A CRITICAL ANALYSIS ON RIBA & GHARAR IN ISLAMIC JURISPRUDENCE

A CRITICAL ANALYSIS ON RIBA & GHARAR IN ISLAMIC JURISPRUDENCE By SYUHAEDA AENI BINTI MAT ALI IZUAN IZZAIDI BIN AZMI SYUKRINA ALINI BINTI MAT ALI RAFIDAH@MALISSA BT DATUK SALLEH OCTOBER 2009

TABLE OF CONTENTS Page SURAT PENYERAHAN LAPORAN 11 REGISTER OF RESEARCH TEAM ACKNOWLEDGEMENT ABSTRACTS IH V 1V CHAPTER 1: INTRODUCTION 1.1 Introduction 1 1.2 Problem Statement 2 1.3 Objective of study 2 1.3 Literature Review 3 1.4 Methodology 5 1.5 Limitation 5 1.6 Significant of the study 1.7 Outline of chapters 6 6 ii

CHAPTER 2: AN OVERVIEW ON RIBA (INTEREST) 2.0 INTRODUCTION 2.0.1 Ribainqur'an 8 2.0.2 Riba in hadith 11 2.0.3.Scholars view 13 2.1 CLASSIFICATION OF RIBA 2.1. Riba al-nasiah 15 2.2. Riba al-fadl 15 CHAPTER 3: AN OVERVIEW ON GHARAR 3.1 Definition 17 3.2 Conditions for gharar 19 3.3 Prohibition of gharar 20 3.3.1 Spectrum Of Prohibition 21 3.3.2. Excessive And Minor Gharar 23 3.3.3 Sale of Unseen (ghaib) and the Non Existant 26

CHAPTER 4: COMPARATIVE STUDY BETWEEN RIB A AND GHARAR 4.1.1. Scope or subject matter 30 4.1.2 Effect of riba and gharar 34 4.1.3. Possibility of removing gharar 38 4.1.4. Islamic banks are more exposed to gharar, not riba 40 CHAPTER 5: ISSUES RELATING TO ISLAMIC BANKING PRODUCTS 43 CHAPTER 6: RECOMMENDATIONS TO ISLAMIC FINANCIAL INSTITUTION IN MALAYSIA TO ENSURE THEIR PRODUCTS ARE INTEREST-FREE AND GHARAR-FREE 46 CONCLUSION 57 BIBLIOGRAPHY 58

Tarikh : 30 OCTOBER 2009 No Fail Projek: Penolong Naib Canselor (Penyelidikan) Institut Pengurusan Penyelidikan Universiti Teknologi MARA 40450 Shah Alam Yang Berbahagia Prof, Laporan Akhir Penyelidikan "A Critical Analysis Jurisprudence" On Riba & Gharar In Islamic Merujuk kepada perkara di atas, bersama-sama ini disertakan 3 (Tiga) naskhah laporan Akhir Penyelidikan bertajuk "A Critical Analysis On Riba & Gharar In Islamic Jurisprudence " Sekian, terima kasih Syuh&da Aeni Mat Ali Projek Penyelidikan ii

RESEARCH TEAM MEMBERS SYUHAEDA AENI BINTI MAT ALI PROJECT LEADER IZUAN IZZAIDI B AZMI PROJECT MEMBER SYUKRINAi PR LINI BINTI MAT ALI bt MEMBER Signature RAFIDAH (a) MALISSA BT DATUK SALLEH PROJECT MEMBER Signature iii

ACKNOWLEDGEMENT Our greatest appreciation and sincere thanks are extended to all those involved directly or indirectly in completing this study. Special thanks to: Dr Mohd Daud Bakar The President/CEO of International Institute of Islamic Finance (IIF) Inc. (BVI) and Amanie Business Solutions Sdn Bhd (The Former of Deputy Rector (Student Affairs and Development) and an Associate Professor at the International Islamic University Malaysia Associate Professor Saudah Sulaiman Dean, Faculty of Law UiTM Shah Alam iv

