Prohibition of Riba in Financial Transactions is Key in Islamic Finance

“And for their charging Ribā (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.” Surat an-Nisa 4:161.
Many disbelievers don’t recognize that Allah allowed trading but prohibited interest
transactions. In addition to the verse quoted above, there are 11 other verses in the Quran –
2:275-281, 3:130-132, 4:161, and 30:39 that highlight the prohibition of riba, writes Mariam Nalunkuuma. 

In our previous article, we noted that the basic principles of Islamic finance according to the
teachings and the practices of Prophet Muhammad (PBUH) are the prohibition of
riba (usury/interest) in all transactions and that transactions should be free
from gharar (speculation or unreasonable uncertainty), there should be no Maysir (gambling)
and that all businesses and investments should be undertaken on the basis of halal
(legal/permitted) activities, thus invest in businesses that are only permissible.

The most common example of riba being our focus today is taking a loan from a commercial bank or a moneylender and in return, the borrower repays the money at a later date with a percentage
increase over the original amount. Any additional income, excess compensation or unjustified
return got either in buying-selling or lending-borrowing transactions is riba. 

Arguments for the unfairness of riba to the lenders have been fronted in many ways. For
example, one borrowing money makes a profit but does not make any additional income to
the lender when returning it. Another example is when one borrowed money ten years ago
and gives it back to the lender today without any additional amount. All such arguments are
considered unfair and unjust and have led to debates about its prohibition. 

On the ninth day of Dhul Hijjah, 10AH, Prophet Muhammad (PBUH) delivered a very short
but powerful sermon (Khutbah) in the Uranah Valley of mount Arafat. The Prophet’s words
were without any ambiguity and the clarity of the khutbah is still undisputed because it was
directed to the entire humanity. 

In his sermon, Prophet Muhammad emphasized the rule of economic justice and declared
that riba is haram. Many studies have quoted Prophet Muhammad (PBUH) saying, “Allah
has forbidden you to take usury (interest); therefore, all interest obligations shall henceforth
be waived. Your capital is yours to keep. You will neither inflict nor suffer any inequity.
Allah has judged that there shall be no interest.” 

Quran chapter 2:275 where Islamic financial activities are derived encourages asset-backed
businesses and transactions which implies that all financial transactions must be representative of real transactions or the sale of goods, services, or benefits. 

Riba is not only confined to money or limited to an increase in a loan contract. It extends to
all kinds of commodities in which there is an idea of stipulated increase when a loan or a commodity is taken or given. Practical forms of riba including riba in loan contracts (riba al-nasiyah) and riba in a sale or exchange contract (Riba al-Fadl) will be analyzed in our next article.

We are all living in a world that revolves around riba, in form of banking, financing, and
mortgage among others. But we are duty-bound and are encouraged to keep away from
dealings with any financial activities which expose us to riba transactions. So, as we share
this information and knowledge, keep in mind that Allah sternly warns and threatens whoever
persists in dealing in riba after having been warned. Chapter 2:275 states that; “so whosoever
receives an admonition from his Lord and stops eating riba, shall not be punished for the
past, his case is for Allah to judge. And for those who have knowledge that Allah made usury unlawful, and refrain from indulging in it as soon as they acquire the knowledge, then Allah
will forgive their previous dealings in riba.”

As a Muslim who bows your head to the creator every day, you can successfully live
without riba especially now that Islamic microfinancing is being implemented by the
Microfinance Support Centre through the support of the Islamic Development Bank.