ISLAMIC BANKING

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O, God increase my knowledge
ISLAMIC BANKING TRAINER MANUAL RIBA MODULE
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ISLAMIC BANKING

• ECONOMIC PHILOSOPHY OF ISLAM
• no concept of Riba because it encourages
• concentration of wealth in few hands
• creation of monopolies
• greed and selfishness leading to injustice and
  oppression

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ISLAMIC BANKING

• ISLAMIC MODEL OF DISTRIBUTION OF WEALTH
• Based on two underlying principles
• Importance of economic goals
• Real nature of wealth and property

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ISLAMIC BANKING

• ISLAMIC MODEL OF DISTRIBUTION OF WEALTH
• economic activities of man are lawful,
  meritorious and at times obligatory and necessary
• however economic activity is not the basic
  problem and therefore economic progress is not
  the be-all and end-all of human existence

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ISLAMIC BANKING

• IMPORTANCE OF ECONOMIC GOALS
• according to materialistic economics
• Livelihood is the fundamental problem of man and
  economic development is the ultimate goal of
  human life
• according to Islamic economics
• Livelihood may be necessary and indispensable but
  cannot be the true purpose of human life

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ISLAMIC BANKING

• REAL NATURE OF WEALTH AND PROPERTY
• wealth in all its possible forms is created by
  Allah
• therefore wealth is the property of Allah
• the right of property which accrues to man is
  delegated to him by Allah

• therefore Allah has the right to demand that
  man subordinate his use of wealth to the
  commandments of Allah

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ISLAMIC BANKING

• REAL NATURE OF WEALTH AND PROPERTY
• whatever wealth man possesses has been received
  from Allah
• it should be used in such a way that it ensures
  success in the world hereafter
• since wealth has been received from Allah its
  use by Man should also be subject to the
  commandment of Allah

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ISLAMIC BANKING

• REAL NATURE OF WEALTH AND PROPERTY
• Allah may command man to give a specified part
  of his wealth to another man.
• Allah may forbid use of wealth in a particular way

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Hud 87
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OBJECTIVES OF DISTRIBUTION OF WEALTH

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• Establishment of a practicable Economic system
• Islam accepts the following thing within a
  certain limits
• laws of demand and supply
• motive of personal profit
• market forces
• natural relation of employer and employee

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2. Enabling every one to get what is rightfully
due to him- A Elementary level of deserving
wealth Factors of production B Secondary level
of deserving wealth poor In the second verse
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3 Eradicating the Concentration of Wealth
through Prohibition of hoarding, interest,
gambling, speculation, Uqood Fasidah, and
Gharar Holy Quran Says in Al Hashr 7
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• The Factor of Production in Conventional System
• Capitalism has four factors of production
• 1. Capital - the produced means of production"
• Compensation Interest
• 2. Land -'natural resources'' (that is to say,
  those things which are being used as means of
  production without having previously undergone
  any process of human production). Compensation
  Rentals
• 3. Labour -that is to say, any exertion on the
  part of man.
• Compensation Wages
• 4. Entrepreneur, or Organization - the fourth
  factor which brings together the other three
  factors, exploits them and bears the risk of
  profit and loss in production.
• CompensationProfit

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The Factors of Production In Islam

• 1. Capital That is, those means of production
  which cannot be used in the process of production
  until and unless during this process they are
  either wholly consumed or completely altered in
  form, and which, therefore, cannot be let or
  leased (for example, liquid money or food stuffs
  etc.)
• Compensation Profit

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• 2. Land that is, those means of production which
  are so used in the process of production that
  their original and external form remains
  unaltered, and which can hence be let or leased
  (for example, lands, houses, machines etc.).
• Compensation Rentals
• 3. Labour -that is, human exertion, whether of
  the bodily organs or of the mind or of the heart.
  This exertion thus includes organization and
  planning too.
• Compensation Wages

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ISLAMIC BANKING

• DIFFERENCE BETWEEN CAPITALISM, SOCIALISM AND
  ISLAM
• CAPATILISM affirms an absolute and unconditional
  right to private property
• SOCIALISM totally denies the right to private
  property
• ISLAM admits the right to private property but
  does not consider it to be an absolute and
  unconditional right which can be used to cause
  disorder on earth

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ISLAMIC BANKING

• RIBA
• Riba means excess, increase or addition
• Riba in banking implies any excess compensation
  without due consideration