ABSTRACT Nowadays, financial institutions like banks are the backbone of the nations economy. The application of riba-based banking system has contributed astonishingly to the growth and development of our modern society. The emergence of Islamic financial system has shown us that it is possible to have a financial institutions that are competitive and yet, shariah-compliance. Islamic financial institutions offered us alternative products that are interest-free and gharar-free. Therefore, this study seeks to analyse the concept of riba and gharar in Islamic Jurisprudence, the comparative study between these two and suggested remedies on how Islamic financial institutions can ensure that their products are interest-free and gharar-free. It is hope that we can have a better understanding of the issue and able to appreciate the need and possibility to have better products that are not only shariah-compliance, but fulfill the aim and spirit of the shariah itself. Our finding is that Islamic Bank is free from riba, but subject to gharar since it main product based on trade, which is exposed to gharar.while riba is totally null and void, gharar depends on the degree on how it affect the contract to render the contract is void or voidable. vi

CHAPTER ONE : INTRODUCTION 1.0 Introduction Nowadays the role of financial institutions like banks as the backbone of the nations economy is obvious. It is without doubt that the riba-based banking system has contributed astonishingly to the growth and development of our modern society. Development cannot be achieved, as it has been widely propagated, without the role of financial intermediaries i.e. banks. The emergence of Islamic financial system has shown us that it is possible to have a financial institutions that are competitive and yet, shariah-compliance. Islamic financial institutions offered us alternative products that are interest-free and gharar-free. There are many attractions to prefer Islamic financial system rather than the conventional interest-based system. For the Muslim, one of the main attractions is obviously the divine warning concerning the consumption of riba as stated in the Holy Quran and Sunnah of the Prophet S.A.W. Therefore, Islamic financial institution like Islamic bank must prove from a purely financial aspect that it is competitive and capable of providing alternative products that is as good, if not better, than the products offered by the interest-based financial institution. Therefore, this study seeks to analyse the concept of riba and gharar in Islamic Jurisprudence, the comparative study between these two and suggested remedies on how Islamic financial institutions can ensure that their products are interest-free and ghararfree. Hopefully, by the end of this paper, we can have a better understanding of the issue and able to appreciate the need and possibility to have better products that are not only shariah-compliance, but fulfill the aim and spirit of the shariah itself. 1

1.1 PROBLEM STATEMENT There are several legal issues that needs to be addressed as regard to incursion of gharar in some of the products offered by Islamic Financial Institution in Malaysia. The researchers shall identify on what constitute riba and gharar. We will also critically analyse the practice by Islamic Financial Institution in Malaysia on whether their products are gharar free and interest free. 1.2 OBJECTIVE OF STUDY The overall aim of this research is to analyse the concept of Riba and Gharar in Islamic Jurisprudence. Further we will identify on whether the shariah products offered by Islamic Financial Institutions are interest free and gharar fee. The specific objectives of the study are:- 1. 1. To critically analyse the concept of Riba and Gharar in Islamic Jurisprudence. 2. To determine whether the shariah products offered by Islamic Financial Institutions are interest free and gharar fee. 3. To identify the solutions to ensure the shariah products offered by Islamic Financial Institutions are interest free and gharar fee. 2

1.3 LITERATURE REVIEW In this Reseach/Study, The Researchers reviewed the various literature related to Riba and Gharar. A book entitled Islamic Law on Commercial Transactions 1 discussed in chapter three on Sale of Goods. The relevant part for our research is the condition of sale and Gharar in sale. He elaborated in detail on how the validity of sale contract will be affected due to the existence of gharar. The Juristic opinions on gharar and reasons for prohibitions of Gharar are discussed in detail. An Article on Contract In Islamic Commercial And Their Application In Modern Islamic Financial Institution System explained the historical evolution of contract in Islamic Law. Islamic law has prohibited many pre-islamic period's contracts of exchange because they were either uncertain or lead to injustice as it involved riba alfadl and riba al-nasiah. An overview on Islamic Financial Institution in Malaysia which is known as Interest Free banking scheme were further elaborated. Sources of Fund in Islamic Financial Institution such as Wadi'ah Yad Dhamanah where the bank's practice to reward a hibah to the depositors are necessary to be competitive with the conventional banking. However, the bank are not allowed to declare or promise any amount or rate of hibah upfront as this would be tantamount to riba. Riba and Islamic Banking explained among others the meaning of riba, classification of riba, the prohibition of Riba in Islam during the lifetime of prophet passed over four different phases and stages and the rationale and reason for the prohibiton of riba. Islam promotes positive sum game where all parties gain or at least there is a possibility of gain 1 Professor Dr Razali Hj Nawawi, Islamic Law on Commercial Transactions, CT Publications Malaysia 1999 2 Assoc prof Dr Mohd Daud Bakar, HUM, unpublished article 3 Assoc prof Dr Mohd Daud Bakar, HUM, unpublished article 3

