The rationale of prohibition of Riba
Riba, which means not only usury, but all forms of unearned income, has been strictly prohibited by Islam. Although the Qur’an did not specify any particular kind of riba, Muslim scholars have categorized it in two types: riba al-nasi’ah, and riba al-fadl. Riba al-nasi’ah refers to the interest on loans; its prohibition essentially implies that the fixing in advance of a positive return on a loan as a reward for waiting is not permitted in Islam. Riba al-fadl is the excess over and above the loan paid in kind. It lies in the payment of an addition by the debtor to the creditor in exchange of commodities of the same kind. The Shari’ah wishes to eliminate not merely the exploitation that is intrinsic in the institution of interest, but also that which is inherent in all forms of unjust exchange in business transactions.
Despite the fact that interest occupies a central position in modern economic system and that it became the very life blood of the existing financial institutions, Islam considers that the principle of charging interest is quite opposite of that of business in the spirit of sharing and cooperation and that lending on interest is not as a business in the real sense.
In legalizing trade and condemning interest, Islam considers that there are fundamental differences between the nature of profit resulting from interest charges and that earned by trade. In interest-based transactions, there may be no equitable division of profit between the buyer who makes a profit on the sale of good purchased, and the seller who derives a profit in consideration of the labour and time spent in procuring the goods. Moreover, there could be no end for an interest-based transaction, since there could always be interests of unpaid interests as long as the principle amount loaned is not fully returned. This could, in extreme cases, create un-repayable debt for generations
The rationale for the prohibition of interest the Islamic economic framework highlights how the risk-reward sharing would be more conductive to the realization of equity and the promotion of entrepreneurship. In fact, the interest-based banking system relies heavily on collateral and gives inadequate consideration to the strength of the project or the ultimate use of the financing. Even though collateral and cash flow are indispensable for ensuring repayment of loans, giving them undue weight result in a relative misestimating of the purpose for which borrowing takes place. Hence, that system tends to enforce the unequal distribution of capital by allocating financial resources mainly to the rich, who have the collateral and cash flow.
Islam considers even interest-based loans taken for investment in a productive activity as not equitable because in the profits that may accrue from it is not required to be known forehand and if there is a loss, the entrepreneur has to bear the entire loss in spite of all the risk and engagement he took, whereas the money lender, who did less sacrifice than the entrepreneur, gets an effortless profit determined by a positive rate. In Islam both risks and rewards should be shared by the different parties.
And since the unrestricted power of the creditor to make profit from interest has no regard to the financial ability of the debtor to repay indebtedness, middle-class consumers, as well as the developing countries, could be caught up in a never-ending debt-trap. And because the Riba system encourages living beyond one’s means for both individuals and governments, it results in an accentuation of macroeconomics, inflation and external imbalances in addition of squeezing the resources available for development. This leads some poorer countries to the over-exploitation of their earth’s resources and thus to the destruction of the ecological system.
Moreover, the high degree of interest rate volatility in the modern economies injects great uncertainty into the investment markets and makes it difficult for entrepreneurs to have a long-term investment vision and to make their decisions with confidence. This turbulence in the financial markets and the rise to fictitious assets tend to aggravate economic instability.
Despite the fact that interest occupies a central position in modern economic system and that it became the very life blood of the existing financial institutions, Islam considers that the principle of charging interest is quite opposite of that of business in the spirit of sharing and cooperation and that lending on interest is not as a business in the real sense.
In legalizing trade and condemning interest, Islam considers that there are fundamental differences between the nature of profit resulting from interest charges and that earned by trade. In interest-based transactions, there may be no equitable division of profit between the buyer who makes a profit on the sale of good purchased, and the seller who derives a profit in consideration of the labour and time spent in procuring the goods. Moreover, there could be no end for an interest-based transaction, since there could always be interests of unpaid interests as long as the principle amount loaned is not fully returned. This could, in extreme cases, create un-repayable debt for generations
The rationale for the prohibition of interest the Islamic economic framework highlights how the risk-reward sharing would be more conductive to the realization of equity and the promotion of entrepreneurship. In fact, the interest-based banking system relies heavily on collateral and gives inadequate consideration to the strength of the project or the ultimate use of the financing. Even though collateral and cash flow are indispensable for ensuring repayment of loans, giving them undue weight result in a relative misestimating of the purpose for which borrowing takes place. Hence, that system tends to enforce the unequal distribution of capital by allocating financial resources mainly to the rich, who have the collateral and cash flow.
Islam considers even interest-based loans taken for investment in a productive activity as not equitable because in the profits that may accrue from it is not required to be known forehand and if there is a loss, the entrepreneur has to bear the entire loss in spite of all the risk and engagement he took, whereas the money lender, who did less sacrifice than the entrepreneur, gets an effortless profit determined by a positive rate. In Islam both risks and rewards should be shared by the different parties.