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First Revelation about Riba

• That which you give as interest to increase the
  peoples' wealth increases not with God but that
  which you give in charity, seeking the goodwill
  of God, multiplies manifold. (Surah Rome, Verse
  39)

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Second Revelation

• And for their taking interest even though it was
  forbidden for them, and their wrongful
  appropriation of other peoples' property. We have
  prepared for those among them who reject faith a
  grievous punishment (Surah al-Nisa', verse 161)

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Third Revelation

• Believers! Do not swallow riba, doubled and
  redoubled, and be mindful of Allah so that you
  may attain true success ( Al Imran, Ayat 130)

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Fourth Revelation
Surah Al Baqarah Verses 274-281
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Those who spend their wealth night and day,
secretly and openly, they have their reward with
their Lord, and there is no fear for them, nor
shall they grieve.Those who take riba (usury or
interest) will not stand but as stands the one
whom the demon has driven crazy by his touch.
That is because they have said Trading is but
like riba. So, whoever receives an advice from
his Lord and stops, he is allowed what has
passed, and his matter is upto Allah. And the
ones who revert back, those are the people of
Fire. There they remain forever.Allah destroys
riba and nourishes charities. And Allah does not
like any sinful disbeliever. Surely, those who
believe and do good deeds, establish Salah and
Zakah have their reward with their Lord, and
there is no fear for them,nor shall they
grieve.O those who believe, fear Allah and give
up what still remains of the riba if you are
believers. But if you don 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. (Verses of Surah Al
Baqarah 274-281)
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Prohibition of Riba in Hadith
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The prohibition of Interest is not limited to
Islam, but it is shared by Judaism and
Christianity. Some of the old testaments have
rendered riba as haram (See Exodus 2225,
Leviticus 2535-36, Deutronomy 2320, Psalms
155, Proverbs 288, Nehemiah 57 and Ezakhiel
188,13,17 2212). Agibi Bank was established
circa 700 B.C. in Babylonian and functioned
exclusively on equity basis.
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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Riba-un-Nasiyah or Riba-al-Jahiliya
• Riba-al-Fadl or Riba-al-Bai

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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Riba-un-Nasiyah or Riba-al-Jahiliya
• that kind of loan where specified repayment
  period and an amount in excess of capital is
  predetermined( Imam Abu Bakr Hassas Razi)

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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Riba-un-Nasiyah or Riba-al-Jahiliya
• all loans that draw interest is riba(Hadith
  quoted by Ali ibn Talib)
• the loan that draws profit is one of the forms
  of riba(definition from Sahabi Fazala Bin Obaid)

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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Riba-un-Nasiyah or Riba-al-Jahiliya
• real and primary form of riba
• premium paid to the lender in return for his
  waiting
• giving or taking of every excess amount in
  exchange of a loan at an agreed rate
  irrespective of whether it is low or high

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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Riba-al-Fadl
• excess taken in exchange of specific commodities
  which are homogeneous
• legal definition defers in every fiqh

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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Hadith prohibiting Riba-al-Fadl
• sell gold in exchange of equivalent gold
• sell silver in exchange of equivalent silver
• sell dates in exchange of equivalent dates
• sell wheat in exchange of equivalent wheat
• sell salt in exchange of equivalent salt
• sell barley in exchange of equivalent barley

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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Hadith prohibiting Riba-al-Fadl

• sell barley in exchange of equivalent barley but
  if a person transacts in excess, it will be riba.
  
• However sell gold for silver anyway you please on
  the condition it is hand-to-hand(spot sales) and
  sell barley for date anyway you please on the
  condition it is hand-to-hand(spot sales)

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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Imam Abu Hanifa on Riba-al-Fadl
• commodities must have two common characteristics
• Weight
• Volume
• includes all commodities having weight or volume
  and are being exchanged

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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Imam Shafi on Riba-al-Fadl
• commodities must have two common characteristics
• be a medium of exchange
• be edible
• includes all commodities that are edible or can
  be used as a medium of exchange(currency)

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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Imam Maalik on Riba-al-Fadl
• commodities must have two common characteristics
• can be preserved
• be edible
• includes all commodities that are edible and can
  be preserved

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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Imam Ahmad Bin Hanbal on Riba-al-Fadl
• first citation conforms to the opinion of Imam
  Abu Hanifa
• second citation conforms to the opinion of Imam
  Shafi
• third citation includes three characteristics at
  the same time i.e. edible, weight and volume