and loss on both parties. Whereas riba activities do not create new stock of wealth. Instead they lead to the transfer of the wealth from one party to another i.e from borrower to the lender. Islamic Banking : A Quick Guide 4 stated inter alia the concept of riba and consequences of riba which includes "in the hereafter, they shall be raised by Allah like those who have been driven to madness by the touch of the devil (Al-Baqarah:275) " "A dirham of Riba which a man receives knowingly is worse than committing adultery 36 times. (Hadith reported by Muslim). The Issue of Interest and the Islamic Financing Alternatives 5 discussed the interest or riba which is regarded by economists as containing three elements which justify payment of a return to savers: a time factor, an opportunity cost and an element of risk. However, Islam emphasis on profit sharing as an alternative to fixed or variable interest-based lending. For instance: Mudarabah (Trust Financing), and Musharaka (Venture Capital Finance). Understanding Riba 6 highlighted a dispute which arise between scholars as to the status of interest paid by banks on deposit accounts. The majority of the scholars describe this as riba but a minority lead by Mufti of Egypt, Shaikh Muhammad Tantawi suggests that the deposit is not a loan but an investment in which the bank acts for the depositor. The whole operation was called mudaraba. However, his view were counted by arguments that is the profit in the form of interest in not a proportion of the profit accrued by the employment of the capital but is a fixed percentage of the capital as in riba transaction. Further, the bank acquire their profit through lending at fixed interest which is clearly a riba transactions. 4 Assoc Prof Dr NorHashimah Mohd Yasin, paper presented at the Public Lecture organized by Islamic Society of University of New South Wales (ISOC UNSW), Sydney, Australia on 12 November 1999. 5 Rodney Wilson, University of Durham (1998) J.I.B.L. Issue 1 Sweet & Maxwell Limited ( And Contributors) 6 Islamic Banker, 20 July 1995 4

1.4 METHODOLOGY This research is based on a qualitative method since it is most recommended in the legal study. Whereas, a comparative approach is also considered for riba and Gharar. The collection of facts and information would be library based research. We will also do research by the latest sources of information that is by using the internet, newspapers and magazines. Various literatures will be referred to, ranging from statutes, reported cases, legal documents, law books, articles, online journals that can be found under the Malaysian law and Islamic Law. Online database such as LexisNexis and CLJ Law database will be used. 1.5 LIMITATIONS OF STUDY In order to achieve the aim and purposes, this research will analyze the concept of Riba and Gharar in Islamic Jurisprudence. The comparative study between the Riba and Gharar will be elaborated in detail. The researchers will also identify and analyze the the products offered by Islamic Financial Institutions It will make us keep abreast with the current arising issues on the same. This study is also prepared to discover any suggested remedies on how Islamic financial institutions can ensure that their products are interest-free and gharar-free. 5

1.6 SIGNIFICANCE OF THE STUDY The researchers hope that the study of this research would throw more light in the understanding of the concept of Riba and Gharar in Islamic Jurisprudence. The finding of this study would be to provide a better understanding to the society especially to the bankers, lawyers and customers dealing with Islamic Banking products. 1.7 OUTLINE OF CHAPTERS This research consists of Six (6) chapters which are as the followings:- Chapter 1 is the introductory chapter which explains the background of the study, its objective, methodology, literature reviews, significance, limitations and outline of chapters. Chapter 2 is the explanatory/ descriptive chapter which describe (briefly or give an overall overview of Riba, the authorities from verses of Qur'an and Hadith, reasons for prohibitions Chapter 3 is the explanatory/ descriptive chapter which describe (briefly or give an overall overview of Gharar, the Authorities from verses of Qur'an and Hadith, reasons for prohibitions, possibility of removing gharar Chapter 4 is the comparative study between Riba & Gharar 6

