A CRITICAL ANALYSIS ON RIBA & GHARAR IN ISLAMIC JURISPRUDENCE
By
SYUHAEDA AENI BINTI MAT ALI IZUAN IZZAIDI BIN AZMI
SYUKRINA ALINI BINTI MAT ALI RAFIDAH@MALISSA BT DATUK SALLEH
OCTOBER 2009
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TABLE OF CONTENTS Page
SURAT PENYERAHAN LAPORAN 11
REGISTER OF RESEARCH TEAM IH
ACKNOWLEDGEMENT V
ABSTRACTS 1V
CHAPTER 1: INTRODUCTION
1.1 Introduction 1
1.2 Problem Statement 2
1.3 Objective of study 2
1.3 Literature Review 3
1.4 Methodology 5
1.5 Limitation 5
1.6 Significant of the study 6
1.7 Outline of chapters 6
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C H A P T E R 2 : A N O V E R V I E W O N R I B A ( I N T E R E S T )
2.0 INTRODUCTION
2.0.1 Ribainqur'an 8
2.0.2 Riba in hadith 11
2 .0 .3 .Scholars view 13
2.1 CLASSIFICATION OF RIBA
2.1. Riba al-nasiah 15
2.2. Riba al-fadl 15
C H A P T E R 3 : A N O V E R V I E W O N G H A R A R
3.1 Definition 17
3.2 Conditions for gharar 19
3.3 Prohibition of gharar 20
3.3.1 Spectrum Of Prohibition 21
3.3.2. Excessive And Minor Gharar 23
3.3.3 Sale of Unseen (ghaib) and the Non Existant 26
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CHAPTER 4: COMPARATIVE STUDY BETWEEN RIB A AND
GHARAR
4.1.1. Scope or subject matter 30
4.1.2 Effect of riba and gharar 34
4.1.3. Possibility of removing gharar 38
4.1.4. Islamic banks are more exposed to
gharar, not riba 40
CHAPTER 5: ISSUES RELATING TO ISLAMIC BANKING PRODUCTS 43
CHAPTER 6: RECOMMENDATIONS TO ISLAMIC FINANCIAL INSTITUTION IN MALAYSIA TO ENSURE THEIR PRODUCTS ARE INTEREST-FREE AND GHARAR-FREE 46
CONCLUSION 57
BIBLIOGRAPHY 58
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Tarikh : 30 O C T O B E R 2009 No Fail Projek:
Penolong Naib Canselor (Penyelidikan)
Institut Pengurusan Penyelidikan
Universiti Teknologi M A R A
40450 Shah Alam
Yang Berbahagia Prof,
Laporan A k h i r Penyel id ikan "A Critical Analysis O n Riba & G h a r a r In Islamic Jurisprudence"
Merujuk kepada perkara di atas, bersama-sama ini disertakan 3 (Tiga) naskhah laporan Akhir Penyelidikan bertajuk "A Critical Analysis On Riba & Gharar In Islamic Jurisprudence "
Sekian, terima kasih
Syuh&da Aeni Mat Ali Projek Penyelidikan
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RESEARCH TEAM M E M B E R S
SYUHAEDA AENI BINTI MAT ALI PROJECT LEADER
IZUAN IZZAIDI B AZMI P R O J E C T M E M B E R
SYUKRINAi LINI BINTI MAT ALI P R ® b T M E M B E R
Signature
RAFIDAH (a) MALISSA B T DATUK SALLEH
PROJECT M E M B E R
Signature
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ACKNOWLEDGEMENT
Our greatest appreciation and sincere thanks are extended to all those involved directly or indirectly in completing this study.
Special thanks to:
Dr Mohd Daud Bakar The President/CEO of International Institute of Islamic Finance (IIF) Inc. (BVI) and
Amanie Business Solutions Sdn Bhd (The Former of Deputy Rector (Student Affairs and Development) and an Associate Professor at the International Islamic University
Malaysia
Associate Professor Saudah Sulaiman Dean, Faculty of Law UiTM Shah Alam
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ABSTRACT
Nowadays, financial institutions like banks are the backbone of the nations economy.
