The Prohibition of Riba, Gharar & Maysir in Islamic Banking PDF

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A lecture notes on the prohibition of riba(interest), gharar (uncertainty) & maysir (gambling) in Islamic Banking as discussed in classes....

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THE PROHIBITION OF RIBA (USURY), GHARAR (UNCERTAINTY), AND MAYSIR (GAMBLING) IN ISLAMIC BANKING 1) Riba (Usury) 

Literally: increase, addition, expansion or growth



Technically: a predetermine excess or surplus over and above the loan received by the creditor conditionally in relation to a specified period



An increase in a loan transaction or exchange of commodity accrues to the owner (lender) without giving an equivalent counter-value or recompense in return.



Al-Quran: 1. Al-Baqarah: 275, “But Allah has permitted trade and has forbidden interest.” 2. Ali Imran:130, “O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful.”

•

Hadith: 1. Narrated by ‘Aun bin Abu Juhaifa: My father bought a slave who practiced the profession of cupping. (My father broke the slave’s instrument of cupping). I asked my father why he had done so. He replied, “The Prophet S.A.W. forbade the acceptance the price of a dog or blood, and also forbade the profession of tattooing, getting tattooed, and receiving or giving riba (usury), and curse the picturemakers.” 2. Narrated Abu Huraira: The Prophet S.A.W. said, “Avoid the seven great destructive sins.” They (the people) asked, “O Allah’s Messenger! What are they?” He said, “To join partners in worship with Allah the Almighty; to practice sorcery;

to kill the life which Allah The Almighty has forbidden except for a just cause (according to Islamic Law); to eat up usury (riba), to eat up the property of an orphan; to give one’s back to the enemy and freeing from the battlefield at the time of fighting and to accuse chaste woman who never even think of anything touching chastity and are good believers.” 3. Jabir reported: The Prophet (saw), cursed the receiver and the payer of interest, the one who records it (the contract) and the two witnesses to the transaction and said, “they are all alike (in guilt).” 

How does riba works?

1. The one who gives loan (creditor) will ask the borrower for an increase in return for the extension of time, •

Example: Loan

2. Same exchange value, •

Illustrations: i. Exchanging 1kg of grapes with 1.5kg of grapes that are of the

type, quality and value. ii. RM100 exchangeable for RM110. 

Types of riba:

RIBA AL-NASI’AH

RIBA ALDUYUN (Loan)

RIBA AL-FADL

RIBA AL-BUYU’ (Exchange contracts)

same

1. Riba Al Nasi’ah 

Due to the delay in time



Literally: to postpone



It arises when a loan payment is postponed to a later date (al-nasi’ah) but with the penalty in the form of an increase over the principle loan



Example: o A borrows a RM5k loan, he cannot pay in time, must pay an additional amount eg RM100 to receive a credit extension. o Current debt is RM5100. If continuously fails to pay and asks for postponement. o Debt will increase to RM5200 (double the additional amount).

2. Riba Al Fadl 

Arises out of the exchange transaction (al-buyu’)



Basis of prohibition of riba in the exchange of ribawi commodities is the famous hadith of the Prophet S.A.W. on the six commodities.



Classifications of the commodities: 

Medium of currency: gold and silver



Staple foods: barley, wheat, dates and salt



The requirement is that if the commodities are of the same type: 1. The exchange should be made on the spot 2. The amount of the exchange commodities must be equal as the Prophet S.A.W. said:

Narrated by Abu Sa’id al-Khudri: “Do not sell gold for gold unless equivalent in weight, and do not sell less amount for greater amount or vice versa; and do not sell silver for silver unless equivalent in weight, and do not sell less amount for greater amount or vice

versa and do not sell gold or silver that is not present at the moment of exchange for gold or silver that is present.” 

Rationale of Prohibition of Riba:  To promote economically just, socially fair and ethically and correct economic behavior.  Riba’ violates the principle of property rights.  Promotion of profit-and-risk-sharing.  Act of lending is an act of charity. Lending should be a benevolent act. If money is needed other than for commercial purposes (thus, risk sharing), such need should not be exploited where the borrower is put under undue burden. Verse 57:11 “ Who is he that will lend unto Allah a goodly loan, that He may double it for him or his may be a rich reward…”  To charge interest from someone who is constrained to borrow to meet his essential consumption requirement is considered an exploitative practice in Islam.  Interest can leads to injustice and exploitation in society; The Qur’an (2:279) characterises it as unfair, as implied by the word zulm (oppression, exploitation, opposite of adl i.e. justice)

2) Gharar o Literally

: Risk, uncertainty or hazard

o Technically

: It refers to the sale of probable item whose existence or

characteristic are not certain o Authorities: 

There is no verse from Al-Qur’an that explicitly prohibits gharar but jurist recognized that the prohibition of other property in vanity (batil) in many verse of Qur’an



2: 188 - “And devour not one another’s possessions wrongfully, and neither employ legal artifices with a view to devouring sinfully, and knowingly, anything that by right belongs to others”



4:59 - “O you who believe! Eat not up your property among yourselves in vanities: But let there be amongst you traffic and trade by mutual goodwill:nor kill (or destroy) yourselves; for verily Allah has been to you Most Merciful!”



