Article Review: Riba and Islamic banking
by Ahmad, A. U. F., & Hassan, M. K.
The responsibility of a Muslim towards another Muslim are many, including to learn about Islamic transaction when they are dealing with business trade, finance and buying and selling transaction. This kind of knowledge will avoid them from being trapped/involved with riba transaction and other prohibited elements in Islam
Riba is derived from an Arabic word ‘raba’ that literally means ‘to grow’ or ‘expand’ or ‘increase’. Technically, riba could be defined as ‘premium’ that must be paid by the borrower to the lender along with the principal as a condition for a loan or for an extension in its maturity. Riba has been classified into two categories according to the transaction which give rise to riba:
- Riba al-nasiah (delayed payment interest) which involves lending and borrowing,
- Riba al-fadhl (increase interest) which involves buying and selling.
The main hadith with reference to the comprehensive meaning of riba is one which was reported by ‘Ubadah that the prophet said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, the like for the like, hand to hand (i.e., immediate sale), (but) if the kinds differ, then sell as you may like it from hand to hand”.
This hadith shows two rules must be applied to avoid riba:
- It must be a spot transaction, if one of the items are delayed, riba al-nasiah occurs.
- It must be equal counter value. Meaning to say for instance, in an exchange transaction, if the parties want to dates with dates, it must be an equal amount, 1 kg of dates with 1 kg of dates.
Some modernist argue that extra charges are allowed when they are used for:
- The motive other than exploiting the weak and poor people of the society by the strong,
- Loans other than loans that has been practised in pre-Islamic period,
- Interest-based transaction but not for usurious transaction,
- Business investment but not for consumption loans,
- Simple interest but not for compound interest,
- The lost suffered by the creditor due to inflation, and
- Institutions, but not for individuals.
As opposed to these views, any predetermined fixed return for the use of money is considered as riba whether it is excessively high or reasonable, is additional to principal borrowed and does not comply with Quran. All form of exploitation and injustice are eliminated by this prohibition.
Islamic bank was established based on interest-free institution. The objective of this institution is to issue financial facilities by providing financial instruments that comply and in line with the revelations in the Quran and the Hadith. It’s to render socio-economic benefits to the Muslim communities.
The operation of Islamic banks and the conventional banks are totally different. Islamic banks promote profit and loss sharing (PLS) between investors and entrepreneurs. It is guided by the shariah principles. Since the Islamic banks do not charge interest and therefore do not lend money, they have developed some techniques such as murahabah contract, musharakah, and mudharabah in order to invest money and gain profit.
Islam encourages its followers to invest their money. Muslim economists noticed that both the demand and the supply of investment funds are possible to show an increase consequent to replacement of conventional interest based system by PLS based system (Ahmad, 2007). It has been pointed out that Islamic banking would be more competent and efficient in allocating resources as contrasted to the conventional interest based banking. Islamic banks also promote sharing of losses, which decrease the badness of business recession and business are able to keep going without shutting down their activities.
We can conclude that Islamic banking promotes stability rather than instability. In addition, we are able to avoid riba and gain profit by Islamic banking. Removing riba from any activities are absolutely necessary as part of Islamic business principle. As addition, Islamic banks try to maximize the benefit to the societies.
- Ahmad, A. U. F., & Hassan, M. K. (2007). Riba and Islamic banking. Journal of Islamic Economics, Banking and Finance, 3(1), 1-33.