Introduction to Islamic Banking & Finance and Rationale of Prohibition of Riba in Islam

Commercial and Corporation law

TABLE OF CONTENTS
Commercial and Corporation law..............................................................................................1
Table of Contents.......................................................................................................................2
Introduction to Islamic Banking & Finance...............................................................................3
Introduction to Riba...................................................................................................................4
Rationale of prohibition of Riba in Islam..................................................................................5
Conclusion................................................................................................................................17
Bibliography.............................................................................................................................20

INTRODUCTION TO ISLAMIC BANKING & FINANCE
Islamic Banking & Finance is a system of raising capital and performing other banking and
financing activities, driven by the laws of Sharia, or Islam. It is mostly practised in the
Muslim countries, which strictly abide by the Islamic Law1. There are many branches of this
system, the most popular being Wadiah or safekeeping, Ijara or leasing, Mudarabah or
profit/loss sharing, and Musharaka or joint venture. Though initiated with the beginning of
Islam in the seventh century, Islamic finance came into prominence only in the 1960s when
the Gulf dominance demanded compliance with Sharia, worldwide.
The banking and financing sector significantly impacted by the current and strong desire of
the compliance of Shari’ah in many Islamic countries. The undertaking of the Islamic
banking and finance sector did not only impact the Islamic countries, but the effect of this can
be seen across the universe. The economic globalization requires coordination among the
world. Therefore, it is essential for the non-Islamic countries to absorb the commercial
transaction with the Islamic countries, otherwise, they have to face the economic
separateness. In the present era, Islamic countries achieved the economic reputation, and it
assists in to influence the economy of the other countries of the world, that were earlier not in
their control. The capitalist countries face difficulty because of the interest-free banking
system promoted by a regularly rising Islamic banking movement. Specifically, interest-free
banking and finance system is in the contrast of the principle of the normal banking system2.
Nevertheless, it is yet tremendously important for the feasibility of their specific economies
and the global economy, that the west understand how to integrate with their Islamic
complements economically.
1 MasudulAlam Choudhury, AB Rahman Asmak, and HasanAbul."Trade versus riba in
the Qurʾān with a critique of the role of bank-saving." (International Journal of Law and
Management 60.2 2018) Pp 701-716.
2 Zamir Iqbal, and Mirakhor Abbas."Ethical Dimensions of Islamic Economics and
Finance." Ethical Dimensions of Islamic Finance. (Palgrave Macmillan, Cham, 2017) Pp
103-134.

The goal can be gained only by considering the issue objectively and free from the
misunderstanding at the time of building the observation regarding the opinion of Islam3. The
essential viewpoint can be obtained by an actual understanding of Islam and its prevention
against the interest. Further, the history of the Islam, basis of the law that regulates the
prevention of interest, the basic objective of Islam, the different method of banking and
finance made by the Islamic banking movement assists in understanding this concept.
Moreover, the comparison of the objective between the Islamic countries and capitalist
countries also help to acquire a clear understanding.
This article describes the rationale of the underlying principle of the exclusion of riba in the
Islamic financial system.
INTRODUCTION TO RIBA
Any dealing in Islamic monetary system is dependent on justice and eliminates all
appearance of utilization throughout inequitable exchange for example riba. Riba can be
explained as add to (fall) capital rather in loans or in a replace of a product, accumulate to
the proprietor (lender) in lack of giving in return some equal counter value or reward (‘iwad)
to the other party.
Riba is a banned practice in Islam, which refers to charging interest on the amount lent. It has
been discussed at various places in the Qur’an, which condemns this concept. It is also
compared with “usury”, which means illegal exploitation by charging abnormal rates of
interest on the amount lent4.
3 Simona Franzoni and AsmaAitAllali. "Principles of Islamic Finance and Principles of
Corporate Social Responsibility: What Convergence?." (Sustainability 10.3 (2018) Pp
637.
4 Munawwaruzzaman Mahmud, Hisyam Hassan Muhammad, and
NurFathinKhairulAnuar."Bayʿwasalaf in Islamic banking current practices." (ISRA
International Journal of Islamic Finance 10.2 2018) Pp 206-224.

