interest and riba.ppt

Welcome To The Training Session On

Riba: Its Meaning, Classification and Difference among Bai, Riba, Profit, Rent etc.

M. Sanaullah SPO & FM, IBTRA

Points to be Discussed A. Riba

B. Riba and the Holy Quran

C. Riba and the Hadith

D. Controversial Issues about Riba

E. Arguments on behalf of Riba

F. Impact of Riba

Definitions and Lexical Analysis of Riba

Lexical Meaning of Riba

Literary Meanings of Riba

i) Dictionary Meaning-Riba = Increase, excess, expansion, additional

ii) Technical Meaning =Interest/Usury/Sud

What Increase is Known as Riba?

The Holy Quran is the best Evidence to answer this question

But if you turn back, you shall have your capital sums, deal not unjustly, and you shall not be dealt with unjustly (Sura Al-Baqara-278-279)

Extracted Principle1. Imam Qurtubi (671AH/1070AC) clearly indicates that-

Muslims are agreed on the authority of their Prophet that the condition for an increase over the amount lent is Riba

2. Ibn Manzur (711AH/1311AC) clearly states that-

what is prohibited the extra amount, benefit or advantage received on any loan

Early Definitions of Riba

Early Definitions of Riba

1. Imam Abubakr Al-Jassas (305-370 H)=

The Riba of Jahiliyya is a loan given for stipulated period with a stipulated increase on the principal payable by the loanee

Abubakr Al-JassasAhkamul QuranP.469 V.1

Definitions (Cont)2. Imam Abubakr Al-Jassas= The Riba which was known to and practiced by the Arabs was that they used to advance loan in the form of Dirham (silver coin) or Dinar (gold coin) for a certain term with an agreed increase on the amount of the principal advancedAbubakr Al-JassasAhkamul QuranP.465 V.1

Definitions (Cont..)3. Imam Fakhruddin Al-Raazi (1149-1209 C)= The Riba Al-Nasiah, it was a transaction well-known and recognized in the days of Jahiliya i.e. they used to give money with a condition that they will charge a particular amount monthly and the principal will remain due as it is. Then on the maturity date they demanded the debtor to pay the principal. If he could not pay, they would increase the term and the payable amount. So it was the Riba practiced by the people of JahiliyaAl-Tafseer Al-KabeerImam Al-RaaziP.91, v.7

Modern Definitions of Riba

Modern Definition of Riba/Interest1. Riba is a predetermined, fixed and time- related excess over and above the principal of a loan

2. Riba is a discrepancy which results from the contractual obligations of a party in the context of a direct exchange of items of the same general kind between two parties.

Islamic Financial System: Including Strategy for Elimination of Riba

Definitions (Cont.)3. Riba technically refers to the Premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity. (The nature of Riba in Islam, Dr. M. Umer Chapra)

4. Any amount, big or small, over the principal, in a contract of loan or debt is riba prohibited by the Holy Quran, regardless of whether the loan is taken for the purpose of consumption or for some production activity (The Historic Judgment on Interest)

Classifications of Riba

Classification of Riba1. Riba Al-Nasiah2. Riba Al-Fadl

a) Riba Al-Buyub) Riba Al Duyun

i. Riba Al-Jalyii. Riba Al-Khafi

I. Riba Al-Quran II. Riba Al-Hadith

Riba Al-Nasiah Riba Al-Nasiah refers to the time that is allowed to the borrower to repay the loan in return for the addition or the premium. Dr. M. Umar Chapra

Riba Al-Fadl

Riba Al-Fadl is anything that is unjustifiably received as Extra by one of the two counterparties to a trade transaction

Dr. M. Umar Chapra

Riba in the Holy Qur,an

Riba in the Holy Qur,an

The word Riba mentioned in the Holy Quran -8 Times

The Ayats of the Riba descended -15

The Suras where Riba is discussed -4

The Holy Quran and Riba a) First Revilation (5th Year before Hijrah, AL-Rome-39)

b) Second Revilation (Early Madina Period after Hijrah, AL-Nisaa-160-162)

c) Third Revelation (After Ohud, Al-Imran- 130-136)

d) Fourth Revelation (9 or 10, Al Baqarah-275-281)

The Time Period of Prohibition of Riba

18 years of time period of prohibition of riba.

