International Islamic University Malaysia

Department of General Studies

RIBA RIBA RIBA RIBA
And Its Presence in Todays Financial Institutions



Ahmad Faridi Bn Abdul Matin
O715433
Section: 19




BACHIR SOUALHI (DR.)




SEMESTER 2
2007/2008


Table of Contents
Introduction i
Chapter 1: Riba: An Overview ii
1.1 Introduction to Riba 1
1.2 The Term and Its Definition 1
1.3 The Types of Riba 1
1.3.1 Riba Al-fadl & Riba Al- Nasiah: Definitions & Examples 2
1.4 The Hukm 3
1.5 Quranic and Sunnah verses 3
1.6 The Hikmah behind prohibiting Riba 4
1.7 Muslimss Reaction. 5
1.8 Chapter Conclusion. 5

Chapter 2: Riba in Todays Financial Institutions iii

2.1 Loans 6
2.1.1 How do banks give loans? 6
2.1.2 The Types. 8
2.1.3 The Hukm. 8
2.2 Savings 9
2.2.1 The Forms. 9
2.2.2 The Hukm. 9
2.3 Banking Cards 9
2.3.1 The Types 10
2.3.2 The Hukm 10
2.4 Monetary Exchange 10
2.4.1 Exchange using current and future rates. 11
2.5 Insurance. 11
2.5.1 The Types: 12
2.5.2 The Hukm: 12
2.6 Chapter Conclusion 13

Chapter 3: Islamic Banking: A Solution to Riba iv

3.1 Introduction and History 14
3.2 The Reasons Behind preference of Islamic banks in the modern world. 14
3.3 The characteristics and goals of Islamic banks 14
3.4 Types of banks falling under Islaimc banking category. 15
3.5 Services Islamic banks provide. 15
3.6 Islamic Banking Oporations and Interactions. 15

Conclusion v
Conclusion 17

Bibliography vi
Introduction


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Introduction
AssalamuAlaikum wr. wb.
Praise be to Allah SWT, for his mercy and blessing has poured upon us without boundaries and the
blessing and prayers of Allah be upon our prophet SAW.
The issue of riba in the modern world has been a controversy issue between different intellects and
scholars, as it will be seen later on. This is because riba has evolved tremendously from a simple
interaction to a business that involves multibillion-dollar companies and individuals alike. The choosing
of this topic was based on some reasons I would like to present herewith.
1. The lack or limited resources of other topics pertaining modern fiqhi issue in our respective
university, and even it was hard to acquire these resources that I have used regarding this
particular topic.
2. To gain self satisfaction of understanding another scope of knowledge that is not related to my
course of study, which was the main reason I chose the scope of Contemporary fiqhi issue.
Although many people will argue, like some of my friends, that riba is not a contemporary issue
since it is well known in the early ages, and early scholars have plainly give their opinion regarding
its un-permissibility. I would like to stress that this argument is true in some sense but looking to the
topic in different angle, it would be obvious that it is a contemporary issue because the forms of riba
used today has somewhat evolved and changed from what is used to be.
Before going further, I would like to thank those who helped me in completing this work, by
correcting my grammatical and spelling mistakes and also by giving me ideas throughout, and letting
me use their resources.
Asking Allah SWT to bless this work and grant it acceptance.
WASSALAM






Chapter 1:
Riba (Usury): An
Overview
Introduction to usury in Islamic prospective
Ahmad Faridi
0715433

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1.1 Introduction to Riba.
The existence of financial exchange between people emerged since the beginning of
time such practices include trade and loans, and as time passed by, people began to make up
new practices or develop and alter the existing ones. Such additions include, among others,
investments, banking, usury, insurance, interests and the use of paper money etc. These
practices have a very good indication that humans have developed throughout time, but
alarmingly it also indicates how low peoples ethics have become. This is evident with the
emergence of non-ethical practices among people such as the appearance of Riba (en. Usury).
Riba has been practiced for centuries and thus we could find some traces of rejection from the
ancient intellects such as the Greek philosopher Aristotle
1
, who describe usury as a Fake
profit. And even religions such as Judaism and all Christian sects have prohibited it.
2

So it is not a mere coincidence that Islam, which is a religion sent to complete the ethics
Akhlaq has stated some guidelines for people to observe in order to restrain from such low
and unethical practices. And thus the rulings of Usury had been established.


1.2 Riba : The Term and Its Definition.

Riba " " literally means in Arabic accumulation and growth whether in something
physical or emotional
3
. Lisan Al-Arab dictionary provides: The root of it is the increase
4
.
Riba is usually translated to English as usury. Oxford Advanced Learners Dictionary
defines usury as: The practice of lending money to people at unfairly high rates of interest
5

and The American Heritage Dictionary have defined it as the lending of money at an exorbitant
rate of interest.
Although the Islamic term and the English term slightly differs in the meaning, both term are
used interchangeably.
Islamically, Riba can be defined according to its types. These types are presented below.


