Riba and its types

Contents
o Introduction;

o Definition of Riba;
o Riba in Qura'n;

o Riba in Hadees;

o Types of Riba:
Ribal Al Jahiliyyah;
Riba al -Fadl;

o Modern forms of Riba;

o Rationale for prohibition of Riba;

o Riba Vs Interest;

o Misconceptions about Riba;

o Issue of reference rate;
o Q & A;

Introduction

o As we discussed four basic prohibitions in first

lecture here we will discuss inshaaAllah taalah

basic concept of Riba and its types;
o Topic of Riba is essential and requires deep
attention from participants;
o Here we go;

Definition of Riba

o Literal meaning of Riba is growth or increase;

o The Holy Qur'an did not give any definition for the term for

the reason that it was well known to its immediate audience

like the prohibition of pork, liquor, gambling, adultery etc,
which were imposed without giving any definition;
o However, Fuqahaa (Jurists of Islam) have described Riba as
an effortless profit or a profit which is without due
consideration or the extra earning that is free of exchange;
o According to a definition:
it is any excess compensation over and above the
principal which is without due consideration. Its a
premium paid to the lender in return for his waiting as
a condition for the loan;

Definition of Riba

o Another definition of Riba is that: Riba means and

includes any increase over & above the principal

amount payable in a contract obligation, not covered
by a corresponding increase in labor, commodity,
risk or expertise;
o Hazrat Shah Waliullah Dehlvi, a famous great scholar
of subcontinent, has given a very concise and precise
definition of interest. He says:
"Riba` is a loan with the condition that the
borrower will return to the lender more than
and better than the quantity borrowed."

Definition of Riba

o So the conclusion is:

Riba literally means 'increase' or 'excess';

Classical and contemporary Islamic scholars define Riba as:
The conditional or customary increase which a creditor (owner
of the loan) receives from his debtor (user of the loan) for giving
him time to repay his debt;
The increase in principal may be in form of cash or kind or
services;
The increase is counted Riba if it is stipulated or becomes
customary in the society;
Unconditional increase in principal as gesture of thank and
without predetermination is not Riba;
Riba in Arabic or 'Sood' ( ) in Urdu or interest or usuary
in English give similar meanings;

Definition of Riba

o In modern financial system, interest or the excess (increase)

in loan is a legitimate consideration or compensation for the

period of re-payment of loan;
o But this theory is not acceptable to Islam as Arabs and others
used to give money with a condition that they will charge a
particular amount monthly or at maturity and the principal
will remain due as it was. Then on the maturity date they
demand the debtor whether to pay the principal or they
would increase the term and the payable amount both;
o Islam has prohibited this way of charging compensation and
declared it Haram;
o Therefore, any increase in principal loan amount for just
waiting is not allowed;

Definition of Riba

o Sometimes meaning of 'due consideration' is confused and it is

o
o
o
o

argued that the increase in principal for waiting for a period of time is
not an 'undue consideration';
This appears a true argument but the point is that, Islamic did not
recognize 'period' or 'waiting for a period' in a loan a valuable property
(Mal);
Therefore, if a person gives something to other as loan then he must
forgo the period or time he waited the recovery of loan and he will be
rewarded in the day of judgment by Allah SWT;
More precisely, loaning is a social activity rather than an economic one;
Protection as reward:
o In return of such loaning the lender gets security of its loan
amount;
o Therefore, according to all Fuqahaa loan amount is secured and
must be payable by borrower;

Riba in Quran

o There are four different sets of verses which were revealed on

different occasions. Let us see the verses of the Holy Qur'an about
Riba:
First, in Surah Ar-Rum, in the following words:
"And whatever Riba you give so that it may increase in the
wealth of the people, it does not increase with Allah." [ArRum 30:39]
The second verse is of Surah Al-Nisaa in the following
words:
"And because of their charging Riba while they were
prohibited from it." [An-Nisaa 4:161];
The third verse of Surah Al-i-'Imran is with these words:
"O those who believe do not eat up Riba doubled and
redoubled." [Al-i-'Imran 3:130];

Riba in Quran

In the Surah Al-Baqarah the following set of verses has been revealed:
"Those who take interest will not stand but as stands whom the demon has
driven crazy by his touch. That is because they have said: 'Trading is but like
Riba. And Allah has permitted trading and prohibited riba. So, whoever
receives an advice from his Lord and stops, he is allowed what has passed,
and his matter is up to Allah. And the ones who revert back, those are the
people of Fire. There they remain for ever.
Allah destroys Riba and nourishes charities. And Allah does not like any
sinful disbeliever;
O those who believe, fear Allah and give up what still remains of the riba if
you are believers. But if you do not, then listen to the declaration of war
from Allah and His Messenger. And if you repent, yours is your principal.
Neither you wrong, nor be wronged;
And if there be one in misery, then deferment till ease. And that you leave it
as alms is far better for you, if you really know.
And be fearful of a day when you shall be returned to Allah, then everybody
shall be paid, in full, what he has earned. And they shall not be wronged."
[Al-Baqarah 2:275, 275, 276, 278, 279, 280 and 281]