The application of riba-based banking system has contributed astonishingly to the
growth and development of our modern society. The emergence of Islamic financial
system has shown us that it is possible to have a financial institutions that are competitive
and yet, shariah-compliance. Islamic financial institutions offered us alternative products
that are interest-free and gharar-free. Therefore, this study seeks to analyse the concept of
riba and gharar in Islamic Jurisprudence, the comparative study between these two and
suggested remedies on how Islamic financial institutions can ensure that their products
are interest-free and gharar-free. It is hope that we can have a better understanding of the
issue and able to appreciate the need and possibility to have better products that are not
only shariah-compliance, but fulfill the aim and spirit of the shariah itself. Our finding is
that Islamic Bank is free from riba, but subject to gharar since it main product based on trade,
which is exposed to gharar.While riba is totally null and void, gharar depends on the
degree on how it affect the contract to render the contract is void or voidable.
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CHAPTER ONE : INTRODUCTION
1.0 Introduction
Nowadays the role of financial institutions like banks as the backbone of the
nations economy is obvious. It is without doubt that the riba-based banking system has
contributed astonishingly to the growth and development of our modern society.
Development cannot be achieved, as it has been widely propagated, without the role of
financial intermediaries i.e. banks.
The emergence of Islamic financial system has shown us that it is possible to
have a financial institutions that are competitive and yet, shariah-compliance. Islamic
financial institutions offered us alternative products that are interest-free and gharar-free.
There are many attractions to prefer Islamic financial system rather than the
conventional interest-based system. For the Muslim, one of the main attractions is
obviously the divine warning concerning the consumption of riba as stated in the Holy
Quran and Sunnah of the Prophet S.A.W. Therefore, Islamic financial institution like
Islamic bank must prove from a purely financial aspect that it is competitive and capable
of providing alternative products that is as good, if not better, than the products offered
by the interest-based financial institution.
Therefore, this study seeks to analyse the concept of riba and gharar in Islamic
Jurisprudence, the comparative study between these two and suggested remedies on how
Islamic financial institutions can ensure that their products are interest-free and gharar-
free. Hopefully, by the end of this paper, we can have a better understanding of the issue
and able to appreciate the need and possibility to have better products that are not only
shariah-compliance, but fulfill the aim and spirit of the shariah itself.
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1.1 PROBLEM STATEMENT
There are several legal issues that needs to be addressed as regard to incursion of gharar
in some of the products offered by Islamic Financial Institution in Malaysia. The
researchers shall identify on what constitute riba and gharar. We will also critically
analyse the practice by Islamic Financial Institution in Malaysia on whether their
products are gharar free and interest free.
1.2 OBJECTIVE OF STUDY
The overall aim of this research is to analyse the concept of Riba and Gharar in
Islamic Jurisprudence. Further we will identify on whether the shariah products offered
by Islamic Financial Institutions are interest free and gharar fee.
The specific objectives of the study are:-
1. 1. To critically analyse the concept of Riba and Gharar in Islamic Jurisprudence.
2. To determine whether the shariah products offered by Islamic Financial
Institutions are interest free and gharar fee.
3. To identify the solutions to ensure the shariah products offered by Islamic
Financial Institutions are interest free and gharar fee.
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1.3 LITERATURE REVIEW
In this Reseach/Study, The Researchers reviewed the various literature related to Riba
and Gharar. A book entitled Islamic Law on Commercial Transactions1 discussed in
chapter three on Sale of Goods. The relevant part for our research is the condition of sale
and Gharar in sale. He elaborated in detail on how the validity of sale contract will be
affected due to the existence of gharar. The Juristic opinions on gharar and reasons for
prohibitions of Gharar are discussed in detail.
An Article on Contract In Islamic Commercial And Their Application In Modern
Islamic Financial Institution System explained the historical evolution of contract in
Islamic Law . Islamic law has prohibited many pre-Islamic period's contracts of
exchange because they were either uncertain or lead to injustice as it involved riba al-
fadl and riba al-nasiah. An overview on Islamic Financial Institution in Malaysia which
is known as Interest Free banking scheme were further elaborated. Sources of Fund in
Islamic Financial Institution such as Wadi'ah Yad Dhamanah where the bank's practice
to reward a hibah to the depositors are necessary to be competitive with the
conventional banking. However, the bank are not allowed to declare or promise any
amount or rate of hibah upfront as this would be tantamount to riba.