1.3 Riba: The Types.
According to S.H. Hamoud in his book, Banking: The Adaptation of Banking Practice to
Conform with Islamic law, that there are at least three trends
6
in the classification of Riba.
These trends are:

1
100 Soal Jawab Bank Islam, Ahmad Al-Nagar, Mohd. Ibrahim, Mohd. Al-Ansari, pg 13.
2
Ibid, pg 13.
3
, Abdul Fattah Mahmood Idris, pg. 5.
4
Islamic Banking: The adaptation of banking practice to conform with Islamic law, S.H. Hamoud, pg47.
5
Oxford Advanced Learners Dictionary, pg 1628.
6
Op.cit. pg, pg 53.
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1. Riba of increase Ar. Riba Al-Fadl
7
and Riba of Delayed paymentsAr. Riba Al-
Nassiah
8
. As-syafie adds a third type Riba of hand. This classification views Riba
with the scope of sales and its effects.
9


2. The second classification has two parts: (viewing it with a comprehensive scope)

A. Riba of the pre-Islamic
10
: Meaning to return the lent money with some extra
amount for each delay in paying back defined at the time of the agreement.
B. Riba explained by the prophet which is in two types:
I. Usury of increase. Such that one dinar sold with two and so on.
II. Usury of delayed payment.

3. Ibn Al-Qyyem classification:
a. Covert Usury; The increase usury.
b. Overt Usury; The delayed payment.
It seems that his classification does not differ from the first one. Yet his
argument is based upon How extreme the ban Haram is. He argues that
Covert usury has been banned Intentionally, but the overt one has been banned
to prevent leading to the former. Thus the later has a much milder degree in the
Haram standerd.
11


As seen, though there are three classification system most of the components are similar.
Classification system number 1 will be the basis that will be used throughout the paper.


1.2.2 Riba Alfadl & Riba Al-Nasiah : definitions, and examples.

1. Riba Al-fadl (Usury of increase):
Taking a superior thing of the same kind of goods by giving more of the same kind of
inferior goods
12
.
Examples of this type:
10 kg of first class dates with 15kg of an inferior type of dates.
1 gm of gold with 2gm of gold. And so on.
2. Riba Al-Nasiah (Usury of Delayed Payments ) .
This type has two subtypes:

7
, Abdul Fattah Mahmood Idris, pg. 7.
8
Ibid, pg 8.
9
Banking: The adaptation of banking practice to conform with Islamic law, S.H. Hamoud, pg 53,54.
10
Ibid, pg 56.
11
Ibid, pg 58,59.
12
The Noble Quran: English translation of the meanings and commentary, King Fahd Complex For Printing of the holy quraan.
Pg 62.
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First, to sell an items i.e Riba compatible item, with another one. With a delay in both
or either items collection
13
. Or what is well known in fiqhi terms Al-Qabd qabla Al-
Tafarruq or collect as you pay. Note here that Riba compatible items are, among
others, gold, silver, wheat, dates and salt
14
.
The second type is the Pre Islamic Riba. Meaning to return a lent money with some
extra amount for each delay in paying back defined at the time of the agreement.
An example of this is as follows.
Person a borrows RM100 from person b. person b then states that for any one day delay
on repaying, person a should pay extra %1 of the original amount.


1.4 Riba: The hukm.
Riba with all its forms are generally prohibited Haram, this is proven in The Holy Book
Al-Quraan , Prophets traditions and the Ijma of the Ummah , and it is considered as one of the
capital prohibition Kbair Alzzunub . Note that kabair is a term used to describe prohibited
actions which are not forgiven by Allah SWT except by sincere repentances (Tawba).
Though some scholars (as discussed earlier) classified the intensity of the prohibition to
extreme and mild like Ibn Al-Qayyem , and also some of the companions of the prophet, such as
Ibn Abbas, Ibn Arqam, Usamah bin Zaid and others, did not consider Riba of increase as
prohibited
15
as they have their own justification for it.


