds, or selling what one does not possess.  

4. This transaction involves economic harm to the parties involved, especially the investor because it is based on borrowing to excess and taking risks, which may lead to severe economic turmoil that will cause great loss and harm in society.


(6) Multi-level marketing:

It's also known as pyramid selling or network marketing. It's a type of business model in which a distributor network is needed to build the business. It features a low upfront investment by an individual in buying a specific product then trying to sell this product directly to friend, family and other personal contacts. In addition to ask them to recruit them as sales representatives as well. The recruits establish a "downline" and their sales generate income for those above them in the program.

This kind of business includes stipulate that one must buy a certain product in order to be able to engage in marketing and take commission which involves:

1. Ambiguity: They tend to buy the unworthy product in order to join the marketing to get high commission.

2. Gambling: They pay for a product in the hope of being able to attract customers and get commission, which may or may not happen.

So, the main purpose of this business is to earn commission, not to buy the product. The commission may reach tens of thousands, whilst the product is not worth more than a few hundred. So, it's not only haram because it's Riba, but it's a kind of gharar (ambiguous transaction) and it was narrated that Abu Hurairah said that the Prophet (ﷺ) forbade Gharar transaction and Hasah transactions." [Sunan an-Nasa'i 4518]

عَنْ أَبِي هُرَيْرَةَ، قَالَ نَهَى رَسُولُ اللَّهِ صلى الله عليه وسلم عَنْ بَيْعِ الْحَصَاةِ وَعَنْ بَيْعِ الْغَرَرِ‏.‏

It also involves cheating, deceiving, tricking people, and consuming people's wealth unlawfully, because these contracts benefit no one but the companies and very few participants.

(7) Credit Cards:

Credit card is a card issued by a bank or similar entity that grants its carrier the advantage of meeting his needs whether for goods or services on credit and allow the amount to be settled with a grace period without penalty. If the cardholder delays the payment after due date, he should pay late fees which is considered Riba. In this case, even if the cardholder will not going to delay his payment and would settle his debit on time without any penalty fees, it's forbidden to sign such a contract with the bank because he is agreeing on dealing with Riba in specific circumstances.

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