The Prohibition of Riba' and Gharar

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					Accounting for Islamic
Banks (Lecture Week 2)

             Part 1
   Islamic Prohibition of Riba’
 The Prohibition of Riba’ and Gharar
Meaning of Riba’
 Literally: excess, increase, expansion or growth


Definitions of Riba’
Ibn al-Arabi: every excess in return of which no
  reward is paid
Mawdudi: predetermined excess or surplus over
  and above the loan received by the creditor
  conditionally on relation to a specified period
Haque: an increase or excess which, in an
  exchange or sale of commodity, accrues to the
  owner (lender) without giving in return any
  equivalent counter or recompense to the other
  party
 Prohibition of Riba’
In the Qur’an - 4 Stages:
1.  Surah al-Rum: 39
   compare riba’ with Zakat and charity
   praising Zakat but not riba’
2. Surah al-Nisa’: 160-161
   attaching the practice of riba’ with the Jews
   Consider the practice as an inequity
3. Surah ali-Imran: 130
   Prohibiting the practice of charging double
    and multiple riba’
Prohibition of Riba’
4. Surah al-Baqarah: 275-281
 Conclusively prohibiting all forms of riba’

 Any excess over the capital is disallowed

“…they say: trade is like riba’, but Allah has
  permitted trading and forbidden (haram) riba’
  (usury)”

Example in the Sunnah:
“From Jabir the Prophet s.a.w cursed the
  receiver and the payer of riba’, the one who
  records it and the two witnesses to the
  transaction: they are alike in guilt”
     Types of Riba’
1.  Riba’ al-Buyu’ (exchange transaction)
   Riba al-Fadl (due to excess)
   Riba al-Nasiah (due to delay)
Example:
(a) Trading commodities of the same commodities
    (gold – gold; dates – dates)
   Both commodities must be equivalent
   Prompt delivery
(b) Trading commodities of the same group but
    different kinds (gold - silver; wheat – barley)
   Equality not a condition
   Prompt delivery
(c) Trading commodities of different groups and
    kinds (gold – wheat; silver – barley)
   No conditions imposed i.e. free trading
Types of Riba’
2. Riba’ al-Duyun (loan/debt transaction)
   Riba’ al-Nasi’ah (due to delay)

Characteristics of Riba’ al-Nasiah
3 Elements:
1.  Excess or surplus over and above the loan
    capital;
2.  Determination of surplus in relation to time;
    and,
3.  Stipulation of surplus in the loan agreement.
 Riba’ vs Trade
Wisdom behind prohibition of riba’
  Elimination of injustice and encourage
   cooperation
  Spirit of brotherhood

Riba’ is not trading:
   Money loaned for self-generating or self-
    expanding value is not sale
   Growth or increase in money is inequitable
   One party receives an increase without
    equivalent return to the other party
   In sale, there is productive exchange such as
    goods for goods and money for goods
           Part 2
Islamic Prohibition of Gharar
Meaning of Gharar
Literally: In Arabic means negative elements
   e.g. deceit, fraud, uncertainty, danger, risk,
   hazard etc. that might lead to destruction
   and loss

Technically: uncertainty and ignorance of one
  or both parties of a contract over the
  substance or attributes of the object of sale
  or doubt over its existence and availability
  at the time of contract
    Gharar in the Qur’an
 The word Gharar appeared 27 times in the Qur’an
 Refer to the need of believers to be aware of the
  deceptive character of the worldly pleasures, and
  not to be deceived by such temptations
 Example in Surah al-Nisa’ (4:29):
“O you believe! Eat not your property among
  yourselves unjustly (bil batil i.e. by falsehood and
  deception) except in a trade amongst you by
  mutual consent”
 Most jurists agreed that al-Batil refers in the
  above verse includes illegal and deceptive
  elements in commercial contracts
Gharar in the Sunnah

   In commercial transactions, the Prophet
    s.a.w in many of his sayings prohibited the
    sale involving gharar
   Examples: The prohibition of sale of fish in
    the sea, bird in the air, unborn animals, etc.
   Gharar is prohibited by consensus of the
    jurists (ijma’) since the time of the
    companions, their followers (tabi’in) and
    subsequently until now.
Reasons for prohibition of Gharar

   To ensure full consent and satisfaction of all
    parties in a contract
   Without full consent and satisfaction the
    contract is null and void
   Full consent can only be achieved through
    certainty, full knowledge, full disclosure and
    transparency, and zero deceit or fraud
   Gharar also results in the risk being built
    into the contract at its inception which may
    result in a profit for one party and
    corresponding loss to other party (zero-sum
    game or gambling)
Factors for Gharar in Contracts
   None or incomplete ownership (“do not sell
    if you do not have” or cannot legally
    guarantee delivery
   Non-possession or cannot guarantee
    physical delivery to avoid manipulation by
    the seller and protect the interest of buyer
   Uncertainty in the contract or conditional
    sales
Exceptions of Gharar
   The uncertainty is too trivial or too slight
    and tolerable by both or all parties
   Charitable contracts (tabarru’at i.e. Waqf
    etc.)
   The real public need for the transaction or
    contracts even gharar is excessive e.g. bay
    al-Salam (advance purchase), al-Istisna’
    (manufacturing contract )
   To satisfy people’s immediate need and
    removal of hardship makes Gharar an
    exception and need takes priority
Exceptions of Gharar

Gharar is averted if:
 Both the price and the subject matter are
  proved to be in existence at the time the
  transaction concluded
 The qualities are known and the quantities
  are determined
 The contractual parties have control over
  them so as to ensure the exchange can take
  place
 Term of time can be precisely determined

				
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posted:4/11/2011
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