interest and islam

[smraza]

as far i know, Riba and Interest are the same things called in two different languages, Interest is an English word where as the Riba is an Arabic word, which means to give some thing and take back in excess of the original thing.

SMR

[sumaaan]

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Kindly identify the difference between riba and interest

Plz Smile ...... it cost just some pleasent breaths!
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Interest is a word used in broader terms... Interest can be on a loan and investment as well.

Riba is a word used in a very limited context... Its the 'extra amount' gained by the principle from the 'loan' he has granted... It is not used for interest charged on Investments.


This topic is a very lengthy one... But if anyone wants to know more about it, I'll be pleased to explain what I have been told by learned scholars of Islam about Riba, and how our 'Islamic Banking' works.

[fidarsi]

Well sumaaan I thought we should discuss Islamic banking in Pakistan. I will appreciate if you provide little of your introduction. I agree with you regarding difference between riba and interest. Up to my knowledge riba is the word used in Arabic language and usury is the synonym word used in ancient English language. Then the word interest comes with a broad meaning like “what is my interest in this”. But what matter is only the real essence of using the terminology. Generally interest is used for riba.

Kindly mention some investments in which you thought interest is halal.

We all are happy to receive information in this regards espacially with reference to islamic banking and products offered currently like murabaha and ijarah.

Regards



Plz Smile ...... it cost just some pleasent breaths!

[sumaaan]

'Interest' is the profit or extra amount gained by the principle when investing or lending money.
'Riba' on the other hand is the profit or extra money gained by the principle ONLY by lending money.

We see that even banks in Saudi Arabia who claim to work through 'pure islamic banking' too pay out interest... Our Al-Meezan Bank, which introduced Islamic Banking in Pakistan itself pays out interest... Then where does the whole Riba-Free banking concept go?

Well actually you see, when you 'invest' money, you are a sort of a partner in that business... Lets say you have a friend who's starting a 'halal' business, you plan to invest money with him... If you invest a small amount, then you'd be called a 'sleeping partner', i.e a partner who can't take business decisions due to the percentage of his capital employed in the business but gets a fixed return...
Therefore, the same is the case when you invest money in bank... You become a 'sleeping partner' with the bank... And then you get return for your investment...

There is another mode of getting return from your money... By lending a loan one can demand a fixed percentage return or a pre-decided amount to be returned in excess of the principle amount... Now this is the definition of 'Riba'... Riba is earned ONLY from Loans and not investment... Therefore, Islam allows investment...

When our religious scholars claim that the banking in Pakistan is based on 'Riba', they are right... And why is that so?... Its because the profit you earn by Investing money in a Bank comes from the 'Riba' a bank has earned by lending loans... So simply put, the profit you are earning through your investment is 'Haram'...


I hope that simplifies a lot of misunderstandings about the Islamic Banking System.

[smraza]

dear sumaaan, i m little bit confused about the difference b/w Riba and Interest,
take a look at your example of investment in the business started by the the friend, if somebody invests in a business, the return on that investment is dependent upon the profit earned by that business, in case of loss you will not earn any thing, even there is a risk of loss of your original investment.
u cannot compare the above investment with the amount invested in a bank, where there is no risk of loss of your original investment moreover the return is predecided and guaranteed even if the bank suffers loss in the business.

SMR

[sumaaan]

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dear sumaaan, i m little bit confused about the difference b/w Riba and Interest,
take a look at your example of investment in the business started by the the friend, if somebody invests in a business, the return on that investment is dependent upon the profit earned by that business, in case of loss you will not earn any thing, even there is a risk of loss of your original investment.
u cannot compare the above investment with the amount invested in a bank, where there is no risk of loss of your original investment moreover the return is predecided and guaranteed even if the bank suffers loss in the business.

SMR
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Theoritically and rationally speaking, if we take that 'business with a friend example', if one invests a very small amount which forces him not to take part in business decisions, then he shouldn't bear any losses and infact should get his 'fixed' return, because the reason why the business flopped was NOT his fault as he was never involved in decision making...

Thats the reason why banks offer a fixed percentage return because the investor is never really involved in any decision making with the bank as to where the bank should further invest the money, etc.

[fidarsi]

FIXED RETURN …………….. I did’nt agree with this theory, as far as my understanding is concerned Islamic economy is based on risk associated theory. One has to bear risk for return. The difference b/w riba and interest……….its little hard to understand ……... lets simplify ourself (for discussion sake) say riba what is haram …and profit what is halal.

