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Islamic Finance - Riba
The Arabic word riba can be literally rendered in English as either usury or interest. Regardless of the amount that is paid back, any premium that is levied for money that is borrowed is considered to be riba. Riba can be defined in its most basic form as the gain of an advantage by one party at the expense of another party without any adequate consideration being given. The question of this unwarranted benefit is addressed by Islamic commercial law in the context of two possible transactions, namely a contract for a loan or cash exchange, as well as a contract for the trade of barter goods.
There are two distinct groups of assets that can be subject to riba, and all Muslim jurists have come to the conclusion that these groups are currency or money, as well as a few commodities, primarily food products. The conditions for completing an exchange that involves either of these kinds of assets are exactly the same.
According to the tradition, the Prophet Muhammad was reported to have said the following: "Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, like for like, equal for equal, hand-to-hand, and if the commodities differ, then you may sell as you wish provided the exchange is hand-to-hand."
These requirements are only relevant when there is a transaction involving the exchange of one currency for another currency, regardless of whether the currencies involved are the same or different. The standards also apply to the process of exchanging one food item for another food item, regardless of whether the new food item is of the same type or a different type entirely.
When exchanging assets of the same class, you are required to hand over an amount of the counter value that is equivalent to the assets themselves. When one currency is exchanged for another currency or when one food item is traded for another food item, spot exchange, also known as the simultaneous delivery of counter values, is necessary. This is the case regardless of whether the currencies or food items being exchanged are of the same type or of a different type. In the event that the delivery is delayed in any way, the exchange will be considered to be equivalent to riba, also known as riba al-nasiah, which is simply riba because of the delay in the exchange or delivery of these two countervalues.
When seen from a different angle, the transaction involving these two assets is similarly subject to the same amount or quantity of the two counter values provided that they are of the same kind. Should this requirement not be met, the practice of riba known as riba al-fadl, in which riba is determined by an excess of one of the counter values, could emerge as a result.
However, if they are of different sorts, such as GBP for USD or wheat for barley, the requirement to have the same quantity does not apply because it is not relevant.
This custom forms the basis for the permissibility of currency exchanges that are carried out on the basis of the current rate of exchange, such as exchanging one thousand pounds sterling for three thousand dollars, provided that the transaction is carried out on a spot basis. Because it is not in accordance with the needs of the tradition, any deferral of the exchange or delivery, such as in the case of a forward currency exchange, is forbidden. This is because it is not in line with the standards of the tradition. When exchanging two separate usurious products, such as USD for GBP, the quantity that is being exchanged is irrelevant.
Because of this, the Riba theory may be summed up as follows:
RIBA(1) is defined as the exchange of two similar usurious items for differing countervalues and/or for deferred exchange; for instance, the exchange of one another on a deferred basis of one thousand pounds for one thousand and two hundred pounds.
RIBA(2) is the exchange of two different types of usurious goods for postponed exchange. One example of this would be exchanging one thousand pounds for one thousand dollars on deferred exchange.
According to the information presented above, riba (also known as interest or usury) is applicable to situations in which a borrower is required to repay the main amount borrowed in addition to a premium in the same currency. This type of loan would be granted in British pounds by conventional banks and other institutions. Because the borrower is compelled to pay more than he borrowed and repayment will take place in the future, this practice of modern Riba in the banking sector is related to both Riba al-nasiah (Riba by postponement) and Riba al-fadl (Riba by excess). This is the reason why traditional savings accounts and fixed deposit accounts, in addition to all forms of financing that are based on loan-for-interest, do not comply with the principles of Shariah. The riba theory can also be used to the exchange of currency, which can take place exclusively in the spot market. It is not possible to engage in forward or future currency transactions.
It is essential to provide an explanation for one exception to the aforementioned principles of exchange involving either monetary values or various types of food. A loan contract known as Qard or Hassan is permissible under Islamic commercial law; nevertheless, the interest charged on the loan cannot exceed the legal maximum, known as riba. However, Islamic commercial law "tolerates" the necessity of needing to exchange two countervalues on a spot basis because this demand is inconsistent to the notion and philosophy of a loan, which is fundamentally to enable the borrower to settle their loan obligation at some point in the future. It makes no sense to give them a loan if they have to repay it so quickly after taking it out, because then the loan is meaningless. This exception is given in order to make it possible for individuals to engage in the activity of lending fungible items or money without charging a fee. The prohibition of any excess in the repayment of the loan is far more pertinent to the discussion. If the borrower is in need of financial assistance in the form of money, then the lender may be willing to accept a delay in the repayment of the loan for a period of time.
Therefore, the concept of riba could be summed up as follows: "The stipulation of an excess for the lender in loan is prohibited, and it amounts to riba, whether the excess is in terms of quality or quantity or whether the excess in a tangible thing or a benefit, and whether the excess is stipulated at the time of contract or while determining the period of delay for satisfaction or during the period of delay, and, furthermore, whether the stipulation is writing or is part of the customary practice.