1.5 Verses from the Quraan and Sunnah regarding Riba.

The Quran has dealt with the issue of usury in four different chapters sura, this is to
stress the importance of the issue and also to remind people about the great punishment
awaiting those who rejects His orders.
Allah SWT warned those who do not restrain from committing Riba, A grave punishment
in the hereafter. Allah SWT said in His Glorious Quraan:
)) %!# =2' #/h9# ) ) $. ) %!# 6F 9# b9# ((
Those who eat Riba (usury) will not stand (on the Day of Resurrection) except like the standing of a
person beaten by shaitan
16
.
(2:275)
He then said in the next verse:
)) ,s !# #/h9# / M%9# 3 !# =s . A$ . ?O& ((

13
, Ahmad Al-dweesh,part 13, pg 330.
14
Ibid, 330.
15
, Abdul Fattah Mahmood Idris, pg. 7,8.
16
The Noble Quran: English translation of the meanings and commentary, King Fahd Complex For Printing of the holy Quran,
(2:275) pg 62.
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Allah will destroy riba (usury) and will give increase for Sadaqat (deeds of alms and charity)
And Allah likes not the disbelievers, sinners
17
.(2:276)
And in another verse he promised a spiritual war against those who commit Riba. He said:
)) $' %!# ## #)?# !# # $ +/ #/h9# ) F.
* 9 #=? #' 5>s/ i !# &! ((
O you who believe! Be afraid of Allah and give up what remains (due to you) from Riba (usury) (from
now onward), if you are (really) believers (278) And if you do not do it, then take a notice of war from
Allah and His Messenger
18
(2:278,279).

The above verses are all from the second chapter of the Quran surah el-Baqarah, the other
verses that dealt with Riba can be found in chapters 3 Aal Imran, 4 Al Nisa and 30 Al
Room of the glorious Quraan.

As for evidence from the Sunnh, the prophet has been reported saying several Hadiths
pertaining Riba. These Hadiths can be found in books of treditions of the prophet such as
SahihBukhari and Sahih Muslim.

Ibn masud (RA) has been reported saying:
(( ))
((Allahs Massenger SAW cursed the one who accepts ArRiba (the usury) and the one who pays it
19
)).
Being cursed here means that he will be away from Allahs SWT mercy
20
.


1.6 Riba: The Hikmah behind prohibiting it.

The prohibition of Riba in Islam has a lot of meaning behind it, one of the reasons are that Riba
comprises of using people
21
who are in need to satisfy ones greed and selfishness. This act is
without doubt can be considered as unjust Zhulm and thus it is Islamically unethical, as a
religion of equality and justice, will not pass without dealing with it. Also Riba to some extent is
a burden on the borrower since he has to pay extra of the original amount, and sometimes he
might be obliged to pay double the amount or even more. This is clearly a form of torture to the
borrower, and it might lead to bad consequences on him and his family.
Another reason that might be considered is that Riba is a way to earn money without work
22
,
which is contradicting Islam's teachings, which encourage Muslims to seek lawful rizk using
appropriate means.

17
Ibid, (2:276) pg 63.
18
Ibid, (2:278,279) pg 63.
19
Riyad-us-Saliheen, Al-Nawawi, part 2. pg1218.
20
" : " , Dr. Wahbah Al-zuhaili, 377..
21
Ibid, pg 377.
22
Ibid, pg 377.
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1.7 Riba: Muslims reaction towards it:

As discussed earlier Islam prohibited the use of Riba in the day to day transaction. Not only
that, it has warned a grave punishment for those who dare to defy Allahs command. Thus, it is
obvious that a self-conscious (Taqi) Muslim would be aware of it and also try to stay away from
involving him/her self in suspicious agreements and contracts with non-Islamic financial
institutions. Being aware means, to know and understand the process of these financial
transactions and how to perceive it and know what is Islams opinion regarding that or this
particular transaction.
As for those who already have engaged in such transaction should repent to Allah SWT and try
to find ways to abandon these practices.


1.8 Introduction to Riba in modern financial institution:

Riba throughout the centuries have evolved greatly in its forms and today as people intellectual
capability grown, these forms have been much wider. And its widespread have been alarming.
It might be also the direct consequence of the increase of peoples needs and wants. Another
consequence is that Riba in modern times have become an important part in peoples life, in a
way that in some places usury is part of day to day interactions. It has become part of life that
cannot be separated but rather people have to adapt to it. In the next chapter the issue of
modern financial institutions and how do they use Riba in their interactions will be discussed.
However, before going deeper into the discussion, a list of some of these interactions is
presented herewith. But it is important to understand that these topics are only a small part of
a wider spectrum.
1. Bank loans.
2. Savings.
3. Insurance.
23

4. Credit Cards.
5. And Monetary Exchange.

____________________________________________________________________

23
, Ahmad Al-dweesh, part 15, pg.






