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Islamic Banking Assignment#2

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40 views

Islamic Banking Assignment#2

Uploaded by

omaimaaamir9
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ASSIGNMENT #2

NAME: Aysha Aamir


REG NO: 56-BSPM-S22
COURSE TITLE: Islamic Law of Business Transaction

RIBA

types of Riba and their examples from the prevailing practices (minimum 3
examples for each type with explanation)

Riba and Its Types

The word riba means excess, increase, or addition. From a Shariah point of
view, it can be interpreted as: an excess compensation or unjustified return in
a lending, borrowing, or sale transaction. The most common example is
taking a loan from a conventional bank: the bank gives a loan, and the
borrower repays the money later with a percentage increase over the original
amount.

But riba is not limited to an increase in a loan contract. which is imposed due
to deferment of time in payment. The Quran does not specify any particular
type of riba. However, Muslim scholars have explained two types of riba
based on general texts of the Quran and a number of Ahadith (sayings) of the
Prophet Muhammad ‫ﷺ‬.

There are two types of riba:

• Riba in loan contract (Riba al-Nasiyah)


• Riba in sale or exchange contract (Riba al-Fadl)

Riba in loan contract (riba al-nasiyah)

This type of riba is commonly understood as an increment in payment from a


borrower to a lender, surpassing the original loan amount, attributed to the
delay in repayment. It's noteworthy that this riba variant is exclusive to loans
and doesn't encompass credit sales.
Whether the augmentation over the loan sum is predetermined at the
contract's outset or appended later, such as in the event of borrower default, it
falls under the umbrella of riba. Any agreed-upon or stipulated surplus over
the original loan amount charged by the lender is deemed riba. For instance,
if the borrower consents to an increase over the loan sum as a requisite for
loan repayment, it is considered riba. This type of riba is referred to as riba
al-Quran, given the Quran's explicit prohibition of this practice due to its
prevalence in Arab society at the time.

Optional Gift in Repayment Allowed

It is permissible for a borrower to express gratitude to the lender with a gift


upon repayment. However, it's important to note that any such voluntary
offering should not be pre-arranged or demanded by the lender. It should
sincerely reflect the borrower's goodwill and appreciation for the lender's
assistance or generosity., and is even recorded in a hadith:

Narrated Jabir bin Abdullah: "I went to the Prophet while he was in the
Mosque. After the Prophet told me to pray two Rakat, he repayed me the debt
he owed me and gave me an extra amount." [Sahih Bukhari]

Commonplace Examples of Riba al-Quran

Here's a short list of just a few examples you may have heard of. All of these
types of products and contracts include riba and are classified as haram or
not permissable for Islamic finance:

• Credit cards (debit cards are OK)


• Home mortgage
• Car/automotive loan
• Personal loan from a conventional bank
• Bank certificate of deposit ("CD")
• Capital market bonds
• US Government Savings Bonds

Credit Cards: Credit card companies often charge high-interest rates on


outstanding balances, leading to increased payments by borrowers who do
not pay their full balances on time. The additional amount paid as interest
constitutes riba al-Nasiyah.
Mortgages: In conventional mortgage agreements, borrowers repay the
principal loan amount along with interest over an extended period. The
interest charged by the lender for the delay in repayment constitutes riba al -
Nasiyah.

Payday Loans: Payday loans typically involve short-term borrowing with


exorbitant interest rates. Borrowers who fail to repay the loan by the due date
incur additional charges, representing riba al-Nasiyah.

Riba in sale contract (riba al-fadl)

This one is not as obvious as riba in a loan. It can happen in a sale or


exchange transaction of a commodity. This type of riba only applies to
commodities; things like: dates, barley, rice, wheat, oil, sugar, cotton, etc...

If two people exchange the same commodity but in unequal amounts, the
extra would be riba. This type of Riba is also called Riba al-Hadith in the
literature of scholars because, it is not directly mentioned by the Quran. The
Prophet ( ‫ )ﷺ‬has classified it as riba in a following hadith:

“Gold for gold, silver for silver, wheat for wheat, barley for barley, date for
date, salt for salt, must be equal on both sides and hand to hand, whoever
pays more or demands more (on either side) indulges in Riba” [Sahih
Muslim].

Example 1: Trading Wheat for Wheat

If wheat is exchanged for wheat, then both rules are applied meaning:

• The amount of wheat must be equal in quantity


• The wheat must be exchanged at the same time (on the spot)
Example 2: Trading Wheat for Barley

If wheat is exchanged for barley, then only one rule applies:

• The amounts of wheat and barley can be different; since the


commodities are of a different type, the rule of similar quantity does
not apply
• The wheat and barley must be exchanged at the same time (on the spot )

This type of riba is prevalent in various commercial transactions,


including:

Currency Exchange: In conventional currency exchange markets,


exchanging currency at unequal rates or with additional charges constitutes
riba al-Fadl. For example, exchanging one currency for another at
unfavourable rates results in one party receiving less value for their money,
thereby involving riba al-Fadl.

Unequal Barter Transactions: Barter transactions involving the exchange


of goods of unequal value or quantity can involve riba al-Fadl. For instance,
trading a higher-valued item for a lesser-valued one without appropriate
compensation constitutes riba al-Fadl.

Stock Trading: In conventional stock trading, the purchase or sale of stocks


at unequal prices or with undisclosed fees can involve riba al-Fadl. For
instance, purchasing stocks at inflated prices or selling them at deflated
prices to exploit market imbalances constitutes riba al-Fadl.

Understanding these examples helps elucidate how riba manifests in modern


financial practices, highlighting the importance of adhering to Sharia-
compliant principles in commercial transactions.

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