Nature of Prohibition of Riba by the Holy Quran

Nature of Prohibition of Riba by the Holy QuranThe nature of the Prohibition of Riba is-

1. Strict

2. Unambiguous and3. Absolute Dr. M. Umar ChapraProhibition of Interest: Does it make sense?P.4

Riba in the Hadith

Riba in the Hadith

1. Total Hadith - 40

2. Class of Riba Prohibited - Riba Al-Fadl

3. Items of Riba Prohibited -6

4. Items Prohibited by the Hadith- Gold, Silver, Wheat, Barley, Dates and Salt

5. Nature of Items- Universal Legal tender and Food

Characteristics of Riba Al-Fadl in Islamic Shariah

Decision of Islamic Shariah about Riba Al-Fadl

1. Imam Abu Hanifa (80-150H) and Imam Ahmad (116-241H) are of the opinion that=

The common feature of these six commodities is that-

They can either be weighed or measured

Cont2. Imam Al-Shafie (150-204H) is of the view that= The common feature of these six commodities is that-

They are either eatables or they are used as a universal legal tender

Cont3. Imam Malik (93-179H) is of the opinion that=

The common feature among these six commodities is that- They are either food items or they can be stored

Classification of Goods and Services in this World

Classifications of Goods and Services The goods and services available in this World are divided into two groups-

Fungible Goods (Maale Faani)- Fully consuming or once using

b. Non Fungible Goods (Maale Gaire Faani)- Can be use again and again

The Riba and the Religions

Prohibition of Interest by all the Religions

1. Judaism -Prohibited2. Christianity -Prohibited3. Hinduism -Prohibited4. Islam -Prohibited

Verdict of the Four Schools of Thoughts about Riba

Decision of the Four Schools of Thought

There is, thus, absolutely no difference of opinion among all Schools of Muslim Jurisprudence that-

Riba al-Nasiah stands for interest and is Haram or prohibited.Dr. M. Umar ChapraProhibition of Interest: Does it make sense?P.4

Unanimous Verdict of the Muslim Ummah

Unanimous Verdict of the Muslim Ummah

This is also the unanimous verdict of a number of international conferences of fuqaha held in modern times to discuss the question of riba-1. The International Conference of the Mutamar al-Fiqh al-Islami held in Paris in 1951

2. The International Conference of the Mutamar al-Fiqh al-Islami held in Cairo in 1965

Cont.3. The International Conference of the OIC and Rabitah Fiqh Committee meetings held in 1985 and 1986 in Cairo and Makkah respectively

4. The Historic Judgment on Interest, Delivered in The Supreme Court of Pakistan in 1999

5. In the presence of such an overwhelming consensus there is no room for arguing that interest is not prohibited in Islam

The Condemned Parties of the Riba

The Condemned Parties of the Riba

1. Those who take it

2. Those who give it

3. Those who record the transaction

4. Those who act as witnesses

Relationship Pattern with the Debtor

Prohibition of Borrower Gifts

1. Receiving of a Small Gift

2. Taking any Services

3. Accepting any Favour As a Condition for the Loan

Reasons for Prohibition of Riba

Principal Reasons of the Harsh Verdict Against InterestThe Principal reason why the Quran has delivered such a harsh verdict against interest is that-1. Islam wishes to establish an economic system where all forms of exploitation are eliminated2. Islam wishes to establish justice between the financier and the entrepreneur

Dr. M. Umar ChapraProhibition of Interest: Does it make sense?P.8

Reason for Prohibition of RIBA AL-NASIAH

Philosophical Target of prohibition of Riba1. Elimination of Injustice that is intrinsic in the institution of interest on loans (Riba is inherent in all forms of Injustice)

2. Elimination of dishonest exchange in business transactions (Riba is inherent in all forms of dishonest)

3. Elimination of Unjust exchanges in business transactions (Riba is inherent in all forms of Unjust)

Reason for Prohibition of RIBA AL-FADL

Reasons for Prohibition of Riba Al-FadlThe prohibition of riba al-fadl is intended to

