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Introduction - Islamic Finance /3

Riba (usury)

Riba al-Naseeyah

Riba al-Fadl

We all know what interest on loans is, and this is precisely what is prohibited. Riba lexically means excess.

 

Muslim jurists have divided riba into two types:

1. Related to the Quran known as Riba Al-Naseeyah

2. Riba al-Fadl related to the Sunnah (i.e. sayings and practices of the Prophet).

 

The prohibition of riba has a major impact on Islamic Finance compared to the international capital markets where all finances are directly linked to riba/interest.

This is also known as Riba al-Quran and Riba al-Jahiliyyah.  This is directly quoted in the Quran:  “O ye who believe! Devour not usury, doubled or multiplied; but fear Allah, that ye may prosper”   (Al-Quran 3/130-131).

 

This is technically interest on loan. The underlying basis is that the calculation of the excess depends on the period of delay, that is the period for which the borrowed amount or commodity is used by the customer, for example one year.

 

 

This is also known as Riba al-Hadith and Riba al-Byuoo and has been established through the Sunnah.

 

This is technically any like for like exchange which results in excess compensation without any consideration.  It actually means the excess compensation which is taken in exchange for specific homogeneous commodities and encountered in their hand-to-hand purchase and sale.

 

With Riba al-Fadl, the calculation of excess is through measuring, weighing or counting and depends on the commodity involved.

 

With regards to international finance this applicable to many exchange of commodities contracts.

 

The Islamic objective is that when a compensation is paid, it should be justified or be set against a specific activity and the return should also be associated with specific risk.