The Arabic word riba can be literally rendered in English as either usury or interest. Regardless of the amount that is paid back, any premium that is levied for money that is borrowed is considered to be riba. Riba can be defined in its most basic form as the gain of an advantage by one party at the expense of another party without any adequate consideration being given. The question of this unwarranted benefit is addressed by Islamic commercial law in the context of two possible transactions, namely a contract for a loan or cash exchange, as well as a contract for the trade of barter goods.
There are two distinct groups of assets that can be subject to riba, and all Muslim jurists have come to the conclusion that these groups are currency or money, as well as a few commodities, primarily food products. The conditions for completing an exchange that involves either of these kinds of assets are exactly the same.
According to the tradition, the Prophet Muhammad was reported to have said the following: "Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, like for like, equal for equal, hand-to-hand, and if the commodities differ, then you may sell as you wish provided the exchange is hand-to-hand."
These requirements are only relevant when there is a transaction involving the exchange of one currency for another currency, regardless of whether the currencies involved are the same or different. The standards also apply to the process of exchanging one food item for another food item, regardless of whether the new food item is of the same type or a different type entirely.
When exchanging assets of the same class, you are required to hand over an amount of the counter value that is equivalent to the assets themselves. When one currency is exchanged for another currency or when one food item is traded for another food item, spot exchange, also known as the simultaneous delivery of counter values, is necessary. This is the case regardless of whether the currencies or food items being exchanged are of the same type or of a different type. In the event that the delivery is delayed in any way, the exchange will be considered to be equivalent to riba, also known as riba al-nasiah, which is simply riba because of the delay in the exchange or delivery of these two countervalues.
When seen from a different angle, the transaction involving these two assets is similarly subject to the same amount or quantity of the two counter values provided that they are of the same kind. Should this requirement not be met, the practice of riba known as riba al-fadl, in which riba is determined by an excess of one of the counter values, could emerge as a result.
However, if they are of different sorts, such as GBP for USD or wheat for barley, the requirement to have the same quantity does not apply because it is not relevant.
This custom forms the basis for the permissibility of currency exchanges that are carried out on the basis of the current rate of exchange, such as exchanging one thousand pounds sterling for three thousand dollars, provided that the transaction is carried out on a spot basis. Because it is not in accordance with the needs of the tradition, any deferral of the exchange or delivery, such as in the case of a forward currency exchange, is forbidden. This is because it is not in line with the standards of the tradition. When exchanging two separate usurious products, such as USD for GBP, the quantity that is being exchanged is irrelevant.
Because of this, the Riba theory may be summed up as follows:
RIBA(1) is defined as the exchange of two similar usurious items for differing countervalues and/or for deferred exchange; for instance, the exchange of one another on a deferred basis of one thousand pounds for one thousand and two hundred pounds.
RIBA(2) is the exchange of two different types of usurious goods for postponed exchange. One example of this would be exchanging one thousand pounds for one thousand dollars on deferred exchange.
According to the information presented above, riba (also known as interest or usury) is applicable to situations in which a borrower is required to repay the main amount borrowed in addition to a premium in the same currency. This type of loan would be granted in British pounds by conventional banks and other institutions. Because the borrower is compelled to pay more than he borrowed and repayment will take place in the future, this practice of modern Riba in the banking sector is related to both Riba al-nasiah (Riba by postponement) and Riba al-fadl (Riba by excess). This is the reason why traditional savings accounts and fixed deposit accounts, in addition to all forms of financing that are based on loan-for-interest, do not comply with the principles of Shariah. The riba theory can also be used to the exchange of currency, which can take place exclusively in the spot market. It is not possible to engage in forward or future currency transactions.
It is essential to provide an explanation for one exception to the aforementioned principles of exchange involving either monetary values or various types of food. A loan contract known as Qard or Hassan is permissible under Islamic commercial law; nevertheless, the interest charged on the loan cannot exceed the legal maximum, known as riba. However, Islamic commercial law "tolerates" the necessity of needing to exchange two countervalues on a spot basis because this demand is inconsistent to the notion and philosophy of a loan, which is fundamentally to enable the borrower to settle their loan obligation at some point in the future. It makes no sense to give them a loan if they have to repay it so quickly after taking it out, because then the loan is meaningless. This exception is given in order to make it possible for individuals to engage in the activity of lending fungible items or money without charging a fee. The prohibition of any excess in the repayment of the loan is far more pertinent to the discussion. If the borrower is in need of financial assistance in the form of money, then the lender may be willing to accept a delay in the repayment of the loan for a period of time.
Therefore, the concept of riba could be summed up as follows: "The stipulation of an excess for the lender in loan is prohibited, and it amounts to riba, whether the excess is in terms of quality or quantity or whether the excess in a tangible thing or a benefit, and whether the excess is stipulated at the time of contract or while determining the period of delay for satisfaction or during the period of delay, and, furthermore, whether the stipulation is writing or is part of the customary practice.
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