Ali-`Imran:186 - “You shall certainly be tried and tested in your possessions and in your personal selves; and you shall certainly hear much that will grieve you, from those who received the Book before you and from those who worship many gods. But if you preserve patiently, and guard against evil, then that will be a determining factor in all affairs”



“Ahmad and Ibn Majah narrated on the authority of Abu-said AlKhudriy: Muhammad (S.A.W) has forbidden the purchase of the unborn animal in its

mother’s womb, the sale of the milk in the

udder without measurement, the purchase of spoils of war prior to their distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver”. 

“Narrated Hakim ibn Hizam : Hakim asked the Prophet: Apostle O Allah, a man comes to me and wants me to sell him something which is not in my possession. Should I buy it for him from the market?He replied : Do not sell what you do not possess.



Concept of Gharar:  Gharar exist when there is element of uncertainty in a contract.  The consequences of having Gharar or uncertainty element in the contract will render it null and void.

 It is because certainty of subject matter is a requirement for a valid contract.  Example : A sells his an asset he does not own or does so when the asset is not yet in his possession. There will be possibility that he may not able to deliver it. In this situation, the transfer of ownership or rights cannot be executed as agreed between parties.



Situation when gharar affects the validity of contract:  Gharar in kind, type, attribute or quantity of the object  Gharar due to time of delivery  Gharar due to price or mode of payment  Gharar over the ability for delivery



Factors of gharar in a contract:

ABSENCE OR INCOMPLETE OWNERSHIP

NON POSSESSION OF THE OBJECT

INSERTION OF AMBIGOUS STIPULATION

•

• It occurs when a seller has no right to that asset and cannot legally guarantee the delivery of the asset mention in the contract • It occurs where a seller does not possess a subject matter of the contract. • Cannot guarantee the physical delivery of that subject matter

• It happens when the parties insert extraneous stipulations that lead the contract to become ambiguous and uncertain.

Why Gharar is prohibited?

 Gharar is unjust (batil) as it leads to uncertainty.

 Allah encourage trade to be held by mutual consent between the parties involved where it can only be achieved through clear unambiguous acceptance.  However, Gharar is tolerable if it is trivial (gharar yasir) in which it can happen in other than exchange contract.  Eg : gratuitous contract or it happen to ancillary object only.  If there is economic need for contract embodying the risk is substantial.  Gharar is different from risk (ghurm) :  Islam encourage people to take risk in their business engagement.  It based on legal maxim, “no reward without risk” (Al-ghurm bil ghunm)  ghunm refers to the risk in business outcome.  eg : mudharabah and musyarakah contract where the parties enter into a contract of partnership investment with certainty about the outcome of the business involved.

3) MAYSIR (GAMBLING)



“Maysir” – Derived from root word yasira (to be easy) and yassara (to succeed)



Means lucky chance or easy success at getting something of value without earning it.



Ibn Qayyim al-Jawziyyah opines in unequivocal terms that the maysir which the Quran has identical to gambling as it is commonly understood,consisting of two players who compete with elements of loss and gain where the winner gain is profited from the loss of the other.



Maysir or gambling can be said to be a game of change and luck where the risks to the parties are built in the contract itself.



A form of gharar in its worst, and involves the exchange of money or other valuables depending upon the uncertain outcome of an event.



Referred to as qimar, which means a game with the condition that the winner of two contestants obtains something from the loser.



It considered as “a combative relationship between two contracting parties, each of whom undertakes the risk of loss and the loss of the means a gain for the other”



Why is gambling prohibited? a. The gambler acquires wealth without effort. b. It can destroy cooperation between communities when people lose focus on what is important in life (worthy activities). c. Creates hatred and anger between members in the society d. Prevents them from performing their prayers as well as from remembering God. e. Risk of losing a lot of money. f. Destroy family institution.



