Islamic Financial Management: Understanding the Concept of Riba

This report provides a comprehensive overview of Islamic financial management, with a specific focus on the concept of Riba. The report begins with an introduction to Riba, defining it within the context of Islamic law and financial practices. It then delves into the Raison Detre behind the prohibition of Riba, exploring its negative impacts on equity, economic stability, innovation, and wealth distribution. The report also examines the time value of money from an Islamic perspective, contrasting it with conventional finance and highlighting its benefits for the economy and society. Furthermore, the report discusses the prohibition of Riba, usury, or interest in other religions, providing a comparative analysis. Finally, the report concludes with a summary of the prohibition of Riba in Islamic banking transactions, reinforcing its importance in maintaining ethical and equitable financial practices.

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ISLAMIC FINANCIAL MANAGEMENT

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Introduction
Islamic financial management is the concept of financial system which is operated according to
the Islamic law. This management overlooks the affairs of commercial organisations including
banks, capital markets and investment firms (Ratten, Rammal and Ramadani, 2017). The main
aim of this report is to build an understanding about the concept of riba. For this purpose, a
detailed introduction of riba is given in this report including its rules and prohibition. Further this
report will include description about Raison Detre and time value of the money from Islamic
perspective. Lastly, this report will cover the prohibition of riba in other religions followed by a
conclusion about prohibition of riba in Islamic banking transactions.

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ISLAMIC FINANCIAL MANAGEMENT
Introduction to riba
According to Islamic financial management, a riba refers to the charged interest. When
an organisation to an individual provides a loan to other individual, an amount is charged
according to the repayment time which is referred as riba.
Understanding Riba Duyun (Qard vs Jahiiliyah)1
Riba Duyun is a term used for 5the interest rate which has been caused due to duration of
time. Riba means interest and Duyun means debt, when individual loans an amount to other
individual against an interest then it is known as Riba Duyun. There are two forms of such
interest which are Qard and Jahiiliyah.
Qard is the additional rate of interest which lender demand from borrower against the
loaned amount. This concept has a condition which states the terms of Qard must be
communicated at the beginning of the loan contract. On the other hand, Jahiiliyah is the
additional rate of interest which lender is entitled to receive from borrower due to the failure
upon borrower part of not paying the principle amount in given time period (Darojat, 2018).
Riba Buyu’ – (Fadhl vs Nasiah)
The concept of Riba Buyu refers to the situation when two items having unequal monetary
values are exchanged. This type of trading is done with consent of all the concerned parties.
There are two types of such concepts which are Fadhl and Nasiah. In the case situation of Fadhl,
same kind of product is exchanged between the parties which have differnt weight or qunatity.
On the other hand, Nasaih refers to the condition where two similar kinds of products having
same weight and quantity are exchanged by parties but the at different time periods. This concept

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is said to be avoided in Islam and is considered as haram as the time periods sometimes increases
the value of product which is exchanged due to which one party face loss (Manzilati, 2018).
Rules of likeness, equality and spot trade
Transactions and trading between individual which involves above mentioned concepts of
Riba are considered as haram or “prohibited”. There are various rules in Islamic law for likeness,
equality and spot trade. A trade can only be considered as halal or permitted when the products
are similar to each other and there is likeness among them. Another rule is associated with
equality in which it is considered that a trade can only be permitted when the weight or units of
the exchanged products are equal. Another rule is for sport trade which states a transaction of
exchange must be done on spot in which both the parties must exchange their products together.
Prohibition of Riba in the Quran and Sunnah
Quran is the central religious book of Islam which is regarded as the revelation of God.
Sunnah is the body of literature which states all the traditional customs and rules for Islamic
community. The concept of Riba or interest which is discussed in above sections was not
initially prohibited but gradually some commentators prohibit it on the basis of the principle
which states charity is a greater gesture that Allah appreciates.
In Quran, the practice of riba is considered as a Sin as it holds the power to control over the
mankind and to preserve the faith upon humanity, the act of Riba is prohibited (Farooq, 2017).
Raison Detre of the prohibition of riba
The practice of riba is prohibited in Islamic financial management and the Raison Detre
behind this prohibition is discussed as follows:

