For millions of Muslims, banks are institutions to be avoided. Islam is a religion which keeps Believers from the teller’s window. Their Islamic beliefs prevent them from dealings that involve usury or interest (Riba). Yet Muslims need banking services as much as anyone and for many purposes: to finance new business ventures, to buy a house, to buy a car, to facilitate capital investment, to undertake trading activities, and to offer a safe place for savings. For Muslims are not averse to legitimate profit as Islam encourages people to use money in Islamically legitimate ventures, not just to keep their funds idle.
The best known feature of Islamic banking is the prohibition on interest. The Qur’an forbids the charging of Riba on money lent. It is important to understand certain principles of Islam that underpin Islamic finance. The Qur’an is clear about the prohibition of Riba, which is sometimes defined as excessive interest. “O You who believe! Fear Allah and give up that remains of your demand for usury, if you are indeed believers.” Muslim scholars have accepted the word Riba to mean any fixed or guaranteed interest payment on cash advances or on deposits. Moreover, interest also using in the loan banking. So, the problem is , now we as a human sometimes need borrowed the money for our life. Then in this time, The companions who can give the borrowed money are use the Interest to their costumers when the costumers paying their loan.
According to the statement above, if we see now. The conventional bank give the interest to their costumer automatically, when they saving money or borrowing money to or from the bank. So, the questions are:
1. What actually the Riba mean ?
2. How the system of bank loans (Conventional Bank System & Islamic Bank System) actually?
3. is that prohibited or permitted, if we take or pay the interest from the bank when we borrow the money from the conventional bank ?
Generally, the author try to find the certain rule of interest. Then, the author try to connected with the Implementation of the conventional banking system. Lastly, the author will get the certain rule of the interest from the bank to their costumer, when the costumer borrowing money from the bank.
RIBA (USURY AND INTEREST) WITH THE CERTAIN RULE
2.1 The Definition of Riba / Interest
The literal meaning of interest or Al-RIBA as it is used in the Arabic language means to excess or increase. In the Islamic terminology interest means A forced “increase of value” in “the medium of exchange” that is loaned or swapped.1
Below is explanation of different meaningful parts of this definition:
– A forced means demanded, desired, claimed, requested, practiced, agreed etc.
Any of the above or similar words would fall under the “forced” category that define and create a liability on other party.
– Increase in value means the increase in terms of value which comprises the quantity and the quality, there is no issue of the minimum or maximum increase, fixed or variable increase, just increase no matter how small or large it is and how that increase is defined.
– The medium of exchange means any thing that can serve the purpose of exchange of good(s) and/or service(s) in the society at any level i.e., international, national, or local. We all know and recognize currency and gold etc. as the best examples of the medium of exchange, but still for instance in some parts of the world, agro-labor are paid in grains from the harvest they had worked upon, and that grains serve as the medium of exchange on a very localized level and certainly that would fall under the classification of “medium of exchange”. Other than this, any thing would become a “medium of exchange” if the loaning party forces the borrower to pay in extra on return.
1. Jamaluddin, Dindin. Loan Banking and Riba. www. Hazariba.com
– That is loaned or swapped means the same medium of exchange that was given as loan or used in the exchange. It is generally understood that exchange is “on spot” and loan is “time related” but both the transactions are based on a single produce, no increase either on spot or in a time frame is allowed because there is a definite potential of using the exchange mechanism for riba if it were only banned in loan transaction. Some people question about the sense of allowing exchange of equal quantity and quality on spot, why some one would do that? The answer is very simple, if one has a currency note of 100 and need to change it into lower denominations, what he gets must be equal to 100 in any combination of lower denominations.
Riba (Usury) is of two major kinds: 1
1. Riba An-Nasia – Interest on lent money
2. Riba Al-Fadl – Taking a superior thing of the same kind of goods by giving more of the same kind of goods of inferior quality, e.g, dates of superior quality for dates of inferior quality in great amounts.
As muslims, our main concern when it comes to financial transactions is to avoid Riba in any of its forms, despite the fact that the basic foundation of the world economics and finance today is that of riba and dealing in usury.
The Prophet has foretold us of a time when the spread of riba would be so overwhelming that it would be extremely difficult for the Muslim to avoid it. This situation calls for muslims to be extra cautious before deciding on what money payment of financial methods to use in any personal or business transaction.
