Chapter 3
RIBA
Definition of Riba or Interest
The word “Riba” means excess, increase or addition, which
correctly understood according to Shariah terminology, implies
any excess compensation without due consideration
(consideration does not include time value of money).
This definition of Riba is derived from the Quran and is
unanimously accepted by all Islamic scholars. There are two
types of Riba, identified to date by these scholars namely ‘Riba
An Nasiyah’ and ‘Riba Al Fadl’.
‘Riba An Nasiyah’ is defined as excess, which results from
predetermined interest (sood) which a lender receives over and
above the principle (Ras ul Maal)
‘Riba Al Fadl’ is defined as excess compensation without any
consideration resulting from a sale of goods.
Ras ul Maal : capital investment, principal sum, capital.
Classification of RIBA
(a) Riba-un-Nasiyah or Riba-al-Jahiliya
(b) Riba-al-Fadl or Riba-al-Bai
Riba-un-Nasiyah or Riba-al-Jahiliya:
“that kind of loan where specified repayment period and an amount
in excess of capital is predetermined”.
Real and primary form of riba. Premium paid to the lender in return
for his waiting/giving or taking of every excess amount in exchange
of a loan at an agreed rate irrespective of whether it is low or high.
Riba-al-Fadl
Excess taken in exchange of specific commodities which are
homogeneous. Legal definition differs in every fiqh.
Hadith prohibiting Riba-al-Fadl
sell gold in exchange of equivalent gold
sell silver in exchange of equivalent silver
sell dates in exchange of equivalent dates
sell wheat in exchange of equivalent wheat
sell salt in exchange of equivalent salt
sell barley in exchange of equivalent barley
Sell barley in exchange of equivalent barley but if a person transacts in
excess, it will be riba.
However, sell gold for silver anyway you please on the condition it is hand-
to-hand(spot sales) and sell barley for date anyway you please on the
condition it is hand-to-hand(spot sales)
Imam Abu Hanifa on Riba-al-Fadl
Commodities must have two common characteristics
• Weight
• Volume
Includes all commodities having weight or volume and are being
exchanged.
Imam Shafi on Riba-al-Fadl
Commodities must have two common characteristics
be a medium of exchange
be edible
Includes all commodities that are edible or can be used as a
medium of exchange(currency).
Imam Maalik on Riba-al-Fadl
commodities must have two common characteristics
can be preserved
be edible
includes all commodities that are edible and can be preserved
Imam Ahmad Bin Hanbal on Riba-al-Fadl
First citation conforms to the opinion of Imam Abu Hanifa
Second citation conforms to the opinion of Imam Shafi
Third citation includes three characteristics at the same time
i.e., edible, weight and volume
Present day Islamic scholars on Riba-al-Fadl
If two characteristics i.e., weight and use as medium of
exchange is present, then the following transactions are not
allowed
a deferred sale of goods having weight and
homogeneous nature
a sale of unequal goods having weight and
homogeneous nature
THE LAWS OF RIBA AL FADL
First law
Exchange of any of the six commodities with itself but
differing in quality, is allowed only under certain conditions.
Conditions of Exchange:
Any difference in value/quality should be ignored
The commodities should be exchanged in equal amounts
(equal weight and volume).
No direct exchange of commodities of the same kind
A person should sell his commodity against cash at the market
value and buy someone else’s commodity in exchange of cash
proceeds at the market value.
Second law
Exchange of a product with its raw material is allowed under
certain conditions
Conditions of Exchange:
If the characteristics of the product has been totally changed by
the industry, then different amounts can be exchanged.
If little difference has been made;
either the exchange should be in equal weights
or one of the commodities should be sold in the market
and the cash proceeds used to buy the then one.
Third law
Exchange of any of the six commodities with one another is
allowed in unequal amounts but the payment should not be
deferred
Provided that the general conditions of a sale contract are
fulfilled
COMMERCIAL INTEREST AND USURY
In the 17th century, two new technical terms of interest
emerged after the establishment of banking system, namely
Tijarti Sood(Commercial interest)
interest paid on loan taken for productive and profitable
purpose
Sarfi Sood (Usury)
interest paid on loan taken for personal need and expenses
Riba al Nasiah is also classified as:
Sood-e-Mufrad (Simple Interest)
interest calculated only on the initial investment
• Sood-e-Murakkab (Compound Interest)
reinvestment of each interest payment on money invested
to earn more interest