In my view the whole Islamic banking is based on the theory that it’s a pool fund with large base of investors (you can say depositors). The bank acts as a mudarib and invest fund on behalf of depositors. The total return will be ascertained after the period and bank after deducting allocable expenses and mudarib fee determine return for depositors. Now almost all banks in Pakistan especially who are working on Islamic principles not offered fixed rate of return. They quote you last declared rates and the final rate would be different based upon actual performance of the fund. Now the question is ………from where bank get income. Lending??? …… stock market operations??? …… Islamic financing??? …… money market transactions????? …...the bank whose investment side is in sharia compliant product is giving halal profit.

As far as Islamic banking is concerned Mezaan is the first bank who takes license of Islamic banking from State Bank of Pakistan. However, there are number of banks in Pakistan who were following Islamic banking principles even before Meezan. Albaraka Islamic bank is one of them, Faysal bank to the some extent. Now there are many banks that have Islamic banking divisions (separate branches for these operations). Alfalah, Khyber, MCB are among those. They all declare final rates after the finalization of results of the period mostly on half yearly basis. They either pay profit after the period or made payment on provisional rates and adjust after the period. I know Albaraka and they are working on the same principle.

Business on fixed return basis……………… I don’t think this is according to best Islamic practices. Decision making right is not the criteria. One has right on profit from the day he invests in business and should not be fixed; he should entitle the return based on performance of the business. If business makes a loss it should bear it in proportion.

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Plz Smile ...... it cost just some pleasent breaths!

Edited by - fidarsi on Mar 24 2004 41040 PM

[sumaaan]

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FIXED RETURN …………….. I did’nt agree with this theory, as far as my understanding is concerned Islamic economy is based on risk associated theory. One has to bear risk for return. The difference b/w riba and interest……….its little hard to understand ……... lets simplify ourself (for discussion sake) say riba what is haram …and profit what is halal.

In my view the whole Islamic banking is based on the theory that it’s a pool fund with large base of investors (you can say depositors). The bank acts as a mudarib and invest fund on behalf of depositors. The total return will be ascertained after the period and bank after deducting allocable expenses and mudarib fee determine return for depositors. Now almost all banks in Pakistan especially who are working on Islamic principles not offered fixed rate of return. They quote you last declared rates and the final rate would be different based upon actual performance of the fund. Now the question is ………from where bank get income. Lending??? …… stock market operations??? …… Islamic financing??? …… money market transactions????? …...the bank whose investment side is in sharia compliant product is giving halal profit.

As far as Islamic banking is concerned Mezaan is the first bank who takes license of Islamic banking from State Bank of Pakistan. However, there are number of banks in Pakistan who were following Islamic banking principles even before Meezan. Albaraka Islamic bank is one of them, Faysal bank to the some extent. Now there are many banks that have Islamic banking divisions (separate branches for these operations). Alfalah, Khyber, MCB are among those. They all declare final rates after the finalization of results of the period mostly on half yearly basis. They either pay profit after the period or made payment on provisional rates and adjust after the period. I know Albaraka and they are working on the same principle.

Business on fixed return basis……………… I don’t think this is according to best Islamic practices. Decision making right is not the criteria. One has right on profit from the day he invests in business and should not be fixed; he should entitle the return based on performance of the business. If business makes a loss it should bear it in proportion.

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Plz Smile ...... it cost just some pleasent breaths!

Edited by - fidarsi on Mar 24 2004 41040 PM
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Have to agree with you... You are totally correct... But as far as I have learnt, that 'decision making' thing also comes in the 'halal' boundaries of Islam... Although I will reconfirm with a different scholar this time.

[farazthegreat]

Here's a thought....
If I lend my friend RS. 1 lac and for ten years, I can't charge him anything extra regardless of whatever inflation takes place during that period. But if instead of money I lend him, say, 1 KG Gold (worth 1 lac just for simplicity), after ten years, he will have to return me 1 KG gold. Now if the price of gold has doubled, will the extra lac be considered interest/Riba (whichever is appropriate) and is it Haram. If not, why can't we use something like this to counter inflation.