Riba in Sunnah

Some traditions (Ahadees) of the Prophet ( )on Riba, which are

explanatory to the Qura'n:

'Zaid Bin Aslam reported that interest in pagan times was of this
nature: When a person owed money to another man for a certain
period and the period expired, the creditor would say: You pay me
the amount or pay the interest. If he paid the amount, it was well
and good, otherwise the creditor increased the loan amount and
extended the period for payment again'. (Al-Muwatta, Imam Malik);
'The Prophet ( ) , during his last sermon addressed his revered
companions, "Every form of riba (interest) is cancelled; capital
indeed is yours which you shall have; wrong not and you shall not be
wronged. Allah has given His Commandment totally prohibiting
riba. I start with the amount of interest, which people owe to Abbas
and declare it all cancelled. He then, on behalf of his uncle, Abbas,
cancelled the total amount of interest due on his loan capital from
his debtor'. (Tafsir Al- Khazin, vol.1, p.301);

Riba in Sunnah

'The Prophet ( )is reported to have said "Sell gold for

gold, silver for silver, wheat for wheat, barley for barley,
date for date, salt for salt, in same quantities on the
spot; and when the commodities are different, sell as it
suits you, but on the spot'. (Muslim);

'Bilal visited the Messenger

of Allah (pbuh) with some

high quality dates, and the Prophet ( )inquired about
their source. Bilal explained that he traded two volumes
of lower quality dates for one volume of higher quality.
The Messenger of Allah (pbuh) said: this is precisely
the forbidden Riba! Do not do this. Instead, sell the first
type of dates, and use the proceeds to buy the other.'
(Muslim)

Types of Riba

Riba which is prohibited by Islam has is of two types;

First types of Riba:

Riba al-Jahiliyya or Riba an-Nasee'ah or Riba al-Qura'n (preIslamic Riba, Riba in loans or Riba that is mentioned in
Qura'n);
This is that kind of loan where specified repayment period and
an amount in excess of capital is predetermined (Imam Abu
Bakr Hassas Razi);
The loan that draws profit is one of the forms of riba
(definition from Sahabi Fazala Bin Obaid);
This is the primary type of Riba which was common in Arabs
and other nations at the time of revelation of Qura'n Kareem;
Riba An-Nasiah or Riba al-Jahiliyyah was a transaction wellknown and recognized in the days of Jahiliyya;

Types of Riba

Arabs and others used to give money

with a condition
that they will charge a particular amount monthly if the
borrower does not return the amount and the principal
will remain due as it is;
Since Riba al-Jahiliyyah was interest on loans and
because of its common nature it was easy to
understand and known to everyone easily, therefore it
was named Riba al-jahiliyyah;
Riba al jahiliyyah is classified in two types:
Simple Interest: Interest calculated only on the initial
investment;
Compound Interest: Reinvestment of each interest
payment on money invested to earn more interest;

Types of Riba

o Second type of Riba:

Riba al-Fadl (Riba in trade, Riba in exchange):

A secondary type of Riba is Riba in exchange of goods. This type of Riba was
extracted from famous Hadees in which Holy Prophet (Sallallahu Alayhi Wa
Sallam) said:
'Sell gold for gold, silver for silver, wheat for wheat, barley for barley, date for date,
salt for salt, in same quantities on the spot; and when the commodities are different,
sell as it suits you, but on the spot'. (Saheeh Muslim);
According to this Hadees Riba al-Fadl has been explained with regard to six
defined things/commodities;
Exchange of these things (barter system of trade) should be with two conditions:
If the transacted commodities are of same nature then (1) Spot delivery immediate
delivery of both commodities and (2) Same quantity on both sides, is essential;
Like exchange of wheat with wheat;
If the transacted commodities are of different nature then (1) Spot delivery
immediate delivery of both commodities is essential (2) But the quantity may differ;
Like exchange of wheat with barley;

Riba Al Fadl business application

Riba al-Fadl was not famous in Arabs before Islam. Islam has

introduced this type of Riba in the world;

