Riba (Usury): Today’s Practical Form and the
Reasons
Behind its Prohibition?
By :
Ust Hj Zaharuddin Hj Abd
Rahman *
zaharuddin@yahoo.com
It is well known that the main
difference between Islamic Bank and Conventional Bank is the existence of Riba. Therefore, this writing will briefly discuss on Riba and the stand of Islamic banks on 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 the coercion and duress resulting from Riba?
Practically, nobody in this matter would feel the coercion, indeed the customer
would be benefiting from the interest charged.
·
How would a
bank gain profit without Riba(usury)? Consequently, how would a Bank attract customers
without profit?
This writing will try to respond to all
the questions raised.
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 Allah permittteth trading and forbiddeth usury” ( Al-Baqarah :
275 )
According to the Shari’ah,
Riba can occur in the following situations:
a) The First Riba
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 RM 50,000 to
customer B, but the bank fixes the interest rate e.g
10 per cent a year, 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 Car Loan, Home Loan, Personal Loan,
Term Loan and 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), which according to Shari’ah is prohibited.
The next
question then will be; why is it prohibited? What is wrong on 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 dire need person 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 customer part. 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 Banks practice, the Banks sell 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 been charged a compensation, which is
very small just enough to cover the administration’s cost. If any excess occurs
it will be distributed 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 and a trait built on putting pressure on the poor, needy and those
in difficulty. It actually eliminates good characteristics in people such as
willingness to helping each other. Moreover, it will create ill feelings among
people and lead to tension in community.
Riba will also encourage laziness in
the rich or inefficiency in the bank its employees will not have to
work hard to gain profit through trade and take risk. Consequently, they will
start finding easier way to gain profit i.e. by giving loan and charging
interest on the loan. 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 constantly 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 labor 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 labor (6:85, 11:85, 26:183,
etc.).
·
The only
discipline approved by the Shari’ah in loan contract
is giving loan without imposing any additional amount on the repayment. This is inline with what stated in the Hadith: “Every loan given which leads to a benefit on the
lender 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).
b) The Second Riba
The second
form of Riba (usury) occurs when customer deposits
their money in any type of conventional accounts, such as: -
1)
Conventional Fixed Deposit account.
According
to the signed agreement, the account operator/Bank will pool the depositors’
money and invest in strong, well-established companies to gain profit.
Consequently, as a reward to the depositor, the Bank will fix an upfront interest rate (fixed interest). For example, 3% interest will be given to the depositor (as an addition to his/ her capital money) at a maturity period say between 1-12 months. According to Shariah, the 3% rate from the fixed deposit account is Riba Al-Qard, meaning Riba out of lending and borrowing. This kind of riba is the extra amount of money over and above the principal of the loan either imposed by the lender on the borrower in the contract or promised by the borrower in the contract
.
2)
Conventional Saving account.
By the same token, for this type of account, the Bank usually
gives a fixed interest rate ranging from 0.1% to 1.5% per annum or higher. For
this type of account, the Bank is regarded as borrowing the money from the
depositor for the purpose of engaging in investments or providing loans. The
depositor on the other hand, is regarded as imposing the fixed interest on the
Bank. As a result, the Bank is required to pay an additional sum based on the
interest rate regardless of condition (profit or loss). If the Bank gains high
profit, it only has to pay the small fixed interest to the depositors. In contrast, if the Bank suffers a loss, it
will still have to pay the fixed interest regardless of the loss. Thus,
iniquity and injustice occurs, when the Bank has to pay the interest despite it
being in a loss position or when the depositor receives a small income versus
the Bank’s high profit.
In an Islamic account, customers may deposit their money in either one of the following
two types of accounts: -
a)
Wadi’ah Yad Dhamanah (Savings Account-i )
Wadi’ah Yad Dhamanah
is when the Bank pools and utilizes the fund. The bank’s responsibility is in
the form of guarantee and therefore it is compulsory for the Bank to return the
fund as and when requested by the customer.