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Violation of equity aspect of economic organisation:
Equity aspect refers to the phenomenon that whether distribution of resources among all
the parties associated with an economic organisation is fair or not. It is important maintain equity
between the contributions engaged by an individual and the benefits received by that individual.
The aspect of equity must be respected in an economic organisation and no individual should
suffer in monetary terms (Saeed, 2011). The concept of equity implies that an organisation
should provide benefit and consideration to one person as it was given to other person. Economic
organisation functions for the purpose of earning profit but it is important to maintain equity in
organisation while earning profit. If organisation practices riba in their organisation, then they
violate the equity aspect in their operations as by charging interest, organisation is favouring one
employee over other. In order to ensure that equity is not violated in an economic organisation,
the riba is prohibited to be practiced.
Amounting to bankruptcies:
Another Raison Detre or reason for existence of riba is bankruptcies. The interest is
considered as the cycle of debt which is never ending and results in bankruptcies. If an
organisation or an individual takes up loan for their personal and business reasons, then they
have pay an amount against the interest which is considered as time value of money. This interest
is prohibited in Islamic financial management (Ghofur, 2016). When an individual procure fund
in form of a loan and has to pay interest for it, they make efforts to wave off the loan amount. In
the act, when they are unable to pay off the debt amount, they take another loan with even higher
interest to pay off the first loan amount. This cycle keeps going until the individual or
organisation is bankrupt. In order to reduce the number of bankruptcies, the practice of riba is
prohibited in Islamic finance.

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Security-oriented and not growth-oriented:
An organisation either is security oriented or growth oriented. According to Quran, an
organisation or an individual should be security oriented and not growth oriented. The reason
behind emphasizing on security orientation is the consideration of security in Islamic finance as a
subject matter of Murabahah. Under this consideration, security is considered as a value of
business which provides satisfaction and business survival (Choujtani, 2018). On the other hand,
growth orientation is considered as haram in Quran and it leads the way towards the destruction.
In order to ensure that a business or an individual is security oriented and not the growth
oriented, the existence of riba is prohibited as riba provides additional profit which makes a
business growth oriented.
Discouragement of innovation:
For every organisation, it is important to practice continuous innovation so that viable
profit can be earned. People buy things which are innovative as they attract them. The practice of
riba provides the profit which is not even earned by the organisations. When organisation earn
the profit without any fair attempts, it discourages them to do hard work and it discourages their
innovation. Along with discouragement of innovation, another Raison Detre for the prohibition
of riba is wealth accumulation in the hands of a few people. According to Quran 59:7, it is
considered that wealth should be equally distributed among all the people and there should not
be a perpetual distribution among the rich only (Quran 59:7, 2020).
All above mentioned points are the reasons due to which the existence of riba is prohibited.
Time value of money from Islamic perspective
Time value of money is the most basic monetary theory which is considered as a
foundation to all notions in finance. A conventional concept of time value of money states that

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the value of money increases with the time passes by. The rationale behind considering the time
value of money is the basic principle in which every individual prefers to have money today
rather than have it at a future date (Suharto, 2014). Considering this principle, if an amount is
exchanged on a present date with a promise to return on a future date then it is important to
consider the time value of money.
The concept of time value of money has been explained in various Islamic perspectives.
According to Monzer Kahf of the Islamic Research and Training Institute, Islamic Development
Bank 1994 stated that Time value of money is a procedure in which a value is discounted using a
rate so that inflation and other external parameters can be included in the value of money (Kahf,
1994). In order to understand the Islamic perspective more conveniently, it is important to
understand the standards of Accounting and Auditing Organisation for Islamic Financial
Institutions. These standards state:
 Profits which are made by an organisation against their credit sale must be proportionally
allotted to the year in which they are earned irrespective of the fact whether or not they
are received by the organisation.
 Another method is whenever amount of profits are realised and received by the
organisation, they should be recognised in that period only.
The above two methods reflect the ways in which time value of money can be recognised. In
Islamic banking, the first method is preferred.
There is a difference between the conventional and Islamic perspective of time value of
money. According to the conventional perspective, money is a commodity which is used to buy
other commodities. But according to the Islamic perspective, money has no intrinsic value and it
cannot be used to fulfil the human needs. Money is only a medium by which goods can be
exchanged.