Riba Al Fadl was mentioned in six commodities only by Holy
Prophet (Sallallah u Alayhi wa Sallam). Is this prohibition
limited to these six commodities or the prohibition is general?
The rule of Riba al-Fadl is not limited to these six commodities
in opinion of Fuqahaa and it is applicable to some other
commodities as well. But Fuqahaa have differences in its
generality;

First viewpoint:

The common feature of these six commodities is that they can

either be weighed or measured, therefore, any commodity which is

sold by weighing or measuring falls within this category and is
subject to the same rule, if it is bartered with a similar commodity;

Riba Al Fadl business application

Second viewpoint:
The common feature of these six commodities is that they are either
eatables or they are used as a universal legal tender. Wheat, barley,
date, salt represent eatables while gold and silver represent universal
legal tenders. Therefore, all eatables and universal legal tenders are
subject to the rule mentioned in the hadith;
Third viewpoint:
The common feature among these six commodities is that they are
either food items or they can be stored. Therefore every thing that is
a food item or can be stored is included in the same category, hence,
subject to the same rule.
Forth viewpoint:
The major characteristic on the basis of which the rules of Riba are
applicable to other commodities by is 'their being in the nature of
money'. Therefore, rules of Riba would apply to anything that serves
the functions of money, such as, paper currency;

Riba Al Fadl business application

There are now two conditions for exchanging money for money:
1. Spot payment and delivery Hand-to-hand basis and 2. Equal
quantity in case of same currency;
Like exchange of PKR with PKR and exchange of PKR with US $;
o Rules for exchange of commodities that attract ruling of Riba:
When the commodities are similar, excess/shortfall in quantity
and delay in payment both are prohibited, e.g., gold for gold or
wheat for wheat;
When the commodities are different but belong to a same group
(the effective cause of prohibition is the same for both), then
excess/shortfall in quantity is allowed while the delay in payment
is not allowed;
Like the case of sale of gold for silver (the common reason being
their use as medium of exchange) or of wheat for rice (the common
reason being edibility);

Riba Al Fadl business application

Six commodities are of two groups:

Group 1: Gold and Silver;
Group 2: Four commodities;

The trading principle:

Trade within group in same items:

Equality and prompt delivery is must;
Gold vs gold, wheat vs wheat;
Trade within group in different items:
Prompt delivery is must but quantity may be different;
Gold vs silver, wheat vs salt;
Trade between groups:
Delay in delivery and difference in quantity both allowed;
Gold vs wheat, silver vs barley;

Modern forms of Riba

The modern forms of interest of two types:

Interest on loans:
This is main type of interest which is clear and easy to
understand for everyone;
Lending and borrowing on interest is simple example of it like
Banking interest;
Under this way cash is advanced to a borrower for receiving
interest from him;
Interest on debts:
Debt originates with a loan and also with a sale and other
transactions wherever the payment of money is deferred to a
future date. The Quranic prohibition of Riba in debt, no
increment is permissible when the debt is repaid or settled;

Modern forms of Riba

The settlement of debt sometimes involved its replacement with a new

increased debt and this has been condemned as the worst form of Riba or
Riba al-jahiliyya;
The Riba in debts corresponds to the compounding mechanism used in
case of interest-based debt. Therefore, the rules for exchange of debts is
that:
Exchange of debt for money: When a debt is exchanged for money, it
must be at par;
Exchange of debt for debt: When a debt is exchanged for debt, it must
also be at par;
Rescheduling of debts: When a debt is rescheduled it should be without
any increase or decrease;
Some implications of these are as follows:
Once the debt is established, it is repayable at par. Charging an increase
for further deferment of the payment of such debts as a function of time
(e.g. a late rental payment in a lease, or a late installment payment in a
credit sale) would be Riba;

The Rationale for Prohibition of Riba

Imam Al-Ghazali pointed evil effects of Riba in the following

words:
"Riba (interest), is prohibited because it prevents
people from undertaking real economic activities. This
is because when a person having money is allowed to
earn more money on the basis of interest, either in
spot or in deferred transactions, it becomes easy for
him to earn without bothering himself to take pains in
real economic activities. This leads to hampering the
real interests of the humanity, because the interests of
the humanity cannot be safeguarded without real
trade skills, industry and construction;
Some other reasons are mentioned in next slide;

The Rationale for Prohibition of Riba

Injustice:

In a transaction

of loan, and it is not necessary that

everybody finds out all the elements of injustice in a
Riba transaction, yet the evil consequences of interest
were never so evident in the past than they are today;
Injustice in a personal consumption loan was
restricted to a debtor only, while the injustice brought
by the modern interest affects the economy as a whole.

