An oft-repeated word in all discussions financial. And whilst the shariah (Islamic law) is clear on its stance on Riba (namely, it being haram), it has reappeared in contemporary discussions around conventional banking and the modern banking system. 

More controversially, it has also become the centre of heated debate amongst Muslim jurists in light of the contemporary Islamic economic solutions and modern Islamic financial institutions. 

But first, we must define Riba and understand it in the light of Islamic law.

What is Riba?

Riba is loosely translated as interest. This tends to be the typical loans or financial products with an interest rate one can attain in conventional banks, through financial transactions or when seeking financial services. 

From a linguistic Arabic point of view, which is important to make note of as the Qur’an was revealed to the Arabs (although its guidance is timeless and not ethnicity bound – but its linguistic nature can only be truly appreciated by first appreciating Arabic) – Riba simply means an increase (ziyaadah).

The Shar’i (technical) definition of Riba is:

‘Any conditional excess in exchange of a deferred payment or any excess in wealth or benefit which is conditioned in the business transaction and is not in lieu of anything.’

Manipulation of the money markets for financial gain.

Riba [interest, usury] is unlawful. Allah says in the Quran in the 275th verse of Surah al-Baqarah,

“Those who eat riba will not stand (on Qiyamah) except like that of one beaten by Shaytan leading him to insanity.”

The prohibition of Riba is further reiterated in the following well-authentic hadith that Imam Muslim related on the authority of Jabir, the Prophet Muhammad (ﷺ) said,

“Allah’s Messenger (SallAllahu alayhie wa sallam) curses the one who consumes riba, gives it, records it, and witnesses it.” (Sahih Muslim)

This hadith is explicit to that riba is unlawful. Furthermore, the Muslims have reached a consensus [ijma’] on the prohibition of interest as related by Imam Nawawi in Sharh Sahih Muslim)

Although we have a conception of Riba in mind, namely that of a percentage rate of loans that appear when purchasing a car or a house, this wasn’t the only (or at least, most-used) conception during the time of the early generations. 

In an insightful narration AbdulRahman bin Abu Bakra said he heard his father say, “The Prophet (ﷺ) forbade the selling of gold for gold and silver for silver except if they are equivalent in weight, and allowed us to sell gold for silver and vice versa as we wished.” (Bukhari)

In a similar narration collected by Imam Muslim and Imam Ahmad, the Prophet ﷺ explicitly concluded his command by saying, “…so whoever increases or is increased has done Riba, the one that took the money and the one that gave it are equal in it.”

The historic prevalence of Riba tended to be on the above terms – namely an exchange of an unequal amount of the same products. For example, trading a sa’ (loosely translated as handful) of good quality dates with two sa’s of bad quality dates. This is known as Riba al-Fadl and is strictly prohibited in Islamic law.

More than spiritual consequences, we can observe that Riba is destructive to society and the economy in general. It builds the disgraceful and barely satiable appetite of greed and influences a negative loop – the rich get richer as the poor get poorer. Islam sought to address this problem early by the prohibition of Riba, firstly, and secondly obligating actions like giving Zakat (a compulsory charity) to the poor and needy. Thus, a society that thrived and stood for justice emerged when Islamic law was implemented at a communal and state level.

Somewhat similar to this is the subject matter of what we consider the ‘buy now pay later’ scheme. This is simply the idea of buying items on ‘credit’ – i.e. to be payed for at a later date.

Buying on credit is permissible on the condition that the payment is completed prior to interest being incurred.

The fatwa mentioned in elaborates on the permissibility:

“The usage of credit cards is permissible as long as the card holder is sure he has the ability to pay off the debt to the card issuing company before any interest becomes due.

Mufti Taqi Usmani (DB) has said, “Credit cards have become a necessity without which many transactions cannot be made; therefore it will be permissible to use them on the condition that the payments are made before the due date to avoid interest.””

As such, leasing a car where one does not pay interest, but gets immediate access to the car, would be permissible.

This does not necessarily affect the profitability of a business either. In fact, the more a business clings itself with the Islamic conception of a financial system, the more barakah and blessings there will be in it.  

Islamic banking and finance – the solution?

Contemporary Islamic scholars differ upon the permissibility of Islamic financing and banking operations and whether it is truly ‘Islamic’. Mufti Taqi ‘Uthman, chairman of AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) and author of the profound text in Islamic jurisprudence Fiqh al-Buyu’, has mentioned that Islamic banking is permissible if done in line with Islamic principles and per the outlines of Islamic scholars. 

The late Shaykh AbdulSattar Abu Ghuddah (may Allah shower him and his father in mercy), who was a specialist in the field of Islamic finance and vice-chairman of the AAOIFI Shari’ah advisory board as well as the son of the great scholar of Hadith Shaykh Abdul Fattah Abu Ghuddah, opined that Islamic banks served as a necessary alternative from traditional banking.

Both AAOIFI and the Islamic Fiqh Academy have done incredible research in the field of Islamic banking and brought forth important and groundbreaking research for the benefit of the wider Muslim community. Consisting of shari’ah boards represented by the leading experts and shariah scholars on Islamic finance from Saudi Arabia, Pakistan, Indonesia, Malaysia, Egypt, and other Muslim countries from the Muslim world, these boards seek to provide shariah compliant solutions to the modern financial dilemmas the Muslim population faces, spanning borrower-lender issues, depositors and debts, interest-free banking and loans, assessing derivatives and financial instruments, and providing regulatory standards by which Islamic banks can operate and function.

It is important to note that Islamic banking is not merely a bank operated by Muslims in the financial market. Being Muslim or opening a bank in the Middle East or the Gulf doesn’t automatically make it halal, as does being non Muslim in Singapore or some other non-Muslim country not make finance haram. Islamic banking has specific functions, operations, ethical and shar’i guidelines that regulate its operations to ensure an interest free model stemming from the broader Islamic financial system. 

In order to compete with the World Bank, or to stand on their own feet, the Muslim population, according to at least one view, needs to get behind Islamic banking and seek to get involved in capital markets. It is through a united effort by economists to put in place Shar’i regulators and improve the financial sector of the Muslim world that prosperous economic development can occur and the banking industry become self-sufficient. Perhaps it is through creating a central bank utilising financiers, or by implementing Islamic solutions in conventional banks as has occurred in South Africa, or the profit-sharing and loss-sharing models of contemporary Islamic financial models – that the Muslim populace will begin to see shari’ah approved options in the finance sector.

Although discussions around Murabaha, Gharar, Sukuk, Mudarabah and other important Islamic financial terminology will continue, we hope that modern Islamic banking continues to make progress and mark-up the Ummah.


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Ethical Finance and Innovation

Dr. Sayd Farook is the Executive Director of Crescent Foundation. He is Group Chief Operating Officer of Crescent Wealth and Managing Director of Crescent Finance. He previously served as Advisor to the Executive Office of the Vice President and Prime Minister of the UAE and Ruler of Dubai. In this capacity, he envisioned and executed strategic / transformation initiatives for Dubai and the UAE. Prior to that, he was the Global Head Islamic Capital Markets at Thomson Reuters, where he advised and served large corporates, multilaterals and governments in the Middle East, North Africa and South East Asia.

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