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Islamic Banking Assignment#1

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17 views

Islamic Banking Assignment#1

Uploaded by

omaimaaamir9
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ASSIGNMENT #1

NAME: Aysha Aamir


REG NO: 56-BSPM-S22
COURSE TITLE: Islamic Law of Business Transaction

RIBA

Why Riba is prohibited? (Reason, consequences etc along with the evidence
from Quran and Sunnah).

Riba is an Arabic word that means “to increase" or “to exceed" and is
commonly used in reference to unequal exchanges or charges and fees for
borrowing. Interest is deemed riba, or an unjust, exploitative gain, and such
practice is forbidden under Islamic law. The concept of Riba, or usury, holds
significant importance due to its prohibition in both the Quran and the teachings
of the Prophet Muhammad ‫ﷺ‬

Reasons for Prohibition:

Social Justice: One of the primary reasons for the prohibition of Riba is to
uphold social justice within society. Riba creates a system where the rich exploit
the poor, widening the gap between the wealthy and the impoverished.

Economic Stability: Riba-based transactions often lead to economic instability.


Charging interest on loans can result in an endless cycle of debt for borrowers,
leading to financial crises at both individual and societal levels.

Ethical Principles: Islam places great emphasis on ethical conduct in all


aspects of life, including financial transactions. Riba contradicts these ethical
principles by promoting unfair gain at the expense of others.
Preservation of Human Dignity: Riba diminishes human dignity by subjecting
individuals to financial servitude. It fosters greed and selfishness, eroding the
values of compassion and empathy.

Consequences of Riba:

Exploitation of the Poor: Riba-based loans exploit the financially vulnerable,


exacerbating poverty. Predatory lending practices, such as payday loans with
exorbitant interest rates, trap individuals in cycles of debt, perpetuating socio-
economic inequality.

Misallocation of Capital: Riba-driven finance prioritizes loan repayment over


productive economic activities. Consequently, capital flows towards borrowers
with high repayment probabilities rather than towards ventures that generate
genuine economic value, leading to inefficient allocation of resources.

Excessive Leverage and Systemic Risks: Riba encourages excessive leverage


in business, heightening systemic risks and increasing the likelihood of business
failures. The 2008 financial crisis exemplifies how high levels of debt, fueled by
riba, precipitated widespread economic turmoil and corporate bankruptcies.

Exploitative Lending Practices: Riba fosters a transactional approach devoid


of empathy or cooperation. Lenders prioritize profit maximization, disregarding
the financial hardships faced by borrowers. This exploitative dynamic
contradicts the principles of brotherhood and compassion advocated in Islam.
Short-Sighted Investments: Riba-based investments promote short-term gains
at the expense of long-term economic sustainability. Investors prioritize
directionless ventures that promise quick returns, neglecting visionary and
meaningful advancements essential for societal progress.

Spiritual Consequences: Engaging in Riba is considered a grave sin in Islam,


with severe spiritual consequences for those involved. It distances individuals
from Allah's mercy and blessings, leading to a sense of spiritual emptiness.

Economic Instability: Riba-based economies are prone to economic downturns


and crises. The accumulation of debt and the concentration of wealth in the
hands of a few can destabilize entire financial systems.

Social Injustice: Riba exacerbates social inequality by perpetuating a cycle of


poverty among marginalized communities. It hinders their socio-economic
development and deprives them of opportunities for upward mobility.

Legal Ramifications: Despite its widespread acceptance in conventional


finance, Riba is prohibited by Islamic law. Individuals and institutions involved
in Riba-based transactions may face legal consequences in the Hereafter.

What does Islam say about riba?

There are four sets of verses of Quran revealed in different occasions. In order
of revelation, they are:

“Whatever riba (increased amount) you give, so that it may increase in the
wealth of the people, it does not increase with Allah” [Ar-Rum: 39]

“And for their charging riba (usury or interest) while they were forbidden from
it, and for their devouring of the properties of the people by false means. We
have prepared, for the disbelievers among them, a painful punishment.”
[Al-Nisa: 161]

“O you who believe, do not eat up the amounts acquired through riba (interest),
doubled, and multiplied. Fear Allah, so that you may be successful.”
[Al-Imran: 130]

“Allah has made interest fruitless and charity fruitful. And Allah does not like
any ungrateful evildoer.” [Al-Baqarah 275-279]

“O believers, take not doubled and redoubled interest, and fear Allah that you
may prosper. Fear the fire which has been prepared for those who reject faith
and obey Allah and the Prophet so that you may receive mercy.”
[Al-Imran, 130-132]

Evidence from Sunnah:

"There are seventy degrees of usury, the least of which is equivalent to a man
having intercourse with his mother." [Sunan Ibn Majah 2274]

"A dirham which a man knowingly receives in usury is more serious than thirty-
six acts of fornication.” [Mishkat al-Masabih 2825]

The Prophet Muhammad ‫ ﷺ‬cursed the receiver and the payer of interest, the one
who records it and the two witnesses to the transaction and said: "They are all
alike [in guilt]." [Sahih Muslim]

The Prophet Muhammad ‫ ﷺ‬prohibited riba explicitly in his last hajj (pilgrimage
to Mecca) which was the most attended gathering of his companions. Jabir ibn
'Abdallah, giving a report on the Prophet Muhammad ‫'ﷺ‬s last hajj, said: The
Prophet Muhammad ‫ ﷺ‬addressed the people and said "All of the riba of
Jahiliyyah (the days predating Islam) is annulled. The first riba that I annul is
our riba, that accruing to 'Abbas ibn 'Abd al-Muttalib [the Prophet Muhammad
‫'ﷺ‬s uncle]; it is being cancelled completely." [Sahih Muslim]

From 'Abdallah ibn Hanzalah: The Prophet Muhammad ‫ ﷺ‬said: "A dirham of
riba which a man receives knowingly is worse than committing adultery thirty-
six times." [Mishkat al-Masabih]

From Abu Hurayrah: The Prophet Muhammad ‫ ﷺ‬said: "On the night of
Ascension I came upon people whose stomachs were like houses with snakes
visible from the outside. I asked Gabriel who they were. He replied that they
were people who had received interest." [Ibn Majah]

From Abu Hurayrah: The Prophet Muhammad ‫ ﷺ‬said: "Riba has seventy
segments, the least serious being equivalent to a man committing adultery with
his own mother." [Ibn Majah]

It can be understood from the above verses of the Quran and the sayings of the
Prophet Muhammad ‫ ﷺ‬that riba is very severe sin and prohibited strictly. The
committing of riba or involving interest-based transactions is considered as
equivalent to being at war with God and His Prophet Muhammad ‫ﷺ‬.

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