Effects of interest on production;

Effects of interest on distribution of wealth;

Lenders are secured all the time;

Time value of Money and interest

Time has a value which is recognized by Islam but there is a detail;

Time value in loans is not acceptable;

Valuation of money is allowed if it enters in circulation of exchange;

Time and Location are important factors in determining the price of
any asset / good/commodity;
Jurists allow the difference between cash and credit prices of a
commodity considering it a genuine market practice;
It is quite natural that in the market credit price of a commodity is
more than its cash price at a point of time;
Another point is that time is not a necessary factor in Riba;
Riba can exist with or without link to time and quantity;
Loan with a condition of increase in lump sum whenever returned (not
time barred);
A loan for six month duration with a condition of x% increase when
returned (time barred);

Riba Vs Interest

o Sometime it is argued that Riba and Interest are two different

words with different meanings. But this argument is based on

misunderstanding the correct scenario;
o The word interest" by and large, is now considered as Riba in
view of big majority of Islamic scholars. The reason of this view is
that 'interest' implies that excess amount which a creditor settles
to receive or recover from his debtor in consideration of giving
time to the debtor for repayment of his loan;
o The word 'Riba', that revealed in Qura'n, was meant for Riba alJahiliyya or pre-Islamic Riba. This Riba manifests when the lender
asks the borrower at maturity date if he would settle the debt or
swap it for another larger debt of longer maturity period;

Riba Vs Interest

The difference between the maturity value of old

and new debt would be Riba;

This clearly shows that the Riba which was common
in Arabs at the time of Revelation was the same
thing which is now practiced in modern financial
system;
Therefore, the present system of time-based
compounding of debt clearly falls in this category
and no difference is there between interest and
Riba;

Misconceptions about Riba

Only Compounding of interest is prohibited;

Interest on consumption loans is prohibited and not on

Production loans;
Debtors are not poor in current times they earn huge profit so
they pay interest;
Commercial interest / Banking Interest that prevails now, is
different from 1400 years old Riba;
Usury is prohibited but banking interest is not;
Riba should be should be allowed in public interest;
Interest keeps value of currency/money intact in future solution
of inflation;
Riba should be allowed on the basis of doctrine of Necessity
since its focal point of modern banking & trade so must be
allowed;

Misconceptions about Riba

General view of the conventional economists:

Interest plays

an important role in promoting savings,

investments, and economic development.;
Time Value of Money is vital concept to run the
economy. It decides about pricing vis--vis related
risks and scarcity of resources;
Decisions of saving, investment and liquidity rest on
existing & expected rates of interest;
Therefore Interest:
Is not Riba; or
It should be Halal Ijtihad is required;
But these are invalid reasons to declare Riba Halal;

Misconceptions about Riba

Islam is the only religion that prohibits Riba:

This claim

is purely incorrect;
Prohibition of interest is not limited to Islam it
is prohibited in Judaism and Christianity;
In fact Islam shares prohibition of Riba, Liquor
and Adultery with other revealed and
unrevealed religions;

The issue of reference rate

Reference rates is always needed for any market including financial

markets;
Financial intermediaries need it for executing and pricing the trade
and leasing transactions;
Different types of reference scales are needed for different kinds of
financial contracts;
While for Conventional finance, there is only one reference rate
(interest rate), Islamic finance will have two basic groups of financial
contracts: debt/semi-debt contracts and non-debt (equity) contracts,
Accordingly, there can be two reference scales:
Price mark up/rent reference scale possibly through the yield
on Government security;
Sharing ratio reference scale, through the Central bank
Mudarabah ratio or Interbank Mudarabah ratio.

Q&A

Gharar and its types

Contents
Definition of Gharar;

Categories of Gharar;
Rules of Gharar;

Gharar in business transactions;

Modern Gharar based contracts;

Some misunderstood concepts;
Q & A;

Definition of Gharar
Gharar is an Arabic word ( ) which means 'risk', 'uncertainty',

and hazard;
Technical meaning of Gharar according to a definition is 'any
bargain in which the result of it is hidden';
So it include uncertainty, cheating, ambiguity and nontransparentness;
Gharar refers to 'the excessive uncertainty' about subject matter
or its quantity / quality or price or maturity of the contracts, that
generally leads to disputes between parties to contract;
Gharar may be in the form of hazard or peril leading to
uncertainty in any business, or deceit or fraud or undue
advantage;

Categories of Gharar

Broadly speaking Gharar can be divided in the following categories:

First: Inadequacy and inaccuracy of information about the

essentials of the contract;

