What is riba’?
As the Islamic finance industry is growing exponentially for a several decades around the globe, the term of free-interest banking is always being touted as a key feature of Islamic banking which make it dissimilar from the conventional practice which dominantly practicing the Riba in its all transactions over the years.
Riba can be translated into English as usury or interest. Regardless of the amount paid, any interest charged on money borrowed is identical to Riba. In its simplest term, Riba is refers to a benefit or gain obtained by a party from another without any consideration.
Syariah addresses the issue of Riba in two types of transactions, specifically in a loan or currency exchange contract as well as in a barter trading contract or Riba in loan and sale contracts. Muslim jurists have consistently agreed that there are two categories of assets which are associated to Riba and known as ribawi items, namely currency or money and a few commodities, mainly food items.
The same requirements need to be fulfilled for the exchange which involved in these two types of assets whereby an exchange of one currency for another currency and also the exchange of a food item for another food item, whether it is the same or of different types and kinds.
It is reported that the Prophet Muhammad said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, like for like, equal for equal, hand to hand, if the commodities differ, then you may sell as you wish provided the exchange is hand to hand.”
Based on the above hadith, it is clearly mentioned that the exchange of the same class of ribawi item for example gold for gold, need to be conducted in spot or simultaneous delivery and with the same value or amount irrespective of whether the golds are the same or different types.
Any delay in the delivery will trigger the exchange to be equivalent to Riba, known as Riba al-nasiah, that is, Riba by virtue of deferment in the exchange or delivery of these two counter values. The failure to observe of the equality of the amount or the value exchanged would lead to the practice of Riba called Riba al-fadl, namely Riba by an excess of one of the counter values.
However, the requirement to have the same quantity is not applicable if they are of different types such as gold for silver (or RM for USD) or barley for dates. The above hadith is the substance of the permissibility of currency exchange, which should be done based on the prevailing rate of exchange and it is done on a spot basis, for example to exchange RM1,000 for USD200.
On the other hand, the practice of conventional banks in imposing the interest on the borrower as a requirement for the repayment of the loan offered to the customers is an example of riba which is based on loan.
Other than that, the dividend granted to the depositors of the Banks is also considered as Riba. This is because money which is deposited into the depositors’ account is treated as a loan for the Bank by the customer which will be used as a source of funds to the Banks for their investment. This practice of modern Riba in the banking sector relates to both Riba al-nasiah which is Riba by deferment and Riba al-fadl (Riba by excess) because the borrower is obligated to pay more than he borrowed and repayment will take place in the future.
This is the reason why conventional saving accounts and fixed deposit accounts, as well as all financing modes based on loan-for-interest are not compliant to Shari’ah principle. As a Muslim individual we have to keep away from dealing with any financial activities which exposed to the riba transactions. Allah s.wt mentioned in the Quran in Surah Al-Baqarah verse 279.
فَإِن لَّمْ تَفْعَلُواْ فَأْذَنُواْ بِحَرْبٍ مِّنَ اللّهِ وَرَسُولِهِ وَإِن تُبْتُمْ فَلَكُمْ رُؤُوسُ أَمْوَالِكُمْ لاَ تَظْلِمُونَ وَلاَ تُظْلَمُونَ
In this verse Allah sternly warns and threatens who those persist in dealing in riba after having been warned.
The Prophet Muhammad s.a.w also cursed the one who consumes riba, the one who pays it, the one who records it and the ones who witness it, and he said: “They are all the same.” May Allah protect us all in this world and in the hereafter.