Zarka 7th DL -Part I- Riba.doc
7th Distance Learning Course: Fall 2008
Lecture on 11-3-2008
Riba and Gharar
PART ONE - Riba
Dr. Muhammad Anas Zarka
1. Lecture objective
to explain the " what" and " how" of riba prohibition, and its implications for Islamic finance.
we do not discuss the " why" of riba prohibition (The rationale behind the prohibition of riba which will be covered in a separate lecture.)
2. What is Riba? In Islamic Shariah Riba is of two types : Riba al-fadhl and riba al-nasi’a
3. Riba al-fadhl it is relevant to certain barter exchanges- of little practical importance to Islamic finance.
4. riba al-nasi’ah = Riba of debts and loans, is our topic in this lecture.
5. Concept and definition of Riba:
- Loan in money or in kind, to be repaid with something extra
- Both fixed and variable “ extra” is riba
- Usury vs. interest in Western culture
- Interest in accounting
6. Is bank interest riba?
- Yes for sure: according to all Muslim scholars and academies interest is one major form of riba. But riba has wider scope than interest.
- It is also the opinion of Western economists
i. - (Don Patinkin: "Usury " in New International Encyclopedia of the Social Sciences
ii. – Prof. Rodney Wilson, Durham Univ.
iii. Prof John Presley
7. What is the difference between profit and interest?
In Shariah, in economics? Irving Fisher; Frank Knight [tried to “eliminate the terrible confusion which results from mixing up the rate of return on investment with the rate of interest on loans...” ] ; Robert Solow.
8. Implications for Conventional banking services: Riba is the main objection
9. Economic functions of the Finance Industry (FI) in general
- Support the country monetary payment system, and
- Financial intermediation between those who save and business community.
- These economic functions are acceptable and encouraged by Shariah. What are objectionable are some conventional methods and contracts that are used to achieve them. Shariah has provided alternatives.
10. The difference between conventional and Islamic banks
On the liability side –
On the asset side.
11. Main Shariah rules about debt and credit:
(A) Loan vs. debt;
(B) money debt vs. real (in kind) debt;
(C) goods and services vs. (currencies, gold and silver).
(D) credit (debt) is not just another commodity (Joseph Stiglitz).
(E) Psychology: Individuals' behavior towards debt and gambling is less rational than towards normal goods, and often addictive.
(F) More details in the Appendix.
12. Major Shariah-compatible financing contracts used by Islamic Financial institutions
(A) introduction to Islamic financial contracts
(B) Classical (nominate) contracts.
(C) Spot vs. financing contracts.
(D) Major financing contracts in Shariah:
i. equity-based: Mudaraba and sharikah for sharing profits, and muzara'ah ( sharecropping) and musaqaah for sharing revenue.
ii. Note: monitoring costs and information asymmetry are very important in selecting one financing contract or the other.
iii. sale-based: Sale for deferred price; Salam; Istisnaa
iv. rent-based.,
v. loan = qardh hasan,supplementary only in commercial (profit seeking) financing
vi. controversial and prohibited contracts : eenah Tawarruq ; Sukuk with buy-back obligation.
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