ELEMENT OF ISLAMIC FINANCE (Non Interest Banking)
Conventionally, the financial system is the system that enables lenders and borrowers to exchange funds. This has been the practice from time immemorial which is un-structure and exchange done on batter until we grew in greed and begin to seek for gratifications and benefits for the fund we borrowed to other. The gratifications that are associated with the financials system are basically a) Usury or Interest b) Uncertainty and c) Gambling.
The Abrahimic religions (Judaism, Christianity and Islam) all forbid interest in their religious textual scriptures. In Judaism the Rabbinic Law Extends the Ban on interest while in Islam the Shariah also extends the ban.
The fundamental of Islamic finance and that which distinguish it from conventional finance is the prohibition of Riba, Gharar and Maysir in financial transactions. I will attempt to discuss these unique features of Islamic finance from the Shari’ah, Quran and Sunnah, perspective.
Usury/Interest/Riba (non interest banking)
Usurious transactions were classified into two categories: a) Riba al-fadl, 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 and b) 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. Hence the interests in conventional financial practices are prohibited.
non interest banking
Quranic references on Riba are to be found in four surahs or chapters. These ayah are an ascending scale which starts with a mere judgment of value, followed by an implicit prohibition, then a limited one and finally, a total and conclusive prohibition (Al-Rum, 30:39; Al-Nisa, 4:161; Ali-Imran, 3:130 and Al-Bakarah, 2:275-9).
Moreover, the detailed varieties of usurious transactions as well as such prohibition are explained and elaborated by the Sunnah. The Messenger of Allah (s.a.w.) has cursed the one who accepted Riba, the one who paid it, the one who recorded it, and the two witness of it, saying they were all alike.2
It is also reported that the Prophet (s.a.w.) has said to the effect:
“(Exchange) gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, measure for measure and hand to hand. If the (exchanged) articles belong to different genera, the exchange is without restraint provided it takes place in a hand to hand transaction.”
It is more than evident from the above discussion that Riba i.e., interest in the modern world is categorically prohibited in the Holy Quran and the Sunnah of the Prophet (s.a.w.).non interest banking
In today’s financial practice Riba arises with loan: car loan, home loan, term loan or overdraft, hire purchase loan and personal loan; Riba in savings and fixed deposit account; Riba in credit card. More often than not Riba is intertwined with modern banking and finance.
Gharar: uncertainty – Non Interest Banking
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. Hanafi scholars have defined Gharar as “something which its consequence is undetermined.” While Shafi’I scholars have described it as “something which in its manner and its consequence is hidden. According to Al-Sarakshi, “anything that the end result is hidden or the risk is equally uncommon, whether it exists or not.” Therefore, 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.
Gharar is divided into two types: Gharar fahish (excess Gharar) and Gharar yasir (light Gharar). Examples of Gharar fahish in contracts are plenty as shown by the Hadith and normally is associated with the reasons why Gharar sales are prohibited.
On the other hand, Gharar yasir, which means small in amount or trivial is the uncertainty that is always present in all contracts and conducts, thus its existence is tolerated. All the scholars agree that every transaction have some amount of Gharar in it but they start to differ when referring to the amount of Gharar contained in each.
There is no specific evidence from the Quran which connotes Gharar, however, Allah (s.w.t) mention “Eat not your property among yourselves unjustly by falsehood and deception, except it be a trade amongst you by mutual consent (Al-Bakarah, 2:188; Al-Nisa, 4:29). The Quran has categorically prohibited gambling (Al-Bakarah, 2:219 and Al-Maidah, 5:93). Many scohalrs argue that Gharar is one of the branches of gambling (Rahman, 2010; p.71).
In addition to that tradition of Prophet Muhammad (s.a.w.) on many occasions forbade many transactions which included Gharar. For example, he Muhammad (s.a.w.) 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.
Gharar occurs in all sorts of transactions where the subject matter, the price or the two, are not determined and fixed in advance. Speculative activities in capital market, derivatives instruments and short-selling contracts are clear examples of Gharar in modern finance.
Maysir is involved in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future. Maysir is regarded by most Islamic scholars as gambling or any games of chance (including lotteries, lotto, casino-type games and betting on the outcomes of animal races). Together, these share a desire for obtaining return through deliberate risk-taking. Both games of chance and gambling are banned by Sharia.
Islam has also categorically prohibited all forms of gambling. Maysir refers to the easy acquisition of wealth by chance, whether or not it deprives the other’s right. Hameed (2009, p.44) defines Maysir as gambling, also, any form of business activity where monetary gains are derived from mere chance, speculation or conjecture.
As noted the Quran, clearly prohibit gambling (Al- Bakarah, 2:219 and Al-Maidah, 5:93). For example, uncertainty of the timing of benefits of a pure life insurance contract creates an element of Maysir. Casinos are also common example of Maysir, where simply transfer of wealth take place from losers to winner without creating a new stock of wealth. In brief, contracts involving pure speculation, conventional insurance and derivatives are examples of Maysir.
The principle of prohibition of Riba differentiates between Islamic and conventional financial institutions and association with Islamic finance indicates religious identity (El-Gamal, 2007). While defining Riba, El-Gamal(2006) argues that Riba has no precise translation in English dictionary and criticizes those who misinterpret it simply as excessive or usurious payment of interest. He further argues that prohibition of Riba should be interpreted as an institution for improving economic efficiency and social justice. For example, requiring contracts to clearly specify fluctuating equity stakes (i.e., marking asset values to current market prices), without using conventional credit and interest rate financing, may help avoid counter-party risk and save costs of contract enforcement in the event of bankruptcy. Similarly, prohibition of Riba can be interpreted as incentivizing myopic decision makers to use mutually owned profit/loss sharing as a commitment device that helps avoid temptation and produces greater accumulations of capital, anticipating by centuries the literature in behavioral economics on dynamic inconsistency.
The Islamic principle that has had the greatest impact on Islamic economics is the prohibition on the payment of interest (Riba), sale of risky assets (Gharar) and gambling or speculation (Maysir).
Salaudeed Jubril Abdullah Ph.D. On Non Interest Banking