Riba and Islamic Banking explained among others the meaning of riba, classification
of riba, the prohibition of Riba in Islam during the lifetime of prophet passed over four
different phases and stages and the rationale and reason for the prohibiton of riba. Islam
promotes positive sum game where all parties gain or at least there is a possibility of gain
1 Professor Dr Razali Hj Nawawi, Islamic Law on Commercial Transactions, CT Publications Malaysia 1999 2 Assoc prof Dr Mohd Daud Bakar, HUM, unpublished article 3 Assoc prof Dr Mohd Daud Bakar, HUM, unpublished article
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and loss on both parties. Whereas riba activities do not create new stock of wealth.
Instead they lead to the transfer of the wealth from one party to another i.e from borrower
to the lender. Islamic Banking : A Quick Guide4 stated inter alia the concept of riba
and consequences of riba which includes "in the hereafter, they shall be raised by Allah
like those who have been driven to madness by the touch of the devil (Al-Baqarah:275) "
"A dirham of Riba which a man receives knowingly is worse than committing adultery 36
times. (Hadith reported by Muslim).
The Issue of Interest and the Islamic Financing Alternatives5 discussed the interest or
riba which is regarded by economists as containing three elements which justify payment
of a return to savers: a time factor, an opportunity cost and an element of risk. However,
Islam emphasis on profit sharing as an alternative to fixed or variable interest-based
lending. For instance: Mudarabah (Trust Financing), and Musharaka (Venture Capital
Finance). Understanding Riba6 highlighted a dispute which arise between scholars as to
the status of interest paid by banks on deposit accounts. The majority of the scholars
describe this as riba but a minority lead by Mufti of Egypt, Shaikh Muhammad Tantawi
suggests that the deposit is not a loan but an investment in which the bank acts for the
depositor. The whole operation was called mudaraba. However, his view were counted
by arguments that is the profit in the form of interest in not a proportion of the profit
accrued by the employment of the capital but is a fixed percentage of the capital as in riba
transaction. Further, the bank acquire their profit through lending at fixed interest which
is clearly a riba transactions.
4 Assoc Prof Dr NorHashimah Mohd Yasin , paper presented at the Public Lecture
organized by Islamic Society of University of New South Wales (ISOC UNSW), Sydney,
Australia on 12 November 1999.
5 Rodney Wilson, University of Durham (1998) J.I.B.L. Issue 1 © Sweet & Maxwell Limited ( And Contributors) 6 Islamic Banker, 20 July 1995
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1.4 METHODOLOGY
This research is based on a qualitative method since it is most recommended in the legal
study. Whereas, a comparative approach is also considered for riba and Gharar. The
collection of facts and information would be library based research. We will also do
research by the latest sources of information that is by using the internet, newspapers and
magazines. Various literatures will be referred to, ranging from statutes, reported cases,
legal documents, law books, articles, online journals that can be found under the
Malaysian law and Islamic Law. Online database such as LexisNexis and CLJ Law
database will be used .
1.5 LIMITATIONS OF STUDY
In order to achieve the aim and purposes, this research will analyze the concept of
Riba and Gharar in Islamic Jurisprudence. The comparative study between the
Riba and Gharar will be elaborated in detail. The researchers will also identify
and analyze the the products offered by Islamic Financial Institutions It will
make us keep abreast with the current arising issues on the same. This study is
also prepared to discover any suggested remedies on how Islamic financial
institutions can ensure that their products are interest-free and gharar-free.
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1.6 SIGNIFICANCE OF THE STUDY
The researchers hope that the study of this research would throw more light in the
understanding of the concept of Riba and Gharar in Islamic Jurisprudence. The
finding of this study would be to provide a better understanding to the society
especially to the bankers, lawyers and customers dealing with Islamic Banking
products.
1.7 OUTLINE OF CHAPTERS
This research consists of Six (6) chapters which are as the followings:-
Chapter 1 is the introductory chapter which explains the background of the
study, its objective, methodology, literature reviews, significance, limitations and
outline of chapters.
Chapter 2 is the explanatory/ descriptive chapter which describe (briefly
or give an overall overview of Riba, the authorities from verses of Qur'an and
Hadith, reasons for prohibitions
Chapter 3 is the explanatory/ descriptive chapter which describe (briefly
or give an overall overview of Gharar, the Authorities from verses of Qur'an and
Hadith, reasons for prohibitions, possibility of removing gharar
Chapter 4 is the comparative study between Riba & Gharar
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Chapter 5 is analytical and evaluative study which provides a detailed
analysis on issues relating to Islamic banking products.