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Islam prohibits the practice of riba but it does not consider time value of money as haram.
This concept is based on the principle that time value is a positive growth in the value of money.
If Ibnu Umar is receiving his revenue in form of Dirhams (silver coins) instead of Dinars (gold
coins), it is considered as legitimate act. This legitimacy is because of the fact that Ibnu Umar is
receiving money according to the current prevailing rate and considering the time value of his
money.
There are various benefits which time value from Islamic perspectives provide to the
economy and society. These benefits include the fulfilment of human needs directly as money
has no intrinsic value and money can only provide satisfaction to humans when money is
converted into a commodity (Hasan, 2011). This perspective also enhances the economic
productivity where Islamic perspective encourages people to trade and contribute towards
national economy.
Prohibition of riba/usury/interest in other religions
The concept of Riba is referred as Usury in the region of Hinduism and Buddhism.
According to the Hindu Sutra, the practice of interest is forbidden. There is a special law in the
religion of Hinduism according to which the high caste people such as Priests known as
Brahmans and Kshatryas are forbidden from being a money lender; this law is known as
Vasishtha. In Buddhist Jatakas as well, the practice of payment of interest is considered as
disdain or prohibited (Berber, 2016).
In the religion of Christianity, the old testament provides three types of ways which helps
in dealing the practice of payment of interest. These three ways are; it is forbidden to take
advantage from a widow or orphan (Zubair and Khattak, 2015). If the money is loaned to a
person who is dead, then it is prohibited to recover interest from their spouse and children. The

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second verses states that if countrymen become poor and unable to support himself then it is
prohibited to take any interest from them. The third verses states that Jews are prohibited to take
interest from other Jews.
The above mentioned testament is considered as old. The new testament states that the
practice interest is not the only which is prohibited but also the followers who practice the
payment of interest.
Another religion which prohibits the practice of Riba is Judaism. Under this religion, the
interest is referred as Neshekh which believed to meant as “bite”. This metaphorically states that
the practice of payment of interest is considered as a bite which harms the payer. Although, the
practice of Riba is forbidden within Judaism, the interest proper is an amount which is agreed
between the lender and the borrower.
Usury is also prohibited in Greek Philosophy. Under this religion, the practice of Riba is
considered as a curse to the society. The reason behind this believe is that if an organisation is
able to earn money with interest and without any trade then it will discourage their hard work
and people will be money centred rather than being security centred (Yazdani and Mamoon,
2012).
The interest is the reason behind business risk, excessive profit generation, exploitation of
the poor, communism, instability in market, fabricated demand and supply and many more. All
these causes are enough to curse the humanity.
All the above points are the beliefs which are followed by the followers of varied religions.
All these religions are ancient and their philosophy regarding the interest is also ancient and is
yet followed by cultural Banks.

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Conclusion on the prohibition of riba
From the above arguments on the prohibition of Riba, it has been concluded that the practice
of interest payment is considered as a curse to the society. Unless a trade is beneficial for both
the parties are is done considering the time value of money is haram or prohibited. Various
religions such as Hinduism, Buddhism, Christianity, Judaism and Greek prohibits Riba in their
own way. Trade and exchange of goods using money is not prohibited nor the consideration of
time value of money but the interest which is gained from it is forbidden. The conclusive reason
behind the prohibition of riba is the prosperity of society. It is important to maintain equity and
equal wealth distribution among people so that people can be protected from bankruptcy and
interest cycle.

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CONCLUSION
From the above report, it has been concluded that Riba is a practice of paying interest
which is considered as prohibited in various religions including Islam. There are usually two
types of Riba which are forbidden according to the Islamic financial management. These Riba
are Fadhl vs Nasiah. It is also observed from above report that even the practice of Riba is
considered as a curse for the society but the time value of money is considered as a fair practice.
There are various reasons observed to be appropriate from above report which provides base to
the prohibition of Riba. These reasons are Violation of equity aspect, bankruptcies and growth
orientation.

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References
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Quran 59:7, 2020. [Online]. Available through: <https://quran.com/59/7>