Chapter 2:
Riba in Todays
Financial Institutions
Examples of Riba interactions in banks and how to avoid it
Ahmad Faridi
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In the modern worlds people day to day dealings, financial establishments play a great
role in fulfilling their needs. Banks have become the treasure chest for a lot of people; they
depend on them in every interaction, this has lead to the sharp increase in the number of banks
and other financial institutions. Although in economic terms, this process is an indication of
healthy economy. However, looking at the issue in an Islamic point of view, this extension
possesses a bad indication that Riba has become wide spreading among suppliers and
consumers alike.
Since the establishment of the early banks and Investment Companies, Muslim scholars tried to
explain to the public the unlawfulness of many of their services. Many people restrained or
limited their interaction with these institutions but as their services increase and the burden of
life increase, peoples need to use these services become more significant. What made it
difficult for a lot of people to restrain from using these dealings is some of the services they
provide cannot easily be traced as a Haram or Halal dealings.
In this chapter, such institutions and services will be discussed. The form of discussion will be
uniformed. The discussion will be in such way the definition, short history, relationship with
Riba, other negative sides and then the Islamic point of view will be covered.

____________________________________________________________________

2.1 Bank Loans .
Lending money or lending in general can be traced as far as human history. It is part of helping
others in need and religions throughout history encouraged such acts and Islam as religion of humanity
gave special stress on this, Although a lot of virtues can be traced for lending money, some people
developed the bad habit of using people in need to gain self interests. Adding extra expenses on the lent
money with the claim of giving a chance for every delay is simply considered islamically as Riba and it is
the same as how the Arabs of Jahiliah used to do. Thus, it is considered non-lawful interaction. This form
of Riba can now be seen around the world in the form of bank loans.
Although the term can be used to describe anything that is lent, it is most popular within
banking terms. The Cambridge Advanced Learners Dictionary defined loan as a sum of money which
is borrowed, often from a bank, and has to be paid back, usually together with an additional
amount of money that you have to pay as a charge for borrowing
1
.
It can be considered, along with savings, as one of the most common bank transactions and most
important one, since most of bank revenue comes from loan transactions
2
.

2.1.1 How do banks give loans?
Before going further it is worth a mention that interest that are taken from the client or
given to him is considered as usury no matter how high or low the percentage rate is. This view,

1
Cambridge Advanced Learners dictionary (software), version 1.0.
2
Banking: The adaptation of banking practice to conform With Islamic law, S.H. Hamoud, pg149.
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although it looks fundamentally correct, caused a controversial argument between scholars,
According to the vast majioraty of Muslim scholars, usury is usury no matter how high or low
the interest rate is, but some scholars including the current Mufti of Al-Azhar stated that since
the interest rate is so low, it is permissible for a bank client to take the interest for his savings.

There are several ways banks provide its loan services to the consumer, these forms can
vary from one bank to another, from time to time or even from a certain class of client to
another class.

Form number 1:
According to Ali Al-Salus, of Qatar University, in his book
one way Banks give loan is by calculating the interest rate and then
subtracting the amount from the loan itself, thus only lending the reaming amount
after subtracting. An example of this is as follows: a lady asks for a RM200 loan from
a bank so if the interest rate is 20%, thus the bank will only give 160 but she is
obliged to repay RM200 back, meaning she pays 25% extra
3
.

Form number two:
A more common way banks provide interest loans is by giving an amount of money
and then does not ask for any extra amount except if the borrower accedes certain
duration, and for every delay the so called fine increases. This type is a form of
multiple usury.
4


Form number three:
Another form is when a customer has a certain business with a third party. He gives
the bank the sole responsibility in paying his obligation to them on behalf of him.
Then, when the issue is resolved the bank asks a refund from the customer
exceeding the amount the bank has paid to the foreign company. If the exceeding
amount is for costs regarding the interaction i.e. commissions. it is not considered as
Riba but if the exceeding amount is portion or a percentage of the amount the bank
has paid, this is considered Riba since it is similar to loan of delayed payment
5
this
type of lending is called casual lending.
6


As mentioned before, the above forms are only few ways banks give loans, new ways and
techniques are constantly been developed to reach a wider scope of clients.



3
, Ali Al-Salus,pg 67.
4
Op.cit. pg 159.
5
Op.cit. pg 72,73.
6
The adaptation of banking practice to conform with Islamic law, S.H. Hamoud, pg163.
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2.1.2 The Types.
7

1. Loan for consumption :
This is the type of loan that is given to people who are in need of the money for survival
i.e. to fulfill day to day expenses such as food, rent, schooling, clothing and such.

2. Loan for production :
This type is the type where the bank gives the loan to corporation and businesses in
order to execute their plans and projects.


2.1.3 The Hukm.
As stated in chapter one, all forms of Riba are Haram. And it is a grave sin that cannot be
forgiven without sincere repentances. But the question arises here, whether the borrower (the
one who is paying the usury), gets any sin or not?. The answer to this question is easily quoted
by one of the prophet companions. He said:
(( ))
((Allahs Massenger SAW cursed the one who accepts ArRiba (the usury) and the one who pays it
8
)).

