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.

WHY IS INTEREST HARAM?

The important question whenever we speak about Islamic finance is, why is the element of interest, as applicable in the conventional banking model, prohibited, or why is it haram?

Interest is haram because of various reasons, however I’ll just summarize it or I’ll just focus on 2 main points.

Taking advantage

One, is because interest is considered as taking advantage over the person who is in a financial difficulty.

Whenever a person goes to the bank, to borrow money, it is because valid or pressing reasons, let’s say he wants to finance his education, his health, his marriage, or even to purchase certain necessity item, for instance car or home.

So whenever the customer does’t have sufficient funds, he goes to the bank, he applies for a loan, in order to facilitate the purchase, or the use, or the purpose that he intends to use.

Making money at low risk environment

Secondly, interest is prohibited, because it’s a form of making money at a very low risk environment.

What you only need is a big pool of amount of money, and you lend it to the borrower who does not have that capacity, and then you expect the repayment of that amount, over the period of time.

So its making money out of money, over a period of time.

So in a sense, the rich will become richer and the poor may become poorer.

Riba (Interest)

So interest is mentioned a few times in the Quran, whereby it’s mentioned as Englishly translated as “Allah permits trade, but prohibits riba”.

Riba here means interest.

So the question here is, then how does Islamic banks make profit out of their business activity.

So the only form of lending which is permissible under Islam is called “Qardul Hassan” which is a soft loan, an interest free loan.

So whenever the borrower wishes to borrow money from the lender, the lender will give the capital or the principal amount, lets say 1 million, and then the borrower will have to repay that principal amount without any additional amount imposed or attached to it.

So, lending 1 million, repaying 1 million.

If lets say, the argument comes saying that, how does Bank make profit?

So Banks are allowed to make profit, however it has to involve, the real economy.

So, under Islamic banking, products are offered for instance, the product of buying and selling, so the Bank may be able to make money out of the selling of the property at a mark up price, which we call a Murabaha.

So this is the difference between conventional banking and Islamic banking, where conventional banking, they make money out of money = interest, whereas Islamic banking they make money out of transaction.

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.