JUMAT SERMON: Riba, Prohibitive Transaction In Islam

• By Sheik Musa Oladapo Raji

ALL praise is due to Allaah, and may His peace and blessings be upon the final Messenger, His pure family, noble companions, and all those who follow them with righteousness until the Day of Judgment. 

Riba is an Arabic word that can be roughly translated as “usury”, or unjust, exploitative gains made in trade or business under Islamic law.

In Islamic Finance, riba refers to interest charged on loans or deposits. Islam forbids riba, even at low interest rate, as both illegal and unethical or usurious. Islamic banking has provided several workarounds to accommodate financial transactions without charging explicit interest.

Usury is charging a rate of interest upon lending money. It is forbidden in Islam and it is clearly stated in Qur’an. Only trade is permissible.

In the Shari’ah, or Divine Way of Islam, riba is the name Allaah Almighty gave in the Qur’aan to any increase of a debt or a loan until its repayment.

Islaam is a way of life. It governs every aspect of a Muslim’s life from spiritual, cultural, social to even economical. The Islamic economic principles regulate economic activities in accordance with the Shari’ah. Riba is the most prominent element among various prohibitions under Islamic commercial law. While trade is permitted, riba is prohibited.

Conventionally, trade is defined as the exchange of goods or services for other goods and services or money. It is not different in Islam. A sale (ba’y) is an exchange of an item for another.

Allaah Almighty has permitted the exchange of goods and services (ba’y) not only to enable individuals make livelihoods but also because human needs are interdependent. Merchants engage in trade transactions to make profit.

Riba (commonly translated to denote interest) literally means an increase, excess or surplus.

The Oxford Dictionary (1989) defines riba (interest) as “money paid for the use of money lent (the principal), or for forbearance of a debt, according to a fixed ratio (rate per cent)…”

Technically, riba refers to any predetermined excess over and above the credit amount advanced to the debtor in relation to a specified period of time.

According to the Shari’ah, a surplus of commodity or an increase in return without a counter-value (‘iwad) is riba. Islam does not differentiate between interest and usury. The term Riba is used interchangeably to denote an illegal excess from a loan transaction. The Shari’ah does not recognize such thing as acceptable and exorbitant riba.

Islam encourages individuals to invest their excess capital so that money rotates in the economy and earns them profit rather than lending it for interest. The most preferred, however, is helping the needy and giving out interest-free loans (qard al hasan). Dealing in interest is one of the greatest sins in Islaam.

The Qur’an 2: 275 legislates:

“Those who consume interest cannot stand (on the Day of Resurrection) except as one stands who is being beaten by Satan into insanity. That is because they say, ‘Trade is (just) like interest.’ But Allaah Almighty has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allaah Almighty. But whoever returns to (dealing in interest or usury) – those are the companions of the Fire; they will abide eternally therein.”

There are various essential differences between ribh (profit) and riba (usury). The above definitive (qati’) verse permits trade (as a mode of earning profit) but strictly prohibits interest.

Briefly, ribh (famously translated to mean profit) refers to a mark-up put above the cost price of a product or service. It is designed to compensate traders for their expenses, effort and time. Riba, by contrast, is an additional amount added to a credit facility and not to product costs.

The amount of riba from a transaction is usually calculated, as a percentage, in advance. Thus, the amount of payable interest depends on the advanced facility and the rate of interest. Profit, conversely, is uncertain. The amount of profit is post-determined after the trade transaction is done. It might be positive, zero or negative (loss).

Profit is earned through investing actively in the real economy. Businesses trade to meet people’s needs in order to make profit. Interest, by contrast, is earned passively. Moneylenders do not take any risks in the monetary economy. The loans are collateralised and interest earned without any real investment or participation in trading.

Profit is halal. Riba is haraam. In Islam, wealth can only be generated through active work. The Shari’ah favours gains proportional to work done. Profit is earned through effort and risks. It is consideration for the entrepreneurial effort and risks incurred in an investment. Riba, on the other hand, is unearned income. The lender does not have to put in any effort to earn interest. Lenders simply gain revenue by offering money which in itself cannot generate income. Money in debt-based economies is simply an end in itself.

Trade transaction is executed immediately an item is exchanged and money (profit) earned. In a riba-based transaction, the debtor has to consume the money, reproduce it (if lucky) and then pay it plus interest. Even so, the interest can still be compounded until paid in full. Thus, a debtor runs double risks in a riba-based transaction.

Term deposit accounts offer a good example of contemporary form of riba. Depositing at a bank for a specified period against a specified interest is definitely usurious. The depositor earns riba during the term without working or taking any risks.

This is equally evident in contemporary Murabaha (cost-plus financing) and Bai Muajjal (sale with deferred payment). Some Islamic banks (IBs) undertake these transactions in a typical riba-based manner. Whereas the Shari’ah assumes that IBs actually buy and possess the items before selling them to customers, most IBs do not fulfill this requirement. Islamic Banks enter into fictitious deals which guarantee themselves a predetermined profit exactly equal to the conventional interest rate margins. These IBs in fact do not even deal in real goods nor share any real risks!

From the foregoing, we realize that business in Islam is not about making profit only. It is an opportunity to please Allaah Almighty more and establish a halal way of life. Profit, is paramount, but should come second after Allaah Almighty. Businesses ought to put Allah Almighty before profits. Implement Islamic values (of social justice, honesty and truthfulness) and business will boom.

 May Allaah Almighty make this sermon a beneficial one for me, the writer, the readers, and the entire Muslims. And our last prayer, is praise be to Allaah Almighty, Lord of the worlds.

The opinions expressed in this publication are those of the author. They do not represent the opinions or views of OSUN DEFENDER.