Legal Basis on The Prohibition of Maysir: 

Surah Al-Maidah verse 90:

“O you who believe! Intoxicants (all kinds of alchoholic drinks), and gambling, and Al-Ansab, and Al- Azlam (arrows for seeking luck or decision) are an abomination of Shaitan’s handiwork. So avoid that in order that you may be successful” 

Surah Al-Baqarah verse 219:

“They ask you about wine and gambling. Say, "In them is great sin and [yet, some] benefit for people. But their sin is greater than their benefit." And they ask you what they should spend. Say, "The excess [beyond needs]." Thus Allah makes clear to you the verses [of revelation] that you might give thought”



Elements in a contract can be said consisting element of maysir if: 

It involves the creation of risk for its own sake.



a combative relationship between two contracting parties



Each of whom undertakes the risk of loss, and the loss means the gain for the other.



If the contract itself consists of a game of pure chance in which there is no economic activity in the practice and the gambler will simply seek to amass wealth without effort.

4) DIFFERENCES IN THE INVOLVEMENT OF RIBA’, GHARAR, MAYSIR BETWEEN ISLAMIC BANKING AND CONVENTIONAL BANKING ISLAMIC BANKING •

•

CONVENTIONAL BANKING

In Islamic banking practice the

scholars

differentiated

between usury and riba’ on the

called financing facility not loan.

ground that the former involves

This is because type of loan that

loans for consumption, whereas the

permitted in Islamic transaction is

latter involves loans for production •

Interest = is an extra charge

Bank also needs to make profit,

imposed on a debtor who borrows

since

money for productive purposes

they

are

the

institution

such as investment, industry, and

conducting business •

Some

facility provided by Islamic bank is

only qard hasan (benovelant loan) •

•

Example

of

contract

provides

financing facility by islamic bank:  Equity

or

financing

trade •

Usury = extra charged imposed on

partnership

debtor who borrows money for

(musyarakah

consumption such as his own

mutanaqisah)

personal day-to-day needs. •

Riba covers all types of loan in which

interest

is

charged,

 Leased

based

(ijarah

financing

regardless whether they are made

al-bai

for consumption or production

thumma

purposes. (Clear example)

(AITAB)

 Loan contract

 Sale based financing (BBA) •

Totally

prohibited elements of

•

contract if it occurs in these areas:

gharar thus introduced Shariah

•

compliant financing facility. It does

•

gharar in kind / type / attribute /

not imposed interest since the

•

quantity of the object

contract is not based on loan and

•

gharar due to delivery time

mostly on sale contract.

•

gharar due to the price/ mode of

The

financing

facility

payment

clearly

prescribed in the agreement. The

•

doubt over the ability to deliver

amount need to be pay by the

•

Examples:

customer is fixed, not depend on

•

Mostly practice in conventional loan

the any rate prescribe in the •

•

•

Gharar will effect the validity of

Example

of

contract

provides

•

Since it is a loan contract with

financing facility by islamic bank

interest, the amount of payment

Equity or parnership financing

made towards the bank depend on

(musyarakah mutanaqisah)

the rate of interest prescribe by

Leased based financing (ijarah

bank in

thumma al-bai (AITAB)

•

The uncertainty in the amount need

•

Sale based financing (BBA)

to be paid by customer to the bank

•

In this type of contract the element

totally an element prohibited in

of uncertainty is eliminated as

Syariah.

subscription and compensation is concerned.

•

conventional

prize-carrying

schemes are repugnant to the tenets

•

•

•

•

involvement of both Riba and

because In wadī’ah, the savers

Maysir

•

accounts, although investors and

of ribā.

depositors money remain safe, the

However,

in

prizes would be taken from the

mudhārabah

(INVESTMENT)

interest generated from the capital

some scholars allow Islamic bank to

so accumulated. •

Pre-calculated

interest

distributed

taken from the banks money.

bondholders. There is also the

Otherwise, it is unjust act where the

aspect of the chance for a few to get

saving account holders and bond

a prize without undertaking any

holders take the profit where the

liability or doing work for it, at the

business activity does not start yet.

cost of other saving account holders

Cannot give loan to the company

and bond holders. This concept

who

similar to games of chance and

run

illegal

or

unlawful

among

is

condition that the prize money

the

speculation.

activities. •

In prize bond schemes and saving

the principal as stated in the hadith

do some kind of contest with the

•

the

amount to ribā.

•

Sharīʿah

to

of

would not entitled any benefit over

the

due

in case of wadī’ah if it is given it

•

Therefore,

conventional

prize-

carrying schemes are repugnant to the tenets of the Sharīʿah due to the involvement of both Riba and Maysir. •

current and saving account.

•

No

limitation

to

the

person

qualified to obtain the loan, can give to the company who run the business of gambling, indirectly involve the element of maysir....