[Apocalypse]

keep thinking and you'll be a Millionaire.
inshallah

[sumaaan]

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Here's a thought....
If I lend my friend RS. 1 lac and for ten years, I can't charge him anything extra regardless of whatever inflation takes place during that period. But if instead of money I lend him, say, 1 KG Gold (worth 1 lac just for simplicity), after ten years, he will have to return me 1 KG gold. Now if the price of gold has doubled, will the extra lac be considered interest/Riba (whichever is appropriate) and is it Haram. If not, why can't we use something like this to counter inflation.


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Okay so I discussed this question with a very learned islamic person...

Actually when you invest money, technically speaking, you enter into a contract with the entity/business... Hence, its their duty to pay you the relative profits that your investment has earned you...

But when you give someone 1KG of gold, you don't enter into any sort of contract with that person (considering you're not a raw gold supplier businessman)... In simpler terms, that gold is 'Amanat', and that person has to return it to you someday as it is.

Therefore, the distinction between this example is that of 'Amanat' and 'Investment'.

[smrizvi68]

ASA,

Interest(Riba) is totally Haraam in Islam If we argue against it we are going aganist the Quran & Hadis. I really appreciated Mr. Khan description about the matter. but we should know the defination of Interest & should research about the same I thing Mofti Taqi Usmani describe it in detail & we should read his books on that particular topic. May Allah give us strenght to avoid Interest in our life.

regards

Sohail

[derivativetrader]

The current topic seems to be very vibrant!!

OK.., so what about Inflation, the general sustained rise in the price level? Does Islam has any teaching on this?

Would appreciate some feed backs.

Thanks, DT

[bilhash]

Salam Folks,
Even though I have strong arguments against the existing theories declaring interest as it is as Riba and thus haram, still I am not indulged in interest based activities taking heed from the hadith which can be summarised as "If you have a doubt about something, leave it..." Excuse me as I am not able to recall it corectly and fully.. Would just like to add some dimensions to the discussion

Economics is actually the subject here, and not banking and acounting. If you refer any book of Economics, you will find FOUR factors of Production namely LAnd, Labour, Capital and Organisation. In order to produce an economic good, one or more of above factor is needed. Now each factor comes with a price. Land is paid Rent, LAbour is paid wages, Capital is paid interest and Organisation is paid Profit. People who wish to remove capital, a basic factor, are destroying the very foundation of economics. Thus, this utopian so called Islamic economic system wont work in the absence of capital.

Quran declares Riba as haram. In english we have two words (i) Interest (ii) Usury. I believe that its this Usury which is haram and not interest. Usury is that exorbitant rate of interest which defeats the purpose of national economic development and well being of society as a whole and is descriminatory and exploitory in nature. ISlam protects a poor and needy from exploitation. In the times of prophet Muhammad (saw), such interest was enforced. People, for personal needs and obligation (and not business needs), were subjected to such exploitation which is in direct conflict to the virtues of Islam. Thus Quran declared it as a war against Allah and Prophet for those who are indulged in such exploitation. Still, in our feudal society, and even if you visit to Liyari and Fishrey, you will find such interest rates which exceeds 100%. This has made the life of poor peasants and fishermen a real hell, but you wont find any moulana sab coming up for their rescue.

As per well known econmic theories, Prices are the direct effect of supply and demand forces. IF Land is scarce, the price will shoot up. Example is the prices of properties in Tokyo and Newyork. Now match this against the price of Capital. There is abundance of Capital in Newyork and Tokyo and thus the interest rates are as low as ZERO to 2% in those top capitalistic countries. Now who can term this exploitation? In furtherance of my real needs and to increase my standard of living, if I seek capital for such a nominal interst rate, how can Allah declare a war on me? Does this looks logical?

I have more such good reasons which have made me to believe that our moulanas and scholars have a misunderstanding in fully appreciating the philosophy of the modern econmic system. But referring back to my first point, since they are all nearly unanimous, I am not indulging myself in interest.

I would like if anyone can correct me on those.

Wassalam.
Bilal.

[Rafay]

Dear Friends
I m thankful to one of my good friend who informed me about this forum.

I am 100% agree with Bilhash that any thing which which creat doubt leave that.

Actaully Islamic banking or trading emphasizes over profit and loss shairing concept.

Interest is only acceptable if there is same psooibilty of loss in that transection.

And this mechanism how how implemnet and how excesise and who implement are other relatively important question to think.

Now a days in pakistan we have just given the islamic name but in fact machenisim is remain same.

Positive thing which we r required is what is mode of Islamic Banking in its real spirit and that on this issue we r in need of "Ijtihad" not by "Qias" from learned islamic scholors paneel