2.2 The Certain Rule of Riba
2.2.1 How is Interest Illegal
1. Doi, Abrurrahman. 2002. Shari’ah :The Islamic Law. Kuala Lumpur : A.S.Noordeen. p.375
2. Jamaluddin, Dindin. Loan Banking and Riba. www. Hazariba.com
ü The first one is in Surah Al-baqarah verse no.275
“Those who devour usury will not stand except as stands one whom the Satan by his touch has driven to madness. That is because they say, “trade is like usury”, but Allah has permitted trade and has forbidden usury”, In the next verse verse 276 in the same place he says, “Allah will deprive usury of all blessing, and will give increase for deeds of charity, for he does not love any ungrateful sinner.”
ü Two verses later in verse 278 he says, “Oh you who believe! Fear Allah and give up what remains of your demand for usury if you are indeed believers.” In verse 279 he says, “If you do not, take notice of war from Allah and his Messenger sallallahu alaihe wasallm but if you repent you shall have your capital sum. Deal not unjustly and you shall not be dealt with unjustly.”
ü In the second place in Surah Aal-Imran, verse no.130 Allah says,
“Oh you who believe! Devour not usury doubled and multiplied; but fear Allah that you may prosper.”
2.2.2 Ahaadith Concerning Interest
These ahaadith have been taken from Mishkat-ul-Masabih under the section of interest and the English translation has been taken from its English version written by Al Hajj Moulana Fazl Karim (218-227 vol. II) 1
Ø Hazrat Jabir radiyallahu anhu has reported that the Messenger of Allah sallallahu alaihe wasallm cursed the devourer of usury, its payer, its scribe and its two witnesses. He also said that they were equal (in sin). (Muslim)
1. Suhendi, Hendi. 2000. Fiqh Muammalah. Bandung : Grafindo Media Pratama. pp. 206-208
THE LOAN BANKING SYSTEM AND THE CERTAIN RULE
3.1 The Loan Banking In The Conventional Banking System (Defining The Rule)
As all the banks are creating money and supplying in to the economy on interest and without any doubt all of them are practicing the same technique, so let us consider there is only one bank in our example that creates some money and supply in to the people’s economy.
Suppose Bank XYZ creates Dirhams 100,000 and supplies it at an interest rate of 10% per annum to several entrepreneurs and governmental units active in the economy, remember there is no money available in the economy from any other source. The bank has taken substantial collateral or guarantee as security of its money from each borrower.
Illustration of Loan banking
See in the following diagram – the borrowers intake loan and repayment liabilities at the end of the first year: It is very simple and clear that at the end of the first year, a combined sum of Dirhams 110,000 is due on all borrowers to repay to the loaning bank.
1. Siddiqi, N, Muhammad. 1983. Banking Without Interest. London : the Islamic Pondation. Pp.53-69
But the money available in the economy is only Dirhams 100,000 as the bank is only supplier of money, so from where the rest 10,000 would come that is the difference in the borrowers intake and total repayment amount from NOWHERE. Yes, that is right from nowhere because that money does not exist in the economy.
Look at the scene, the bank is the only supplier of money, it creates and supplies 100,000 in the economy and that is the total money available in the economy, but as per loan agreements – these borrowers collectively have to pay back 110,000. How is that possible? There is no way. Don’t you believe, it is 100% like this – no less. This is cheating and criminal foul play.
So what will happen, at least one or more of these borrowers would default on their loan(s) and would loose their personal assets or belonging that they had put as security to the bank for the repayment.
The money creator has designed a mechanism that would force few of the borrowers each year to default so that bank could forfeit the security assets and gain wealth by foul play.
This is an eye opening example for those who previously had no idea about the mechanism of banks as how they operate and cause artificial shortage (scarcity) of the money in the societies. This is happening every where in this world from USA to the smallest country on this beautiful planet. This artificial scarcity of money is the root cause of people’s problems from hard struggle for surviving to the loss of happiness from their lives.
3.1.2 Riba at Loan Banking In Conventional Banking System
In a Riba (interest) based system, people are not aware of this foul play – borrowers think that they will manage to repay the principal plus Riba (interest) as they think it would be coming from some where else, but the fact is – every borrower would be in battle with others where some borrowers have to lose in order for others to win, some would fail to pay their loans in order for others to get the sum they need to pay off the Riba (Interest). When seen in totality, the supply side is always in deficit and the liability is always in excess due to Riba (interest), the total combined supply cannot discharge the liability.
Let us begin with the economic reasoning of WHY:
v The availability of each produce is limited, the liability cannot exceed the availability limit.
v In any transaction, if a liability of produce “in excess” of “the produce available” is created, that extra liability would be artificial because excess quantity of produce does not exist.