While there’s a clear condemnation of Riba in Islam, the exact scope remains controversial.
Though Muslims disagree to follow it in their lives, they are still unsure of what exactly it
means – whether it should be seen as a serious crime in Sharia, and hence stated haraam or
forbidden, or it should be simply looked upon as Makruh or a disgrace.
Though the common meaning of Riba is often referred to as unjust or undue advantage made
by lending sums of money, referred to as Riba-an-Nasiya, many Islamic scholars believe that
there’s more to it than what is normally believed. Hence, they have introduced a new
meaning to Riba – termed as Riba-al-Fadi – which refers to the simultaneous trading of
uneven quantities or qualities of a particular article or thing.
While there might be many forms in which Riba is understood, agreed, taught and spoken
about, there are a few common meanings dwelled by this concept, which are: -
 Illegal or unlawful increase in the amount to be repaid, whether in kind or
otherwise.
 A forceful attempt to extract a particular item.
 Inequality in the exchange process, where less amount is given for the article
obtained, or vice versa.
 Any excess charged over and above the amount originally lent.
RATIONALE OF PROHIBITION OF RIBA IN ISLAM
The concept of Riba has been condemned for many centuries. Some of the earliest warnings
against this concept can be found in Vedic Texts of India that date back to 1400 B.C. Besides
being rebuked in Islam, many other religions like Christianity and Judaism have agreed upon
the prohibition of the practice of charging interest. This practice is often looked upon as the
catalyst of the world’s destruction. It is considered to be an open invitation to Shaitan or the
devil, who draws his energy from the ill practices followed around the world.
While there is a strict prohibition on interest related practices in many religions including
Islam, there are still some communities within the religion that openly accept the concept of
Riba. They are usually cited as the enemies of the Prophet and are seen a parallel with those
who were the abusers of his hierarchy. In the modern-day culture, the various Islamic
preachers consider Riba as a destructor of one’s life, detaching one from all his glorious
possessions and rendering him “unfit to be lined up for heaven.”

The Dawoodi Bohra community – one of the most influential sects in Shia Islam – has been a
strong protestor of Riba5. The community largely resides in India and has been active in other
parts of the world primarily dwelling in Pakistan, Yemen and East Africa. The opposition
against Riba caught heat when the 52nd Da’i al-Mutlaq or the spiritual leader, Dr Sydena
Muhammad Burhanuddin, directed his preaching more and more towards the condemnation
and boycott of Riba. He sparked the “Total Riba Boycott Movement” in the late 1960s, after
His coronation to head the community. His preaching disapproved any form of interest and
related practices, opposing even the borrower, financer, arranger and distributor from the
channel. His gospels were heavily inspired by the teaching and beliefs of Prophet
Muhammad, who had always been against Riba, or interest-driven practices.
As Prophet Muhammad preached its disciples, “For every penny of Riba that a person earns,
he is committing adultery thirty-six times”, there are many such strong reasons for the
boycott of Riba in Islam. Some of them are presented here: -
Negatively Impacts the Society
Riba-based money lending has a history of exploitation. It has been cited as one of the major
reasons for the increasing poverty and is often considered as a catalyst of mayhem and
inhuman actions. One of the most prominent examples of Riba is payday loans, where the
poor are charged exorbitantly. The interest rates swell up to as big as 400% in a year, and
thrust the poor borrowers in a vicious circle of never-ending debt.
Riba arouses the capital to build up in only some hands pursuing the most important portion
of prosperity in the hands of hardly any that is going to be difficult for all of the others.
Islamic economic system permits to make revenue simply if the subject matter is bare to the
risk of loss. Furthermore in the conventional banking system for the most part of the plan is
borrowed by banks are not of their own6. However, the money of another person is lent to
5 Nafis Alam, Gupta Lokesh, and Shanmugam Bala. "Prohibition of Riba and Gharar in
Islamic banking." (Islamic Finance. Palgrave Macmillan, Cham, 2017) Pp 35-53.
6 Abul,Hassan and Mollah Sabur. "Just and Balanced: The Importance of Accounting in
Islamic Finance." (Islamic Finance. Palgrave Macmillan, Cham, 2018) Pp 275-283.