1. Ensure Justice

2. Remove all forms of Injustice or exploitation through unfair exchanges

3. Close all backdoors to riba (which is referred to in Fiqh as Sadd al- Dharayeh)

Riba Al-Fadl Requires It requires-1. Absence of Rigging

2. Absence of Uncertainty

3. Absence of Speculation


Riba Al-Fadl DemandsRiba Al-Fadl Demands-

1. Fair knowledge of the prevailing prices of the goods

2. Fair knowledge of the quality of the goods


Key Arguments about Interest

Logical Causes of Interest

1. Interest is the Price of Money

2. Interest is a reward for waiting

3. The rate of interest is a price like all other prices

4. Interest plays a crucial role in the supply of, and demand for, financial resources in any economy

Factors of InterestThere are three factors of interest-

a) Time Factor

b) Opportunity Cost

c) Element of Risk

Reason for Quranic Prohibition from the View point of Capitalist

Logic

i. Exorbitant or Excessive Interest

ii. Consumptive Loan and/Consumptive Interest

iii. Commercial Interest being the back-bone of the Modern Economic

Descriptions of Bai

Descriptions of Bai

1. Production of Goods & Services

2. Consumption of goods and services

3. Demand of goods and services

4. Supply of goods and services

Description of Profit

Description of Profit

Ownership

Possession

Risk

Socio-Economic Impact of Riba

Impact of Riba on Investment and Production

1. Impact of Riba on allocation of Resources

2. Impact of Riba on production

3. Impact of Riba on distribution

4. Impact of Riba in expansion of artificial money and inflation

5. Impact of Riba on Stability

Impact of Riba on Allocation of Resources

Impact of riba on allocation of Resources

Loan in the interest based banking system are advanced mainly to those who-

a. On the strength of their wealth

b. Can offer satisfactory collateral

Cont1. According to Lester Thurow- Credit tends to go to those who are Lucky rather than smart or meritocratic

Zero-Sum SocietyP.1752. According to Arne Bigsten- The banking system thus tends to reinforce the unequal distribution of capital

Poverty, Inequality and Development P.156

Cont..3. Dr. Umar Chapra-

While deposits come from a broader cross-section of the population, their benefit goes mainly to the rich

Why has Islam Prohibited InteresrP.18

Cont..The end use of the funds does not constitute the main criterion for financing

It encourages people to live beyond their means

The people do not borrow for productive projects only, but also for conspicuous consumption

Dr. Taqi UsmaniThe Historic Judgmen on InterestP.103

Cont..4. Similarly, Government borrow money not only for genuine development programs, but also for their lavish expenditure and for projects motivated by their political ambitions rather than being based on sound economic assessment

5. Non-project related borrowings, which were possible only in an interest-based system have thus helped in nothing but increasing the size of our debts to a horrible extent


Impact of Riba on Distribution

Impact of riba on distribution

It increase injustice

It enhances difference between have and have not's

Cont.1. When business is financed on the basis of interest, it may bring injustice either to the borrower if he suffers a loss, or to the financier if the debtor earns huge profits

2. The both situations are equally possible in an interest-based system, where the payment of interest has brought total ruin to the small traders

3. The injustice brought to the financier is more pronounced and much more disturbing to the equitable distribution of wealth

Cont.3. The big entrepreneurs deployed their funds from their own pocket are much less than the funds borrowed by them from the common people through banks and financial institutions (90%:10%)

4. When these huge projects bring enormous profits, only a small proportion will go to the depositors whose input in the projects was 90%, while all the rest will be secured by the big entrepreneurs whose real contribution to the projects was not more than 10%Dr. Taqi UsmaniThe Historic Judgmen on InterestP.103

James RobertsonThe pervasive role of interest in the economic system results in the systematic transfer of money from those who have less to those who have more

It is partly because those who have more money to lend, get more in interest than those who have less; it is partly because those who have less, often have to borrow more

James RobertsonFuture Wealth: A New Economics for the 21st CenturyLondon 1990P.130,131

Cont..3. The transfer of revenue from poor people to rich people, from poor places to rich places, and from poor countries to rich countries by the money and finance system is systematic

James RobertsonTransformation of Economic Life: A Millenial ChallengeLondon 1998P.51-54