Chapter 6 are Recommendations To Islamic Financial Institution In Malaysia
To Ensure Their Products Are Interest-Free And Gharar-Free
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CHAPTER 2: AN OVERVIEW ON RIBA (INTEREST)
2.0 INTRODUCTION
Literally, Riba means increase, addition, expansion or growth. However, not
all type of increase or growth is prohibited. Profit is also a kind of increase but profit
gained from lawful trade is not prohibited. Instead, Muslims are encouraged to enter
into lawful business.
In order to understand what is Riba, reference should be made to the primary
sources of Shariah i.e the Holy Quran and the Sunnah of the Prophet S.A.W to seek
for guidance.
2.0.1 RIBA IN QUR'AN
The Quran says:
Allah permits al-Bay' and prohibits al-Riba.1[2]
It should be noted that this Quranic verse is general in nature and it only stated
two categories of business: 'Bay' and 'Riba'. The precise definition of riba is not
1 Holy Quran, 2:275.
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given in the Holy Quran but Allah states in the very same verse that 'they are
certainly not the same with trade.2[3]
To have a better and more systematic approach, let us first refer to the relevant verses
one by one.
1. The first revelation ( Surah al-Rum, verse 39):
"That which you gave as interest to increase the people I s wealth increases not with
God; but that which you give in charity. Seeking the goodwill of God, multiplies
manifold." (30:39)
2. Second revelation (Surah al-Nisa', verse 161)
"And for their taking interest even though it is forbidden for them, and their wrongful
appropriation of other peoples' property, We have prepared for those among them
who eject faith a grievous punishment. "
(4:161)
2 Dr.Norhashimah Mohd yasin, BBA:Sale or Contract
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3. Third revelation ( Surah al Imran, Verse 130-132)
"O believers, take not doubled and redoubled interest, and fear God so that you may
prosper. Fear the fire which has been prepared for those who reject faith, and obey
God and the Prophet so that you may receive mercy. "
(3:310-132)
4. Forth revelation ( Surah al-Baqarah, verse 275-281)
"Those who benefit from interest shall be raised like those who have been driven to
madness by the touch of the Devil; this is because they say: 'Trade is like interest'
while God has permitted trade and forgiven interest. Hence those who have been
received the admonition from their Lord and desist, may have what has already
passed, their case be entrusted to God; but those who revert shall be the inhabitants
of the fire and abide therein forever. "
(2:275)
5. God deprives interest of all blessing but blesses charity; He loves not the
ungrateful sinner.
(2:276)
6. "O believers, fear God, and gave up the interest that remains outstanding if
you are believers."
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7- "Uy°u do not do so, be sure to be at war with God and His Messenger. But if
you repent, you can have your principal. Neither should you commit injustice
nor should you be subjected to it. "
(2:279)
2.0.2 RIBA IN HADITH
1. From Jabir: The Prophet, may peace be upon him, cursed the receiver and
payer of interest, the one who records it and the two witnesses to the
transaction and said: "they are all alike (in guilt)".
(Muslim Kitab al-Muqasat, Bab la 'ni akili riba wa mi kilihi; also in Tirmidhi
and Musnad Ahmad).
2. From 'Abdallah ibn Hanzalah: The Prophet, peace be upon him, said: 'A
dirham for riba which a man receives knowingly is worse than committing
adultery thirty-six times'.
( Miskat al-Masabih,Kitab al-Buyu', bab al-riba, on the authority of Ahmad
and Daraqutni. Bayhaqi has also reported the above hadith in Shu'ab al-Iman
with the addition that ' Hell befits him whose flesh has been nourished by the
unlawful' (ibid).
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3. From Abu Hurairah : The Prophet, peace be upon him, said: 'Riba has 70
segments, the least serious being equivalent to a man committing zina with his
own mother.' (Ibn Majah)
4. From Abu Hurairah: The Prophet, peace be upon him, said: 'There will
certainly come a time for mankind when everyone will take riba and if he does
not do so, its dust will reach him.'
( Abu Dawud, Kitab al-Buyu', Bab fi ijtinabi al-shubuhat; also in Ibn Majah).