The Gharar exist when a contract does not have clarity in its
essential elements. Such a contract becomes matter of
conflict between parties and become a way of cheating,
deceiving and unjust dealing;
For example if price in a contract is not clear or the attributes
of sold goods are not clear to buyer or the time of payment is
not clear to seller the contract becomes a point of conflict
between parties;
Hiring a cab without telling the deriver the destination or
without agreeing on fare is case of Gharar. Also sale with
through of stick on anything is a sale with element of Gharar;

Categories of Gharar
Indications

of Gharar in a contract (transaction):

Any bilateral transaction in which the liability of the party of the
transaction is either uncertain or contingent;
Consideration of either is not known;
Ultimate result of any one party is uncertain;
Delivery is not in the control of the obligor;
Payment form one side is certain, but from the other side is contingent;
Second: Complexity in Contracts:
Gharar also refers to undue complexity in structures of contracts.
Shari'ah does not permit interdependent contracts;
For example:
Combining two sales in one is not permitted;
Some types of Conditional sale are not permitted;
A sale dependent on a loan from buyer is not permitted;
Sale with multiple prices in a single contract is not permitted;

Categories of Gharar

Third: Pure Games of Chance (Al-Qimar & Al-Maisir):

The term

Gharar is also used in the context of pure games of

chance;
Game of chance means a contract in which one party's gain is
dependent on loss of the other party, so the loss of either party
is certain;
Maysir derived from Yusr means wishing something
valuable with ease by way of game of chance, and without
paying a compensation for it or without working for it, or
without undertaking any liability against it;
Qimar also means receipt of money, benefit or usufruct at the
cost of others, having entitlement to that money or benefit, by
resorting to chance.
Gambling and wagering contracts fall in ambit of Qimar and
Mysir;

Rules of Gharar

It has been narrated from Abu Hurayrah (RA), that he said:

The Messenger of God [ ]forbade the sale of the pebble

(hasah) - [sale of an object chosen or determined by the

throwing of a pebble], and the sale of al-Gharar. [Sahih
Muslim];
Therefore a transaction with element of Gharar is not
allowed in Islam and such transaction becomes void;
Some transaction can be rectified through removal of
element of Gharar like transactions with Gharar in price or
attributes of subject matter;
Shari'ah has forbidden all business transactions, which
cause injustice in any form to any of the parties;

Rules of Gharar
But unlike Riba, Gharar is not precisely defined by Shari'ah

therefore there are differences among Fuqahaa and schools of

Fiqh in details of Gharar;
Following are some rules of Gharar:
Gharar affects remunerative (compensatory) contracts only
and make them void;
Social contracts are allowed with element of Gharar like
uncertainty in gift (Hiba);
Gharar is of lesser significance than Riba;
The prohibition of Riba is absolute but some degree of
Gharar or uncertainty is acceptable in Shari'ah;

Rules of Gharar

Natural or normal Gharar (that is there in human dealings and

does not usually lead to conflicts) is acceptable;

Unnatural or abnormal Gharar (that generally leads to conflicts)
is not acceptable;
By these words generally leads we mean such uncertainty
becomes a reason of conflict in most human dealings;
If a contract with Gharar between two persons does not
lead to a conflict but usually it does, then such Ghrarar
would not be acceptable;
The reason is that rule of generality applies here i.e. if an
act becomes reason of conflict in general then it would be
disallowed even though it may not lead to conflict in a few
cases;

Gharar in business transactions

Gharar is found sometimes in framework of a Contract;

For example (a) two Sales in One, (b) the 'Pebble', 'Touch' and

'Toss' Sales, (c) suspended (Mu'allaq) Sale and (d) the Future
Sale are sales with element of Gharar;
Gharar sometimes appears in object of the Contract;
For example ignorance of the attributes and quantity of the
Object;
Also ignorance of the essence of the object fall in ambit of
Gharar like:
Ignorance of Time of delivery and payment;
Inability to Deliver the subject matter;
Contracting on a Non-Existent Object;
Sale of the Unseen items;

Modern Gharar based contracts

Modern financial system has developed many transactions

which have been denounced by Islamic scholars as

'impermissible contracts/transactions/acts';
Following financial instruments and dealings are among them:
Commercial insurance;
Cash settled derivatives (forward, futures, options and
swaps);
Multi level marketing;
Cash settled Online trading of commodities, metals and
currencies;
Business lotteries;

Some misunderstood concepts

Many a time people get confused with (1) uncertainty, (2)

gambling, and (3) speculation and consider them

synonymous, while they are not synonymous though
related;
Speculation can be permissible and impermissible both;
Speculation is not always a gambling;
Uncertainty is there in speculation and gambling but it
does not mean every uncertainty is Gharar;
There is invalid speculation in short sale but not
gambling;
A high risk activity can be uncertain but not an act of
gambling;

Q&A