Home Weekly Islamic Pages Islamic Banking & Finance Page 01-05-2020

Islamic Banking & Finance Page 01-05-2020

Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan

What Riba means

The basic objective of Islam is against anything that oppresses people and in this way interest (Riba) comes in its way that has many ways of exploiting others, namely the depositors and borrowers. Also, profitability is not seen as the soul target for performing business in Islam. Rather Islamic banking is responsible for social objectives, such as equal distribution of wealth. Social goals are not to be ignored in any part of Islam and this should be the basis of Islamic banking.

As stated above Islam treat Riba as a tool of exploitation so its definition becomes important to design Islamic social system. For example, some time it is argued that current Islamic banking is based on a limited concept of Riba or interest that allows rent on assets providing a basis to Mudarbah contract, the very basis of current Islamic banking. According to these arguments rent tantamount to excess on principal in form of money or other assets. Since in Quaranic verses, the excess is not permissible so as per these arguments, rent comes under the definition of interest and thus bringing in to structure of whole Islamic banking under question.

Riba has been discussed at 20 places in Quran. However there is a difference in approach in understanding Riba in its strict sense. These approaches have been elaborated in the Supreme Court (Shariat appellate Jurisdiction) judgment 2000.  According to this:

One school of thought says that the verses of Quran which prohibit Riba were revealed in the last days of Holy Prophet and he could not have time to interpret them properly, hence no hard and fast definition can be found in Quran and Sunnah. According to this approach the prohibition of Riba should be restricted to the limited transactions expressly mentioned in the Hadith and the principle cannot be extended to the modern banking system which was not imaginable at that time.

Second approach says that Riba only refers to the Usurious (personal) loans on which excessive rate of interest is used to be charged by the creditors which tends towards exploitation. As for modern banking interest, it cannot be termed as Riba if the rate of interest is not excessive or exploitative.

Third approach says that differentiation should be made between consumption loans and commercial loans. Since consumptions loans (mostly consumed by the poor people) tend towards exploitation so they come under the definition of Riba but commercial loans used for commercial or productive purposes do not come under the definition of Riba.

Fourth approach says that Quran has prohibited Riba al jahlia. This was a particular transaction of loan where no additional amount over and above the principal was stipulated in the agreement of the loan. According to this theory if an increased amount is stipulated in the initial agreement of loan it does not constitute Riba-ul-Quran; however it does fall in the definition of Riba al Fadl prohibited by Sunnah.

However, after listening these arguments Shariat appellate court gave its verdict as “any additional amount over the principal in a contract of loan or debt is the Riba prohibited by the Holy Quran”. Further to this following transactions were also termed as Riba as per Sunnah i.e. (1) a transaction of money of the same denominations where the quantity of both sides is not equal either in a spot transaction or in a transaction based on deferred payment (2) A barter transaction between two weighable or measurable commodities of the same kind where the quantity on both sides is not equal, or where the delivery from one side is deferred. (3) A barter transaction between two different weighable or measureable commodities where delivery from one side is deferred.

According to verse Al-Baqrah 2:278-79, any excess compensation over and above the principal without due consideration has been termed as Riba. However in the same verse it has been further said “Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the devil: this is because they say; “trade is like interest” while God has permitted trade and forbidden interest”. So it is very much clear that if transactions are backed by trading activities than excess earned through this mean is not Riba.

Four imams viz: Imam A’zam Abu-Hanifa, Imam Maalik, Imam Shaafi and Imam Ahmed-bin-Hambal are very close in defining Riba, however they technically vary. The Hanafi says that Riba is the extra or the increment of wealth without any return in the exchange of wealth according to Shariah legal measurement. The Hamblis says that Riba is a contract which is the extra or the increment of something which is defined according to legal Shariah and legal measurement. The Shaafi and Malaki say that Riba is a contract which is without equal return or something defined according to shariah legal measurement during the contract or with lapse of time in exchange.

As explained above, Riba in Pakistan has been defined strictly as any excess which is predetermined over the principal sum in a loan transaction. In Iran the Riba is defined as receipt of any extra amount in excess of principal amount of loan if and only if such receipt has been preconditioned. The preconditions are

  • Existence of indebtedness i.e. if in any deal the factor of indebtedness is avoided than the receipt of any extra amount will not be considered as Riba.
  • Existence of debtor independence from creditor i.e. in Iran it is presumed that if lender and borrowers are not independent and interdependent like son and father or central bank and government than receipt of any extra amount on principal will not bring it under Riba definition. Taking advantage of this, the problem of public debt and statuary reserves have been solved in Iran.
  • Existence of a precondition i.e. if a condition for receipt of extra amount is not included in the lending agreement evidently, nothing is payable. However, if in the absence of that condition any amount in excess of principal is paid than it will not be treated as Riba.

In Malaysia they have factored in secondary market trading of debt and debt based securities by making it possible through Bai-ul-Dayn that is not permissible under Riba as per most of Shariah Scholars. Even in Malaysia most of the scholars do not agree with this permission though this transaction is supported by underlying asset. The traditional Muslim Jurists are unanimous on the point that Bai-ul-Dayn with discount or premium is not allowed in Shariah, however some Shariah scholars have allowed this kind of sale by referring ruling of Shaafi School but they also consider this fact that the Shaafi School of jurists allowed it in cases where debt is sold at its par value. All this situation transpires that three main groups exist on definition of Riba in Islamic world: Pakistan, GCC, Sudan follow one school of thought; Malaysia another; and finally Iran another based on their Fiqh where only Quranic definition of Riba is considered as important. These are technical deviations but matter a lot in case of their applications.

So to bring these definitions on one plank, efforts are required by going above to sectarian divide. I remember that being member of international committee on development of Islamic Banking, in a meeting at Hongkong, we all participants tried to have one definition of Riba but Governor of central Bank of Sudan sitting there, said that of course I would carry this definition but after landing in Khartoum I have to do what my country’s Mufti have to say. However a ray of hope has arisen now when Islamic Development Bank in Jeddah has decided to make its decision with majority and not with consensus. Through this way we can defeat sectarianism and can attain a single definition of Riba.


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