Prohibition of 'Riba' In Islamic Commercial Transactions

Prohibition of 'Riba' In Islamic Commercial Transactions

Thesis Statement: Under Islamic law, the prohibition of riba has had substantial impact on international contacts with Islamic law flavor.

Introduction

The prohibition of 'Riba' (Usury) is the fundamental code of Islamic financial system. The literal meaning of 'Riba' is interest, growth, expansion, excessive gain, surplus or increase, or undue profits from a transaction. From Sharia'ah perspective, riba implies any conditional and predetermined additional amount, either small or big or, that is required to be paid to the lender by the borrower over and above the principal, for an extension in its maturity or for the loan to be materialized. The application of Riba has extensive impacts on the international contracts' transactional dynamics established under Islamic law. The most apparent effect of riba is on the financing of transactions; however, its impact is, at times, observed in agreements for the sale of goods especially where the payment for goods has been delayed. In conventional banking, a bank finances a transaction on the understanding that there would be a repayment of capital lent to the customer, along with, interest at a rate fixed in advance as an additional compensation in view of the value of the lending service and time value of money. Under Islamic law, there is prohibition of this type of transaction as riba, and as a result transactions so financed may be declared null and void in jurisdictions of Islamic law. This paper aims to critically examine the prohibition on 'riba' in Islamic commercial transactions. Furthermore, the historical analysis of the concept will also be discussed, in addition to, an exploration of what does or does not form 'riba' under Sharia'ah.

Discussion & Analysis

Molana Taqqi Usmani has explained the concept of Riba as any transaction of loan where, on the principal, the payment of an extra amount is made conditional to the advance of such loan.

Historical Roots of Riba

Prohibition and regulation of charging interests are as ancient as making laws in the history of human. In 1750 B.C., several ceilings and restrictions were enacted by Babylon Code of law on the amount of interests. Charging interest has also been prohibited or restricted by Judaism and Christianity. The Holy Qur'an and the Hadith forbid Riba or charging interest, under Islamic Law. Qur'an and Sunna categorically prohibit Riba irrespective of the purpose of loan, whether it is taken for some production activity or for consumption. The forbiddance is clearly indicated in four revelations of Qur'an, conveying the ideas as under:

Riba leaves wealth without blessings of Allah. 2:275-76

Riba is parallel to unlawful appropriation of others' property 2:278-279

Muslim should avoid riba for their own welfare. 3:130

While loaning money, Muslims are required to take the principal amount only and give up even that amount if the debtor is incapable to pay back. 4:161

In spite of the evident resemblance of earnings from trade and earnings from riba, only earnings from trade are permitted. 30:39

The forbiddance of riba in the very initial phase ...