Impact of Riba in Expansion of Artificial Money and Inflation

Impact of riba in expansion of artificial money and inflation1. The financier, after securing a strong collateral, normally has no concern how the funds are used by the borrower, the money supply effected through banks and financial institutions has no nexus with the goods and services actually produced on the ground. It creates a serious mismatch between the supply of money and the production of goods and services. This is obviously one of the basic factors that create or fuel inflation

2. This phenomenon is aggravated to a horrible extent by the well-known characteristic of the modern banks normally termed as Money creation

Cont.3. The money-creation system turned into the fashionable standard practice of the modern banks under the fractional reserve system

Dr. Tqi Usmani-P.1094. In this way, through fractional reserve lending, banks create far in excess of 90% of the money, and therefore cause over 90% of our inflation

Patrick S. J. Carmack and Bill StillThe Money Masters, How International Bankers Gained Control of America1998P.78,79

Impact of Riba on Stability

Impact of riba on Stability

It increase inflation, fluctuation and volatility etc.

It increase trade cycle, depression

It leads to destruction

Tendency of Interest Based Loans

Tendency of Interest Based Loans

1. Interest based loans have a persistent tendency in favor of the rich and against the interest of the common people


Interest and Humanitarian Goals

Interest and the Realization of Humanitarian Goals Justice demand that

the resources provided by God to mankind as a trust must be utilized in such a manner that the universally-cherished humanitarian goals of-

Cont..1. General need fulfillment

2. Full employment

3. Equitable distribution of income and wealth

4. Economic stability


Actions of Islamic Shariah in the Field of Finance

Actions of Islamic Shariah in the Field of Finance

Islam abolished the interest-based nature of the financier-entrepreneur relationship and reorganized it on the basis of profit-and-loss-sharing


Investment Mechanism of Islamic Banking

Investment Mechanism of Islamic BankingThere are three (3) investment mechanisms in Islamic Banking System-

a) Equity Based Financing

b) Debt Based Financing

c) Benevolent Loan and Services

Equity Based FinancingThere are five (5) Modes in Equity Based Financing-

Mudaraba Trustee Partnership/Profit Sharing

2. Musharaka Joint Venture

3. Muzara-ah Sharecropping- Harvest Yield Profit Sharing 4. Musaqot Irrigation- Plantation of Fruit Bearing Trees- 5. Mugharacha - Agriculture- Plantation of Non-Fruit Bearing Trees

Debt Based Financing

The five (5) Modes we are exercising now-

Bai-Murabaha Cost-Plus sale/Mark- Up

2. Bai Muajjal Credit Sale/Deferred payment sale

3. Bai-Salam - Deferred Delivery sale

4. Bai-As sarf -Trading in Currencies.

5. HPSM -Leasing Contract includes a Promise to Transfer the Ownership

Benevolent Loan (Qard Al-Hassan) and ServicesBenevolent Loans-1. Qard Al-Hasa-Benevolent Loan2. QPF/QBF3. QTDR4. QMSSServices-1. Wakalah- Power of attorney/Agency, Opening of Letter of Credit2. Kafalah- Letter of Guarantee3. Hawala- Debt Transfer

Objective of Islamic Finance

Objective of Islamic Finance

Islamic Finance

Produce of Goods & Services

Consumption

Demand

Supply

Production

THANK You FOR LITENING

The Authors of Books about Foreign Loans1. Susan George The Debt Boomerang, How the Third World Debt Harms Us All 2. Susan George and Fabrizio Sabelli Faith And Credit, The World Banks Secular Empire 3. David Korten When Corporations Rule the Earth

Cont4. Michael Rowbtham The Grip of Death

5. Cheryl Payer The Debt Trap

6. Bade Onimode The IMF, The World Bank and African Debt

7. Jaques B. Gelinas Freedom From Debt

Cont8. Dr. M. Umar ChapraProhibition of Interest: Does it make sense?

9. Michael Rowbotham The Grip of Death: A Study of Modern Money

10. Dr. Taqi Usmani The Historic Judgmen on Interest

11. John Tomlinson Honest Money: A Challenge to Banking

Cont..12. James RobertsonTransforming Economic Life: A Millennial Challenge

13. James Robertson Future Wealth: A New Economics for the 21st Century

14. Richard Thomson Apocalypse Roulette: The Lethal World of Derivatives

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interest and riba.ppt

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