This is not to say that the borrower is always in sin, because in Fiqhi terms or needs
change the status of Haram to Halal
9
. This is only if the borrower could not find other sources of fund
and that he needs the funding urgently.
As for the types of loan, there are no different opinions regarding the Hukm of loan for consumption. It
is agreed that is Haram. The problem arises in the second type where some Ulamas argue that it is Halal
since there is no zulm and misuse of peoples condition. However the vast majority of Ulamas state the
unlawfulness of both types without differentiation.
10

As general, a fatwa that has been issued by the second conference of the Islamic research assembly
explains the Hukm of most of banking interaction.
The translation of the text is as follows:

Interest on any type of loan is all unlawful usury, whether the loan is for consumption or for
production. The Hukm, which is Haram, is the same whether the interest rate is low or high. Lending
money with interest is unlawful whether it is for a normal or urgent cause. Borrowing money with
interest is also unlawful except if the cause is urgent and it is a necessity
Accounts of delay payment, and other types of loan with interest are all Usury interactions. And it is
prohibited
11
.

7
, Abd. Alfattah idrees, pg67.
8
Riyad-us-Saliheen, Al-Nawawi, part 2. pg1218.
9
, Ali Al-Salus,pg 68
10
Op.cit pg 67, 68.
11
Op, cit 9, 10.
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2.2 Savings :
Savings are defined as the money kept in an account in a bank or similar financial
organization
12
. Saving money in a bank as a concept is lawful, but what is happening today in
such savings account is far from being Islamic as we will see, herewith.
Islamically and in law terms the word savings is not accurate to its true meaning. Savings
latterly means to save money or keep it with someone i.e. safekeeping. However, since the
bank is then using the money and it is obliged to return the money whether it got profit from
using it or it lost it, it is then considered as a loan from the client to the bank
13
. So whether the
contract between the client and the bank is to open a simple current account or an account
for investment it is still considered as a loan to the bank.

2.2.1 Savings: it forms:

1. Current Account:
It is to save some amount of money in the bank, and the client can refund his money at any
time whether as whole or part without any limits from the bank in the withdrawal or in
duration.
14
This type generally is lawful if it does not include any form of interest. Despite
the fact the interaction is lawful, it is somehow not encouraged since the bank, which is a
Riba-based bank is using it. It is unlawful in terms of helping for munkar.

2. Savings Account:
This type also similar to the previous, it differs only that it has limits in withdrawal. It is also
lawful except if interest is included in the contract. In such accounts i.e. Riba saving
accounts, the client usually receive an amount of money at the end of every month
15
. This is
unlawful, because he is receiving an amount as usury of delay.



2.2.2 The Hukm:
It is haram if it containes interest, refer to section 2.1.3 for a full Fatwa text regarding loans.

2.3 Banking Cards :
In its strive to provide the best services to clients and also lessen the burden on its branches,
banks have developed the use of cards to ease the interaction between the user and the bank.

12
Cambridge Advanced Learners dictionary (software), version 1.0.
13
Op. cit.pg 9.
14
Ibid, pg 49.
15
Ibid, pg 51.
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Such cards have many benefits no doubt. From simple withdrawal from ones account, to
purchasing items using these cards.

2.3.1 The types.
1. Debit cards.
a plastic card that the holder can use to pay for purchases, the money being transferred
directly from the holder's bank account to the seller
16
This is the most common banking
card available, and currently most clients who have an account in a particular bank, will
be issued this type of card.

2. Credit cards.
a card issued by a bank or business that allows somebody to purchase goods and
services and pay for them later, often with interest
17



2.3.2. The Hukm.
According to scholars, debit cards are lawful since it is a mean to retrieve the loan from the
bank. As for credit cards, it is considered unlawful because the existence of interest which as
discussed earlier is Haram.

2.4 Monetary Exchange .
Exchanging money from one form to another has been common practice throughout the
centuries. Today , banks and monetary exchange shops still practice this important act. though,
ulamas has notice some errors in these interaction that transform the operation from Halal to
Haram.
To make it clear, monetary exchange as a principle is lawful because it is considered as a
buying-selling interaction . Allah SWT said in the holy Quran:
)) 3 ymr&u !$# yt79$# tymu (#4t/h9$# ((
Wheres Allah has permitted trade and forbidden Riba (usury)
18

(2:275)

To make exchange operation to be lawful Islamically some requirements must be fulfilled:
1. If the exchange is between the same currency:

16
Microsoft works dictionary. (software)
17
Ibid.
18
The Noble Quran: English translation of the meanings and commentary, King Fahd Complex For Printing of the holy Quran,
(2:275) pg 62
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a. The exchange should be between the same amounts e.g. 100 cents with RM1. Not
more or less in either party. A breach in this requirement is considered as Usury of
increase.
b. The exchange should be hand to hand i.e. on spot. Or the principle of Al-qabd qabl al
tafaruq. Possession before parting. A breach in this requirement is considered
Usury of delayed payments.
2. If the exchange is between different currencies:
Only the principle of possession before parting must be observed. Again, it is
considered as Usury of delayed payment if this condition is not observed.
19


2.4.1 Exchange using current and future rates.
Banks when dealing with exchange currencies, they either use one of these rates,
current currency rates or future rates.
According to the most majority of scholars exchange using the current rate is
permissible with the condition that before they part from each other, they must take
reciprocal possession. As what is meant by possession here, some scholars (such as Al-
Shafie and Al-Laith
20
) argue that it meant hand possession
21
. Others ,such as the
Hanafis, state that possession here is a designation and not necessary meant receiving
by hand.
22

As for the exchange using future expected rate is Haram
23
, the reason is that it that
there is suspicions of involving interest in the transaction.
24

2.5 Insurance .

Insurance is defined as An agreement between a client and a company in which the client pays
to the company regular amounts of money and the company agrees to pay the costs, for example,
if the client died, fell ill or if he/she lost or damaged something .
25
or as The American Heritage
dictionary defines it financial protection against loss or harm: an arrangement by which a
company gives customers financial protection against loss or harm such as theft or illness in
return for payment premium
26
.
In some countries insurance is compulsory to everyone. They have to have a one or more type
of insurance, mainly driving and car insurance.


19
, Abd. Alfattah idrees, pg87.
20
The adaptation of banking practice to conform with Islamic law, S.H. Hamoud, pg177
21
Op. cit, pg 91.
22
Op. cit. pg 176.
23
Op.cit. pg 93.
24
Op. cit. 182.
25
Oxford Advanced learners Dictionary. Pg 775. (with modification)
26
Microsoft works dictionary (software).
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2.6.1. The Types:
Today there many types of insurance to the extent that some companies cover almost all aspects of
peoples life. These types among others are:
1. Car and Driving insurance.
2. Life insurance.
3. Health insurance.
4. Travelling insurance, and
5. Property insurance.

2.6.2. The Hukm:
There are three opinions regarding the permissibility or the un-lawfulness of Insurance. These
different opinions are the result of the relatively modern issue insurance is.

Opinion one:
All types of conventional insurance are Haram. Because it contains types of Riba, gharar, and
gambling. Muhammad Salih Al-Munjid a mufti from the Saudi committee of supreme Ulamas
said: Insurance include both types of Riba. Riba of delay (because of the money lent) and Riba
of increase (because of replacing a superior good with the same good but inferior), It contains
acts of gambling, It containes the element of gharar (uncertainty of the item purchased)
which is Haram in Islam
27
. Other Saudi Ulamas such as the late Shekh Abdul-Aziz bin Baz (Allh
yarham), Abdul-Razaq Afifi, and Abdullah Bin Qaud signed a Fatwa regarding the
unpermissiblity of conventional insurance with the similar reasons above
28
.

Opinion two:
All types of conventional insurance are Haram because it contains the element of gharar, which
is considered as unlawful in Islam. Gharar is a term used to describe purchasing unknown items
or services. In this sense insurance is Haram because the service payment by the insurance
company is unknown at the time of the regular payments the client makes, and also it might be
that the reason for the company to repay will not happen. For example, an accident might not
happen to the client of a vehicle insurance company.
29


Opinion three.
30

This point of view stresses that the argument that insurance has gharar element is a weak
statement. It argues that there is no gharar in the contract since it has strategic and statistic
knowledge in it. Thus it gives the permissibility of insurance if the company fulfills two
requirements:
a. There is no Riba included in the contract.
b. That the insured items are Halal.

27
Fatwa menempuh kehidupan moden, Daud Baharum, pg 330.
28
, Ahmad Al-Dweesh, part 15, pg248,247 and 246.
29
Op. cit. 329,
30
Ibid, pg 320, 330.
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One of the scholars that supported this argument was the late Sheikh Mustafa Al-Zarqa.(Allah
yarham).

2.6 The Solution:
As seen above, the world has become so used to usury that it has become a normal
interaction. The wide spread of usury-friendly financial institutions made it crucial for Muslim
scholars and intellects to develop parallel institutions that are usury-free. Thus the idea of
Islamic Banking. In the next chapter we will discuss about it and its interaction with their
clients.