The Bank may give Hibah (gift/reward) to
the depositor. The Hibah depends solely on the Bank’s
discretion and cannot be promised by the Bank.
In favor of the Bank’s high investment or financing projects
profit, the depositor will usually receive a good/ high hibah
(gift/reward) appropriate to the profit. On the contrary, in the event of loss,
the Bank need not give any hibah (gift) to customers.
Furthermore, the depositors’ money is still in custody and will not be reduced
even though there is a loss. Therefore, justice prevails for both bank and
customer because: -
·
Customers may
enjoy hibah (gift/reward), which is given by the Bank
for their money in safe custody whilst not having to bear any investment risk.
·
The rate or
amount of hibah solely depends on the Bank’s
discretion and the Bank usually gives away competitive hibah
for profitable investment in order to attract customers.
·
The Bank is not obliged to pay anything to the
customers if there is no profit from investment. Therefore, the Bank will not
be in a disadvantage position.
·
There is no Riba involved in this account and the investment is Shariah compliant.
b)
Wadi’ah with the concept of Mudharabah. (Investment
account)
Means that customer desires to have their money in safe custody
and at the same time also invest. Under this concept, customers are willing to
bear the risk arising from the investments in order to gain higher profit. The percentage rate of the profit is
determined in the first place, in the contract e.g. 70% for customer and 30%
for the Bank or 80:20, 60:40 and etc.
Hence,
in an Islamic account, what is imperative is that the accumulated deposit will
only be invested in companies, which are Shariah
compliant (Shariah approved companies with business
activities which are in compliance with Shariah
principles and all income generated are free from doubtful sources).
For
instance, RHB Islamic Bank Berhad ensures that all
the deposit received is invested in businesses or companies, which are clearly
safe (free from unlawful activities in Islam).
Screening is carried out diligently, and its operation is done in
a client-friendly environment, i.e. a very much transparent discussion takes
place between the Bank and companies, which are targeted to be invested in to
ensure that the companies are Shariah compliant. The
discussion will take into consideration the assets and liabilities of the
companies in which the deposits/funds will be invested, regardless whether it
is public listed or not.
Generally, the following Shariah
filter is used:-
i-
Industry
filtering (excludes companies whose primary business is related to prohibited
products and goods)
ii-
Primary
Financial Filters (excludes companies having unacceptable levels of debts or
impure interest income according to Shariah Committee
guidelines)
In
conclusion, the Islamic accounts differ from conventional accounts which are
not confine to the Shariah
laws and principles and only focusing on profit generating investments without
considering the Shariah aspects. Obviously, this will
mean that one depositing money into the Islamic accounts as supporters of the
Islamic banking system and sponsors of Shariah
compliant activities and profit generation.
As regards to
the issue on how Islamic banks can gain profit without Riba
(Usury), there are actually various permissible ways for generating profit in
an Islamic Bank as well as the Islamic windows which are very much reliable and
capable of income generation, and gaining high profit through the following Shariah approved selling and buying modes, such as:
a.
Bai Bithaman
Ajil (BBA) – Deferred Installment
b.
Normal Ijarah (Leasing), Ijarah Muntahiyah Bit Tamleek (Ending
with ownership) and AITAB (Islamic Hire Purchase)
c.
Musyarakah
(Joint-venture Profit Sharing) and Musyarakah Mutanaqisah (Diminishing Musyarakah)
d.
Mudharabah (Trustee
Profit Sharing)
e.
Murabahah (Cost plus
sale) and Three party Murabahah
f.
Syndication
services (Ujr)
Based on these varieties of Islamic
selling and buying modes (there are a lot more), one should not have any doubt
on the Islamic Banks’ capability in generating profit as well as benefiting
societies for their financial needs.
·
He holds a B.A(Hons) Univ Malaya; MA, Shariah (Hons),