Riba (Usury): Its Practical Form and the Reasons Behind its Prohibition ( Part 1 )
By :Ust Hj Zaharuddin Hj Abd Rahman *
It is well known that the main difference between an Islamic Bank and a Conventional Bank is the existence of Riba. Therefore, this article will briefly discuss Riba and the stand of Islamic banks towards this issue.
Among the frequently asked questions regarding Riba are:
What exactly is Riba in the current practices of the Banks and why is it prohibited in Islam?
What is meant by coercion and duress resulting from Riba? Practically, nobody in this matter would feel the coercion, indeed the customer would benefit from the interest charged.
How would a bank gain profit without Riba (usury)? Consequently, how would a Bank attract customer without profit?
This article will try to respond to all the questions raised.
What exactly is Riba in the current practices of the Banks and why is it prohibited in Islam?
Firstly, one must have in mind that Allah, the Most Merciful, has stated clearly in the Quran:
“ Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say : Trade is just like usury; whereas All permittteth trading and forbiddeth usury” ( Al-Baqarah : 275 )
According to the Shari’ah, Riba can occur in the following situations:
The first is when there is a loan contract between two parties (bank and borrower). For example, in today’s banking practice: Bank A approves a loan of RM50,000 to customer B, but the bank fixes the interest rate e.g 10 % per annum, thus enabling the customer to have the required amount of money in his possession. However, one must realize that the amount accrued from the interest might be compounded to an unknown amount e.g. in the event where the customer is in default.
The practice is regularly done using products such as Personal Loan and Term Loan, etc. That is what we called as Riba. This kind of Riba is categorized under both Riba al-Fadl ( interest in excess) and Riba an-Nasiah (increases due to time) in which according to Shari’ah is prohibited.
The next question then will be; why is it prohibited? What is wrong in charging interest on the customer’s loan?
The answer is that:
Revenue resulting from the interest is actually received as a result of exploiting the difficulty faced by the customer i.e. only a person in dire need would go to a bank to get a loan in order to settle his/her financial problems. Unfortunately, the bank on the other hand is charging an additional amount of payment (interest) for the loan. This is why Riba leads to injustice and duress on the part of the customer. In addition, in the case of failure to settle the monthly payments as fixed by the bank, the customer would then be imposed a penalty, which is compounded.
Whereas, In Islamic banking practice, the bank sells the goods to the customer at a fixed selling price and it cannot be higher than what has been fixed. If there is a default in the payment, he/she is only charged a compensation, which is very small, just enough to cover the administration cost. If any excess occurs it will be given away as a charity.
Thus, readers should be able to differentiate between compensation imposed by Islamic Banks with the penalty imposed by Conventional Banks.
Charging interest will diminish a man’s good conduct or discourage him from lending a hand to others in society. At the same time it encourages selfishness, egoism in the rich, a trait built on putting pressure on the poor, needy and those in difficulty. It actually eliminates good characteristics in people, such as a willingness to help each other. Moreover, it will create ill feelings among people and thus leads to tension in the community.
Riba will also result in causing laziness in the rich or inefficient bank because its employees will not have to work hard to gain profit through trade or to take risks. Consequently, they will start finding easier ways to gain profit i.e. by giving loans and charging interest on the loans. In a riba-based economy the possessors of capital will not only remain permanently rich, since they eliminate the possibility of suffering losses, but they will grow richer, since they will be sucking the wealth which belongs to others.
Islam, on the other hand, prohibits profit-gaining activities, which are independent of any labour or effort, or the assumption of any risk. Islam deliberately accepts the other way, which is: “Al-Kharaj Bid Dhaman” meaning “Profit is by taking risks”. Allah, the Most High, has unambiguously declared that nothing can be had without effort or labour (6:85, 11:85, 26:183, etc.).
The only discipline approved by the Syari’ah in loan contract is by giving loan without imposing any additional amount on the repayment. This is in line with what is stated in the Hadith: “Every loan given which leads to a benefit on the lender’s part is Riba”. In conclusion, no profit can be generated through the loan contract for the benefit of the lender. This is because loan is a process of helping each other voluntarily and in Islam; it is regarded as Qardh Hassan (Benevolent Loan).
-to be continued in the next article-
B.A(Hons) Univ Malaya; MA, Shariah (Hons), Yarmouk, Jordan; presently he is a Manager, Shariah Compliance Department, RHB Islamic Bank Berhad
Riba (Usury) : Its Practical Form and The Reason Behind Its Prohibition (Part 2) |