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Chapter 3:
Islamic Banking: A
Solution to Riba
Followed by the topics conclusion
Ahmad Faridi
0715433

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Introduction and History:

The establishment of institutions that comply with Islamic rules and laws was always a dream that
seemed to some people a mere imposable task. This is because the wide spread of conventional
banks and what it brought with it. The establishment of the IDB (Islamic development bank) and the
International union of Islamic banks was a result of dedication and co-operation between a
numbers of Islamic countries. The establishment of both institutions opened the door to the
relatively rapid growth of Islamic banking and other Islamic financial institutions, today these
institutions has reached the level on which even some non-Muslim countries have opened (such as
Singapore) the door for such institutions to exist on their soils or on their way to implement it (such
as Japan). It is certainly great news that at last Muslims are contributing to the modern civilization
with something that will reshape the financial body of the world. But although the future looks
good for these institutions, many people do not understand how these institutions function and
whether they really comply with the true Islamic rules or it is just merely a change in the cover but
the essence is still un-Islamic. In this chapter Islamic banking interactions will be discussed and a
comparison between them and the conventional ones will be presented.

The Reasons Behind preference of Islamic banks in the modern world.
1

1. The unlawfulness of most of conventional banks interactions.
2. The dissatisfaction of people regarding conventional banks.
3. Peoples understanding that conventional banks are unlawful.
4. The willingness of Muslims to accept institutions that conform to the sharia.
5. The continuous success of Islamic banking in many countries.
6. The awakening of Muslims throughout the world ( ).
7. The support of some Islamic countries governments for these types of banking.



The characteristics and goals of Islamic banks:
The most apparent property and characteristic of Islamic banks is that they are usury free banks
2
,
meaning that they do not depend on interest in their dealings. Other characteristic is that unlike
conventional banks, which gain interest by lending to projects and businesses, it gain profit by
investing. This investment can be in two forms. Firstly, by direct investment in which the bank uses
its capital money to invest in projects and then gets it profit from there. Secondly, by taking over
partial or whole ownership of a business or projects.
Another characteristic of Islamic banks is that they strive to build strong and firm social and
economic ties.

1
The adaptation of banking practice to conform with Islamic law, S.H. Hamoud, pg 5.
2
100 Soal Jawab Bank Islam, Ahmad Al-Nagar, Mohd. Ibrahim, Mohd. Al-Ansari, pg 30,31,32 and 33.
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As for its goals, These banks like other type of business set profit as a main goal, but other goals
that can be sought such as that these banks set observing the rules set by Allah Almighty ,proving
that Islam is a comprehensive way of life , mutual profit with the community, freeing it from usury-
based banks.

Types of banks falling under Islaimc banking category.
1. Islamic banks that are originally establish as such banks.
E.g. Bank Islam Malaysia sdn bhd and Bank Muamalat Mlaysia bhd in Malaysia. PT Bank
Muamalat in Indonesia. Bank Al Rajihi and Bank Al Bilad in Saudi Arabia.
2. Islamic banks that split from its mother bank.
E.g. PT Bank Syariah Mandiri in Indonesia which is a separate bank operating under the main
bank PT Bank Mandiri.
3. Conventional banks that provide Islamic banking corners.
4. And Islamic banks converted from conventional one.

Services Islamic banks provide.
Islamic banks provide similar services as other banks; the main difference is that Islamic banks
observe Islamic teachings in its interactions. These services among others:
1. Savings and current account.
3

2. Investments.
3. The good Loan .
4. Zakat or alms.
5. Exchange and others.

Islamic Banking Oporations and Interactions.
i) Loans in Islamic Banks
4
.
In a true Islamic interaction, banks are not supposed to take any interests meaning that
the bank should not add any extra amount to the value returned, however the bank is allowed to
charge a fixed service cost " commissions", and it is allowed to take guarantees () from the
client.
It might be argued that how will the bank profit from lending service if it does not take interest, the
answer arises that the profit comes from the fixed service cost and the prosperity of the
community. Since the good wellbeing of the community that the bank works in means the good
well being of the bank itself.

3
Ibid, pg 29.
4
Ibid, pg 34
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ii) Savings.
5

Unlike conventional banks, Islamic banks do not give interest to the client. But it can give privileges
to the client. These privileges must be revised and set in a way that does not make it similar to
paying interest.
iii) Middle Man:
6

Islamic banks can be used as middle man, such that it receives payments on behalf of its client from
a third party. Also it can charge commissions from the client.
iv) Exchange:
Islamic banks must observe the Islamic rulings regarding exchanging money and also since
exchanging using future price has usury in it Islamic banks should restrain from that.
v) Interactions with other banks:
7

Islamic banks should minimize, since eliminating is almost impossible, its contact with usury-based
banks in order to purify its money as much as possible.