This universal economic code applies to each and every type of produce; to further get in to the explanation of the rule, let us now identify what represents “the produce”, “the transaction”, and “extra liability”:
1) The Produce
In its general expression “the produce” is any thing available to human beings for their use or consumption, but here specifically those produce that can be involved in a transaction, it is best to take historical standards of transactions which are based on produce like gold, silver, grains, currency etc. because throughout history all transactions are carried out in publicly acceptable produce only. These produce have served the societies as “medium of exchange”, so it is more appropriate logically and historically to consider the produce as “the medium of exchange” which is again a general expression and can accommodate any other commodity/produce that may be used in a transaction.
2 )The Transaction
In this universal economic principle, the transaction is based on a single produce and naturally it can only be a transaction of loan or exchange and nothing else. Although donations/grants also involve only one produce but that is not a transaction because a transaction means exchange of good(s) and/or service(s) either on spot or in any specified time frame involving one or more types of produce.
3) Extra Liability
Riba (interest, usury) is that extra liability created in excess of the produce available and that does not exist. Every liability is a demand in practice, the basic rule of economics known to every one is that to maintain economic equilibrium (stability) in the society, the supply side should be equal to the demand, if the demand is more than the supply – a shortage will occur.
Creating an extra liability means creating an extra demand without increasing equal supply, this will start a never ending mechanism of perpetually increasing the shortage of that produce in the society.
The illustration and explanation above these mention that’s riba was prohibited just to prevent the creation of “extra liability/demand” because that is fake and “does not exist” physically, this artificial “extra liability/demand” creates scarcity of the produce in the society and unjustly accumulation of the produce in few hands. Riba (interest, usury) is a mechanism and dangerous weapon that has a power to get hold of assets/properties of individuals, enterprises, and nations deceitfully. This is unfair and against the nature, so ALLAH banned Riba (interest, usury) very strictly to stop this criminal action.
Nature is the Limit in Islam; any thing not natural is prohibited, stopped, and declared illegal. The above economic reasons are the only base for the prohibition of Riba, ALLAH has allowed everything that is natural but given its strict judgment to stop any behavior, agreement, and practice that is not natural.
3.2 The Loan Banking In The Islamic Banking System (Defining the rule)
3.2.1 Riba and Islamic Banking
Islamic banking, which principally should be completely free from Riba (interest), is practiced under the same “fractional reserve” banking system that has to maintain a minimum “capital adequacy ratio” instructed by central bank of the country they are operating in.
Capital Adequacy Ratio (CAR) is a defined percentage of customer’s deposit that goes to the central bank while the customer’s bank is free to lend/invest remaining part to its other customers, also it is the main constituent of formula that define the “money multiplying factor” in monetary terms. The banks to create money use “Money multiplying factor”. One of the simplest formula for money multiplying factor is:1
MMF = DEPOSIT/CARAn
1. Fachrozi, Ahmad. 2005. Interses and Islamic Banking. http://www.inter-islam.org/Prohibitions/intrst.htm.
3.2.2 Important Observation
In the existing system of money creation by the banks, what an Islamic Bank would be doing? If they are also involved in the creation of money and issuing banking instruments based on the newly created money, then they must be extremely conscious in designing financial and investment instruments, a wrong assessment or interpretation of Islamic principles may create the same effect of the instrument in the society and the economic system as Riba (interest) is doing. This is extremely sensitive subject. This is not the problem of Islamic directives on financial dealings, but it’s the limitation imposed by the controlling master economic system that is ruling and is non-Islamic. There are certainly many questions regarding this system of money creation like who should create money and when? Unless, Islamic spirit of financial system is not inducted at the governmental level, there cannot be a true Islamic economic society.
It has been clearly mentioned in Quranic verses and Hadiths that Riba relates to the increase, and surely that is the truth because only increase can create
artificial scarcity of the produce in the society, while if we see the discounting,
The prevailing misunderstanding in the concept of Riba (Interest) that relates it with time as stated by many economists and scholars, has created unrealistic confusion between banking Interest and discounting, most people think that both are same things but actually they are not. The reason of this confusion comes from the practice of applying time-based rate in both cases. Riba is independent of time, it can exist in a hand-to-hand exchange in zero time frame to any large time frame incase of loans, but it is surely an increase not the decrease.