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ISLAMIC BANKING

• CLASSIFICATION OF RIBA
• Present day Islamic scholars on Riba-al-Fadl
• if two characteristics i.e. weight and use as
  medium of exchange is present then the following
  transactions are not allowed
• a deferred sale of goods having weight and
  homogeneous nature
• a sale of unequal goods having weight and
  homogeneous nature

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ISLAMIC BANKING

• THE LAWS OF RIBA AL FADL
• First law
• Exchange of any of the six commodities with
  itself but differing in quality, is allowed only
  under certain conditions

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ISLAMIC BANKING

• THE LAWS OF RIBA AL FADL
• First Law
• CONDITIONS OF EXCHANGE
• Any difference in value/quality should be ignored
  
• The commodities should be exchanged in equal
  amounts (equal weight and volume).
• No of direct exchange of commodities of the same
  kind
• A person should sell his commodity against cash
  at the market value and buy someone elses
  commodity in exchange of cash proceeds at the
  market value.

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ISLAMIC BANKING

• THE LAWS OF RIBA AL FADL
• Second law
• Exchange of a product with its raw material is
  allowed under certain conditions

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ISLAMIC BANKING

• THE LAWS OF RIBA AL FADL
• Second law
• Exchange of a product with its raw material is
  allowed under certain conditions

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ISLAMIC BANKING

• THE LAWS OF RIBA AL FADL
• Second Law
• CONDITIONS OF EXCHANGE
• If the characteristics of the product has been
  totally changed by the industry, then different
  amounts can be exchanged.
• If little difference has been made
• either the exchange should be in equal weights
• or one of the commodities should be sold in the
  market and the cash proceeds used to buy the then
  one.

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ISLAMIC BANKING

• THE LAWS OF RIBA AL FADL
• Third Law
• Exchange of any of the six commodities with one
  another is allowed in unequal amounts but the
  payment should not be deferred
• Provided that the general conditions of a sale
  contract are fulfilled

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ISLAMIC BANKING

• TYPES OF RIBA
• Riba al Nasiah is classified in two types
• Sood-e-Mufrad( Simple Interest)
• interest calculated only on the initial
  investment
• Sood-e-Murakkab(Compound Interest)
• reinvestment of each interest payment on money
  invested to earn more interest

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ISLAMIC BANKING

• TYPES OF RIBA
• Quranic verses on absolute prohibition of Riba
• O believers fear God and give up the interest
  that remains outstanding (i.e. whether it is
  simple interest or multiplied interest) if you
  are believers (Surah Al-Baqrah, verse 278)

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ISLAMIC BANKING

• TYPES OF RIBA
• Quranic verses on absolute prohibition of Riba
• If you do not do so then be sure of being at war
  with God and His Messenger. But if you repent,
  you can have your principal( only not any kind of
  interest or premium). Neither should you commit
  injustice nor should you be subjected to it
  (Surah Al-Baqrah, verse 278)

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ISLAMIC BANKING

• TYPES OF RIBA
• Tijarti Sood(Commercial interest)
• interest paid on loan taken for productive and
  profitable purpose
• Sarfi Sood (Usury)
• interest paid on loan taken for personal need and
  expenses

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Arguments given to Justify Commercial
Interest a Commercial Interest is charged from
wealthy persons whereas usury is charged from the
poor. It does not exploit the poor while
consumption interest or usury exploit the
poor. Ans. Validity of a transaction is not based
on the financial status of a party, like sale,
leasing etc. Law does not differentiate between
poor and wealthy in crimes like bribery, theft
etc. Further, Commercial Interest also exploit
the poor.
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b It was not in the prevalent modern shape in
those days. Ans. When some thing is prohibited,
it is not directed to a particular form of it but
it covers every form which comes in its general
sense, e.g. gambling and pork, liquor and
adultery are as Haram now as they were in
Jahiliyyah
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c The Commercial interest was not in vogue in
Arab Ans. History shows that it was in vogue. d
Doctrine of necessity and wisdom requires to
allow it Ans. (i) It does not, it is not at all a
necessity in Shariah. Even from economic point of
view, the modern interest has brought more harm
to the humanity than the premature forms of
usury. (ii) The Principles of Shariah are
binding, even though their wisdom is not visible
in a particular transaction. They are based on
Illat.
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ISLAMIC BANKING
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An Nur 33
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Yaseen 71
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Az Zukhruf 32
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Al Maarij 24-25
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Al Anaam 141
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Al Hashr 7