Riba in Islamic Banking & Types of Riba (2023)

What is Riba?

Riba is an Arabic word, and it means: “Excess, Increase or Addition”. In Quran and Hadith, it is used for ‘interest’. Types of Riba in Islam are Riba An Nasiyah and Riba An Fadl. Let us understand riba with the help of an example: Suppose a person lent a sum of money to another person and asked the debtor to pay it back together with an agreed additional sum of money within a fixed period. Or a rate of interest was fixed for a specific period, and if the principal along with the interest was not paid within that period, the rate of interest was enhanced for the extended period, and so on. This enhanced or additional amount is “Riba”.

Prohibition of Riba in Islam:

Islam prohibits Riba because it inculcates miserliness, selfishness, callousness, indifference, inhumanity, greed, and worship of wealth. It also destroys the spirit of sympathy, mutual help, and cooperation, and thus affects the feelings of brotherhood and unity among the community.

It is prohibited because it causes many economic evils, for example, It leads to hoarding of money, adversely affecting its circulation among larger sections of society. It also causes the establishment of monopolies, cartels, and concentration of wealth in a few hands. And so, the gulf between the rich and the poor widens.

Riba is a fundamental element of the Islamic banking and financial system. It is also a key element that makes a difference between Islamic banking and conventional banking. This lecture is a part of AIMS’ Islamic banking courses and Masters in Islamic banking and finance program.

Riba in Quran and Hadith:

It is prohibited in many places in the Quran and Hadith. Here are some references:

RIBA IN QURAN:

“And whatever you give for interest to increase within the wealth of people will not increase with Allah. But what you give in Zakath, desiring the countenance of Allah – those are the multipliers.”.

Surah Ar-Rome, Verse-39!

“And [for] their taking of usury while they had been forbidden from it, and their consuming of the people’s wealth unjustly. And we have prepared for the disbelievers among them a painful punishment”.

Surah Al-Nisa, Verse-161!

“O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful”.

Surah Aal-e-Imran, Verse-130!

See Also

イスラム教における夫の義務は何ですか?

“Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah . But whoever returns to [dealing in interest or usury] – those are the companions of the Fire; they will abide eternally therein”..

Surah Al-Baqarah, Verse-257!

“All of the Riba of Jahiliya is annulled. The first Riba that I annul is our Riba, that accruing to Abbas Bin Abdul Mutallib, it is being cancelled completely.”

Reported by, Hazrat Jabir RadiAllah

(Video) Islamic Banking Course: Riba & Types

Types of Riba?

There are two types of Riba in Islamic banking. We will discuss each of them in detail:

Riba An Nasiyah:

It is also called Riba Al Jahiliya, and it refers to the addition of the premium, which is paid to the lender, in return for his waiting as a condition for the loan. It is technically the same as interest, and this is the real and primary form.

“Every loan that draws excess is Riba.”

Hadith

Riba Al Fadl:

It is also called known as Riba Al Bai. It is defined as excess compensation, without any consideration, resulting from a sale of goods.

“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, 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 and sell barley for date anyway, you please on the condition, it is hand-to-hand.”

Hadith

LAWS REGARDING RIBA AL FADL:

Any difference in value or quality should be ignored and the commodities should be exchanged in equal weight and volume. Instead of a 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 for cash at the market value.

Difference between Trade and Interest:

In trade, one earns profit as a result of the initiative, enterprise, efficiency, and hard work, profit fluctuates, and there is a risk of loss as well. On the other hand, the interest is not earned through hard work or any value-creating process. It is not the reward of labor but is in fact an unearned income. The lender gets his fixed amount, irrespective of the fact, whether the debtor earns any profit or sustains a loss.

Shariah Rules Regarding Riba-Free Loans

The loan may be in any form that is in cash or in commodity, it may be big or small, it may be for the personal needs of the debtor or for purpose of business, the loan shall be given without interest. Since the verbal agreements regarding loans lead to disputes, Quran has made it obligatory for both creditor and debtor to bring the contract of debt into writing in the presence of two witnesses and settle terms and conditions regarding its repayment.

According to a Hadith: “Whoever takes a loan, with an intention of not returning it, is a thief”.

A debtor is eligible for Zakath, for discharging the burden of his debt. Here are some of the duties of Debtor and Creditor in Islam:

Duties of Debtor in Islam:

• Debt should be incurred only when it is unavoidable. It may be incurred to satisfy basic needs or to discharge an essential responsibility.
• In no case, debts should be contracted for unlawful purposes, or for luxurious living.
• The contract of loan should be reduced in writing, in the presence of two witnesses. The debtor has the right to give dictation to the scribe when the contract of loan is being written.
• Debt should be taken with a clear intention to pay it back.
• If a creditor demands some security in the shape of property or asset, the debtor is bound to provide the same.
• The debtor should pay back the debt promptly, on the promised date or earlier.
• The debtor is duty-bound to clear his debts, before his death. Otherwise, his legal heirs should clear the debts.

Duties of the Creditors in Islam:

• The loan should be advanced to a genuinely needy person, who requires the loan for genuine needs.
• When a creditor lends money to someone, he should make a contract in writing with the debtor, settling the terms and conditions of the loan, and the time for its return.
• If the debtor has become insolvent and is not in a position to pay back the loan, the creditor is enjoined to remit the debt. It is an act of great virtue and it carries many rewards.
• If the debtor is not able to make full payment, the creditor shall accept payment in installments.
• The creditor is allowed to use harsh words in case of a solvent debtor, who does not repay the loan despite persistent demand. But still, he is instructed not to lose his cool. He should kindly treat his debtor and should not injure the dignity of the debtor.

Role of Bait-ul-Maal:

The state-managed Public Treasury is called Bait-ul-Maal and it provides loans to needy people in the society.

FOR EXAMPLE:

The people would do their business with whatever capital and economic sources they have, and they would not be generally too ambitious to expand it with borrowed capital.

“The state would need hardly any loans, but, if the state fails to raise funds and the need is dire, it can resort to borrowing. However, the borrowing should be restricted to need only, and loans should be raised preferably from brother Muslim countries, free of interest”.

SUMMARY:

• It means excess, increase, or addition, and there are two types of riba in Islamic banking.
• In trade, one earns profit as a result of initiative enterprise, efficiency, and hard work. But the interest is not earned through hard work or any value-creating process.
• A loan shall be given without interest.
• It inculcates selfishness, inhumanity, greed, and worship of wealth; it destroys the spirit of sympathy and cooperation.
• Debt should be incurred only when it is unavoidable. It may be incurred to satisfy basic needs, and it should be taken with a clear intention to pay it back.
• The contract of loan should be reduced in writing, in the presence of two witnesses.
• Islamic banking is based on the principle of partnership and profit-loss sharing basis.

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