WHAT IS RIBA?
Riba is an Arabic term which means usury or oppression, or most commonly referred to as “interest” in the common language.
In the modern business activity, riba or interest is mainly or predominantly used in the business model of banking institutions. Let say you wish to purchase your house worth 1 million USD, you don’t have sufficient funds, so you go to the Bank, you apply for a loan facility and the Bank will grant you 1 million USD, and put a certain percentage of that principal lent amount to be repaid back by the borrower over a certain period of time.
So let’s say its 10%, so the customer is expected to pay 1,100,000 over the duration of the loan period. So this 100,000, this 10%, is considered as interest which is therefore a prohibition under Shariah, which explicitly mentioned in various Quranic verse for instance “Allah prohibitions Riba”.
There are 2 types of Riba: the first one is “Riba Nasiiah”.
Riba Nassiah is the increase of lending amount for the repayment of that amount over a period of time, as mentioned or explained to you in my example before.
The second type of riba which is not commonly heard of is “Riba Al-Fadhl”. Riba Al-Fadhl means the excess or the surplus of the type of commodity over the sale or exchange period.
So how does it happen? There are 6 ribawi items under Shariah which are: gold, silver, dates, barley, wheat and salt.
So let’s say one party wishes to sell or wishes to exchange gold with another party, so Party A has 10 kg of gold, party B has 20 kg of gold but at a poor quality.
Say they want to exchange with each other.
So, under Shariah this is prohibited, this is impermissible because gold is a ribawi item which has to be exchanged equal to equal, like to like, and hand to hand.
So even though it’s the same type of commodity, which is gold, but because of the difference in terms of the quality and quantity, it therefore violates the prohibition under Shariah which is the prohibition of riba.
If you are interested to get us to help you with Islamic finance consultancy and Shariah advisory, feel free to contact us. Our team are looking forward to grow your brand with Shariah compliance products and services.