With the great competition between both Islamic and conventional banks, Islamic banks must prove
its compatibility to be used in todays hustle and bustling world. With this, discussion of the topic
has finished. A conclusion will be presented next.
____________________




5
Ibid, pg 36.
6
Ibid pg 37.
7
Ibid pg 71.
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Riba existed in the past and present and most probably will exist in the future, the near future
at least. So it is plausible to say that this paper was worth the work and hopefully receive the
satisfaction it deserves. But before I wrap it up there are some points I have concluded that I
would like to stress regarding the topic of this mini-research.
1. Riba, usury, interest or whatever it is called or in which form it is, are strictly prohibited
in Islam and no point of time, whether present or future, nor will space change its
status.
2. Riba has evolved from a simple intercourse between simple lender and borrower to an
intercourse in which whole countries and organization are involved, thus it needs to be
studied and researched in order to understand its big picture.
3. Opening the door to usury is like opening the Pandora box, since it brings a lot of burden
and misery on an individual, organizations, families and countries as can be seen today.
4. When encountering issues with different opinions from the scholars it is always a good
practice to choose the vast majority opinion.
5. The Islamic ruling that says usury is unlawful and gives a harsh punishment in the
hereafter proves that Islam is a religion that is sent to purify intercourses between
people.
6. A huge task is must be put upon religious personnel and bodies in order to convey to the
public the dangers of interaction with riba- based banks, and also to help the authorities
to purify Islamic banks interactions as far as possible.
7. A Muslim must understand his interactions and he need to be aware of his dealings. This
knowledge is obligatory i.e. Fardu Ain. Since it is directly influencing his/her life.
8. A Muslim must be aware from which corner his rizq come from, Halal or Haram.
9. Muslims have a moral responsibility to convey Islams view about usury, and to convey
its alternative to the western or to the non-Muslim world in general.
10. Muslims should before engaging into a new dealing that is new to Islam, ask those who
are knowledgeable, since Alhamdulillah, we have been blessed with numerous of
Ulamas, Shekhs, and intellects who fear Allah SWT.
11. Educational institutes such as universities, schools and training centers should stress on
riba and its uses in todays world and provide sufficient resources in its libraries and
resource corners, as I have encountered some problems regarding acquiring the newest
resources from our respected university, this problem applies also resources regarding
other contemporary fiqhi issues.
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12. Islamic banking as a concept is a positive indication that Muslims are capable in
developing and transforming non-Islamic interactions or dealings to a more Sharia
friendly intercourse.
13. Islamic banking has achieved an outstanding success in theoretical context but
practically it is something harder to achieve without co-operation between institutions,
government bodies, individuals and religious establishments and leaders.
14. The success in solving the dilemma of riba will give hope in solving problems modern life
has arose.
With this I pray to Allah SWT, and thank Him for giving me the strength to complete this
paper and ask his forgiveness for any mishap or short coming.
Wallahu Alam
Wasallalahu Ala Syyidina Muhammad Wa AlaAlihi Wa Sahbihi Wa Sallam.
_______________________________________________________________________________
TAMAT

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References

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Bibliography/ References:

Arabic References:
1. Abdul Fattah Mahmoud Idrees, , 1
st
edition,1420H-2000.
2. Al-Zuhaili, Wahbah. : , 1
st
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3. Shekh Ahmad bin Abdul Razzaq Al-Duwaish, " ; 1424H,
.
4. Al-Salus, Dr. Ali Ahmad; ,1
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edition, 1403H-1983,
.
5. , ministry of Education, Saudi Arabia.
6. Balabaki, Munir & Balabaki, Roohi; ;11
th
edition,2007, .
English Reference:
1. The Noble Quran: English Translation of the meanings and Commentary,1417H. King Fahd
Complex For The Printing of The Holy Quran.
2. Hamoud,S.H, Islamic Banking The Adaptation of banking Practice to Conform With Islamic
Law, 1985, Arabian information, London.
3. Hornby, A S, Oxford Advanced Learners Dictionary, 7
th
edition,2006, Oxford University Press.
4. Abu Zakariya yahya bin Sharaf An-Nawawi Al-Dimashqi, Riyad-us-Saliheen, 1
st
edition, 1418H,
Darussalam Publishers.
Bahasa Melayu References:
1. El-Nager, Ahmad Abdel Aziz; Ibrahim, Mohamed Samir; Al-Ansari, Mahmud Moman, 100 Soal
Jawab Bank Islam ,1
st
edition, 1984, Persatuan Ulama Malaysia.
2. Baharum, Daud ; Fatwa menempuh kehidupan moden;1
st
edition, 2006, Daud Baharum &
Islam Online.net.
Websites:
1. www.wikipedia.com
Other References:
1. Microsoft Works Dictionary. Microsoft Inc.
2. Cambridge Advanced Learners dictionary, version 1.0, Cambridge University Press.