It is a well thought and thoroughly researched conclusion that discounting of financial instruments/bills does not come under the prohibition of Riba. The discounting mechanism inherits a strong characteristic of keeping the circulation of money natural and is an alternative driving force for economic activity for banks and thus for capital.
Discounting is opposite of a Loan transaction (rather one may call it a negative of interest/riba mechanism), the following comparison may be helpful to emphasize on this difference :1
When : Capital is in-hand
When : Capital is not in-hand
Scenario : I give you an amount of 100, after one year, I receive 110
Scenario : I give you a Bill of 100, I receive 90 on spot, after one year, you receive 100
Analogy : I sold 100 for 110
Analogy : I sold 100 for 90
An increase of 10 is noticed
A decrease of 10 is noticed
This increase of 10 is an extra liability created on the borrower
This decrease of 10 is basically sharing of what is available
Nature : A loan is required when the wealth has to be created.
Nature : Discounting is required after the wealth is created.
Activity is dependent on loan
Activity is already done.
Differences between Loan transaction and Discounting transaction
Beside above tabulated differences, there are other differences in nature of these two types of transactions, but the below are two basic differences further explained as :
- The increase of 10 in loan is artificial and does not exist in the transaction cycle as part of the principal transacted amount rather is an extra created liability on the part of the borrower, while -10 in discounting is a sharing part of the transacted amount.
1. Jamaluddin, Dindin. Loan Banking and Riba. www. Hazariba.com
- I give 100 and receive 110 in loan, while I give 100 and receive 90 in discounting. (The analogy to this is – I sold my 100 for 110 in loan and my 100 for 90 in discounting)
Obviously both can not be same. Some people may ask that who gave me 90 on spot would actually get 100 after one year and that is an increase in his money. This is a very common misconception that is noticed and therefore must be replied accurately. Please review : 1
- The capital is not rejected in Islam or in nature, the role of capital is guided with the prohibition of riba and some other ethical and social limitations, otherwise there would be no meaning to Islamic modes of financing. The benefits of capital can not be rejected out rightly, but definitely all those benefits must be permitted which are lawful.
- It must be noted here, I am giving him 100 for discounting and not that way as he is giving me 90 as loan. These are two completely different situations.
- Although already mentioned above but to emphasize again it is repeated here that only the similarity of time based rate as practiced these days in loan and discounting transactions can not become the reason for equating the loan and discounting transactions and classifying both as riba transaction, whereas these are two completely different types as tabulated above.
In short, discounting by any means does not have the must elements of riba as discussed and defined here earlier, it is a real and much powerful mechanism that can be explored as the lawful driving force for the capital in the Islamic banking industry. 2
1. Sutanto. Heri. 2005. Sistem Bank Shari’ah. Bandung : IAIN Press. pp.48-53
2. Sutanto. Heri. 2005. Sistem Bank Shari’ah. Bandung : IAIN Press. pp. 78-79
Riba was prohibited just to prevent the creation of “extra liability/demand” because that is fake and “does not exist” physically, this artificial “extra liability/demand” creates scarcity of the produce in the society and unjustly accumulation of the produce in few hands. Riba (interest, usury) is a mechanism and dangerous weapon that has a power to get hold of assets/properties of individuals, enterprises, and nations deceitfully. This is unfair and against the nature, so ALLAH banned Riba (interest, usury) very strictly to stop this criminal action.
Loan banking is one of economic method which use the interest or riba. But its depend to the using of system banking itself. Because in this time, we have been implemented the capital or conventional system and also the Islamic banking system.
In the conventional loan banking system, they use extra liability. Creating an extra liability means creating an extra demand without increasing equal supply, this will start a never ending mechanism of perpetually increasing the shortage of that produce in the society. So the author find the certain rule of this loan banking system is prohibited (Haram).
On the other hand, we also have loan banking in Islamic banking system. This loan banking system use discounting. In short, discounting by any means does not have the must elements of riba as discussed and defined here earlier, it is a real and much powerful mechanism that can be explored as the lawful driving force for the capital in the Islamic banking industry.
Finally, the author only give the advice : To should not use the loan banking in conventional bank. But, if we have urge situation when we need money for our economic life, is better if we use loan banking in the Islamic banking system.
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Doi, Abrurrahman. 2002. Shari’ah :The Islamic Law. Kuala Lumpur : A.S.Noordeen.
Fachrozi, Ahmad. 2005. Interses and Islamic Banking. http://www.inter-islam.org/Prohibitions/intrst.htm.
Jamaluddin, Dindin. Loan Banking and Riba. www. Hazariba.com
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