And since the unrestricted power of the creditor to make profit from interest has no regard to the financial ability of the debtor to repay indebtedness, middle-class consumers, as well as the developing countries, could be caught up in a never-ending debt-trap. And because the Riba system encourages living beyond one’s means for both individuals and governments, it results in an accentuation of macroeconomics, inflation and external imbalances in addition of squeezing the resources available for development. This leads some poorer countries to the over-exploitation of their earth’s resources and thus to the destruction of the ecological system.
Moreover, the high degree of interest rate volatility in the modern economies injects great uncertainty into the investment markets and makes it difficult for entrepreneurs to have a long-term investment vision and to make their decisions with confidence. This turbulence in the financial markets and the rise to fictitious assets tend to aggravate economic instability.
The prohibition of Maysir and Gharar
The Arabic word Gharar is a fairly broad concept that literally means deceit, risk, fraud, uncertainty or hazard that might lead to destruction or loss. Gharar in Islam refers to any transaction of probable objects whose existence or description are not certain, due to lack of information and knowledge of the ultimate outcome of the contract or the nature and quality of the subject matter of it. For example, the Prophet (pbuh) has forbidden the purchase of the unborn animal in the mother’s womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver.
Islam has clearly forbidden all business transactions, which leads to exploitation and injustice in any form to any of the parties of a contract. It seeks protecting the different parties from deceit and ignorance by forbidding Gharar in any commercial exchange contracts that are not free from hazard, risk or speculation about the essential elements in the transaction to either party, or uncertainty of the ability of one party to honour its rights and obligations. It requires that all Islamic financial and business transactions must be based on transparency, accuracy, and disclosure of all necessary information so that no one party has advantages over the other party.
The rationale behind the prohibition of Gharar is to ensure full consent and satisfaction of the parties in a contract. Full consent can only be achieved in full disclosure and transparency and through perfect knowledge from contracting parties of the counter values intended to be exchanged. The prohibition of Gharar protects against unexpected losses and the possible disagreements regarding qualities or incompleteness of information.
Instead, the Shari’ah promotes the principle of profit-loss sharing between banks and entrepreneurs as an approach to encourage the spirit of brotherhood and cooperation in business relationships. Mutual risk-sharing could help absorbing the weight of loss by sharing it equitably between all parties. However, risk and uncertainty are conditioned by enough adequacy and accuracy of information to make reasonable estimates of the outcomes. Tolerable risk and uncertainties cannot exist in contractual obligations.
Islam has also categorically and firmly prohibited all forms of gambling. Maysir and Qimar are forms of gambling transactions that are considered as totally inequitable in Islam. Maysir refers to the easy acquisition of wealth by chance, whether or not it deprives the other’s right. Qimar means the game of chance in which one gains at the cost of others.
Even though, gambling consists in a form of speculation and that There should not be any place for commercial operations in Islam as it is purely speculative. The prohibited speculation under the Shari’ah is not that, which relies on the analysis of a lot of economic and financial data and which involves the investment of assets, skills and labour. Rather, it is one involving an effortless gain similar to a gambling scheme or activity. This is because the buyer is engaged in a transaction aimed at making profit through trading and not through dishonest appropriation of the property of others.
Islam has clearly forbidden all business transactions, which leads to exploitation and injustice in any form to any of the parties of a contract. It seeks protecting the different parties from deceit and ignorance by forbidding Gharar in any commercial exchange contracts that are not free from hazard, risk or speculation about the essential elements in the transaction to either party, or uncertainty of the ability of one party to honour its rights and obligations. It requires that all Islamic financial and business transactions must be based on transparency, accuracy, and disclosure of all necessary information so that no one party has advantages over the other party.
The rationale behind the prohibition of Gharar is to ensure full consent and satisfaction of the parties in a contract. Full consent can only be achieved in full disclosure and transparency and through perfect knowledge from contracting parties of the counter values intended to be exchanged. The prohibition of Gharar protects against unexpected losses and the possible disagreements regarding qualities or incompleteness of information.
Instead, the Shari’ah promotes the principle of profit-loss sharing between banks and entrepreneurs as an approach to encourage the spirit of brotherhood and cooperation in business relationships. Mutual risk-sharing could help absorbing the weight of loss by sharing it equitably between all parties. However, risk and uncertainty are conditioned by enough adequacy and accuracy of information to make reasonable estimates of the outcomes. Tolerable risk and uncertainties cannot exist in contractual obligations.
Islam has also categorically and firmly prohibited all forms of gambling. Maysir and Qimar are forms of gambling transactions that are considered as totally inequitable in Islam. Maysir refers to the easy acquisition of wealth by chance, whether or not it deprives the other’s right. Qimar means the game of chance in which one gains at the cost of others.
Even though, gambling consists in a form of speculation and that There should not be any place for commercial operations in Islam as it is purely speculative. The prohibited speculation under the Shari’ah is not that, which relies on the analysis of a lot of economic and financial data and which involves the investment of assets, skills and labour. Rather, it is one involving an effortless gain similar to a gambling scheme or activity. This is because the buyer is engaged in a transaction aimed at making profit through trading and not through dishonest appropriation of the property of others.