5. From 'Ubada ibn al-Samit: The Prophet, peace be upon him, 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, and hand-to-hand; if the
commodities differ, then you may sell as you wish, provided that the exchange
is hand-to-hand'. (Muslim, Kitab al-Muqasat; also in Tarmidhi).
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2.0.3 SCHOLARS VIEW
1. Abdul Rahman alJaziri
According to Abdul Rahman al Jaziri in his al-Fiqh 'ala al-madhahid al-Arba'ah, a
compendium of the juristic opinions of the four dominant schools of Muslim
jurisprudence, he define riba as increase in one of the homogeneous equivalents being
exchanged without this increase being accompanied by a return. In simple words, riba
is defined as unjustified increase in the capital. This definition, incomplete as it is,
reflects the usual and typical understanding concerning the definition of riba.3
Not all increase or excess is prohibited. Generally speaking, profit can also be
considered as increase but obviously, profit gained from lawful trade is halal. Indeed,
it is encouraged.
2. Muhammad ibn 'Abdallah ibn al-Arabi (Quran commentator and Maliki
jurist)
Riba literally means increase, and in the Quranic verse (2:275) it stands for every
increase not justified by the return. ( Ahkam al-Quran, Cairo: Isa al-Babi al-Halabi,
1957, p.242). It should be clarified here that the 4 waiting! involved in a loan is not
considered by the jurists to be a return justifying the increase (interest) on the
principal amount.
3 Muhammad Umar Chopra, Riba in the Quran.Jhadith and Fiqh
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3. Ibn al-'Arabi
Ibn al-'Arabi emphasize on the requirement of iwad (equal counter value or
compensation) in the contract of sale so that it does not fall into riba. This is in line
with the legal maxim 'al-ghorm bil ghorm', (no reward without risk) and 'al-kharaj
bil daman. ( in any benefit lies liability). Ibn al-'Arabi says that every increase, which
is without iwad or an equal countervalue is riba.4 Therefore, it seems that some
scholars put much weight on the requirement for iwad. When there is no
consideration for the extra money except 'time postponement' or 'waiting', there is
high possibility that the contract is tainted by riba.
4 See Ziaul Haque, The Moral Economy of usury, interest and profits.pp.10. He quoted the statement f rom the original work of Abu
Bakar Muhammad ibn Abd Allah aLarabi
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2.1 CLASSIFICATION OF RIBA
2.1. Riba al-nasiah
This type of riba happens when the specified increase is in return for postponement
of, or waiting for, the payment. For example, buying one kilogram of wheat in winter
against one and half kilogram of wheat to be paid in summer. As the half-kilogram,
which has been added to the price, was not accompanied by an equivalent value in the
commodity sold and was merely in return for the waiting, it is called riba al-nasiah.
2.2. Riba al-fadl
Riba al-fadl is applicable in sale and purchase of certain restrictive items where
excess in profit is not allowed.5The increase mentioned is irrespective of the
postponement and is not offset by something in return. For example, this happens
when ten carats of gold are exchange for twelve carats of similar gold product. The
four schools of jurisprudence unanimously held that riba al-fadl as prohibited. One of
the wisdom behinds its prohibition is to prevent defrauding or deception of less
sophisticated persons.
The prohibition of riba is laid down clearly in the Holy Quran and the Sunnah
of the Prophet S.A.W and there is no question on that. The conflicts or problems
5 Hamid Sultan
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faced by scholars are the correct definition of the riba. As mention earlier, there is no
clear-cut definition of riba provided in the Divine revelation. Therefore, the scholars
have to resort to ijtihad to interpret the term riba, which was so strictly prohibited in
the Divine revelation. In order to interpret riba, the scholars have referred to the Holy
Quran and Sunnah of the Prophet S.A.W for guidance. From these divine sources, the
scholars realize that riba is related to certain transaction relating to certain ribawi
items and extension of time as exchange for money. Riba is synonym with money for
money. In other words, money become the commodity and generated more money.
For example, if A borrow $100 from B, A has to pay B $200 at a later date. This is
one example of riba. In this transaction, B gained extra money by doing nothing
except giving loan to A. Therefore, in this transaction, money alone has generate
more money. In Islam, money cannot generate money since money is merely a
medium of exchange. In order to get more money or profit, there must be some
elements of effort or risk taken. If A buy a rabbit for $100 and sell it for $200, he
earned the extra money through his effort and by taking risk. Such transaction is
allowed since it falls under business.
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