Chapter 5 is analytical and evaluative study which provides a detailed analysis on issues relating to Islamic banking products. Chapter 6 are Recommendations To Islamic Financial Institution In Malaysia To Ensure Their Products Are Interest-Free And Gharar-Free 7

CHAPTER 2: AN OVERVIEW ON RIBA (INTEREST) 2.0 INTRODUCTION Literally, Riba means increase, addition, expansion or growth. However, not all type of increase or growth is prohibited. Profit is also a kind of increase but profit gained from lawful trade is not prohibited. Instead, Muslims are encouraged to enter into lawful business. In order to understand what is Riba, reference should be made to the primary sources of Shariah i.e the Holy Quran and the Sunnah of the Prophet S.A.W to seek for guidance. 2.0.1 RIBA IN QUR'AN The Quran says: Allah permits al-bay' and prohibits al-riba. 1[2] It should be noted that this Quranic verse is general in nature and it only stated two categories of business: 'Bay' and 'Riba'. The precise definition of riba is not 1 Holy Quran, 2:275. 8

given in the Holy Quran but Allah states in the very same verse that 'they are certainly not the same with trade. 2[3] To have a better and more systematic approach, let us first refer to the relevant verses one by one. 1. The first revelation ( Surah al-rum, verse 39): "That which you gave as interest to increase the people I s wealth increases not with God; but that which you give in charity. Seeking the goodwill of God, multiplies manifold." (30:39) 2. Second revelation (Surah al-nisa', verse 161) "And for their taking interest even though it is forbidden for them, and their wrongful appropriation of other peoples' property, We have prepared for those among them who eject faith a grievous punishment. " (4:161) 2 Dr.Norhashimah Mohd yasin, BBA:Sale or Contract 9

3. Third revelation ( Surah al Imran, Verse 130-132) "O believers, take not doubled and redoubled interest, and fear God so that you may prosper. Fear the fire which has been prepared for those who reject faith, and obey God and the Prophet so that you may receive mercy. " (3:310-132) 4. Forth revelation ( Surah al-baqarah, verse 275-281) "Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the Devil; this is because they say: 'Trade is like interest' while God has permitted trade and forgiven interest. Hence those who have been received the admonition from their Lord and desist, may have what has already passed, their case be entrusted to God; but those who revert shall be the inhabitants of the fire and abide therein forever. " (2:275) 5. God deprives interest of all blessing but blesses charity; He loves not the ungrateful sinner. (2:276) 6. "O believers, fear God, and gave up the interest that remains outstanding if you are believers." 10 (2:278)

7 - "Uy u do not do so, be sure to be at war with God and His Messenger. But if you repent, you can have your principal. Neither should you commit injustice nor should you be subjected to it. " (2:279) 2.0.2 RIBA IN HADITH 1. From Jabir: The Prophet, may peace be upon him, cursed the receiver and payer of interest, the one who records it and the two witnesses to the transaction and said: "they are all alike (in guilt)". (Muslim Kitab al-muqasat, Bab la 'ni akili riba wa mi kilihi; also in Tirmidhi and Musnad Ahmad). 2. From 'Abdallah ibn Hanzalah: The Prophet, peace be upon him, said: 'A dirham for riba which a man receives knowingly is worse than committing adultery thirty-six times'. ( Miskat al-masabih,kitab al-buyu', bab al-riba, on the authority of Ahmad and Daraqutni. Bayhaqi has also reported the above hadith in Shu'ab al-iman with the addition that ' Hell befits him whose flesh has been nourished by the unlawful' (ibid). 11

3. From Abu Hurairah : The Prophet, peace be upon him, said: 'Riba has 70 segments, the least serious being equivalent to a man committing zina with his own mother.' (Ibn Majah) 4. From Abu Hurairah: The Prophet, peace be upon him, said: 'There will certainly come a time for mankind when everyone will take riba and if he does not do so, its dust will reach him.' ( Abu Dawud, Kitab al-buyu', Bab fi ijtinabi al-shubuhat; also in Ibn Majah). 5. From 'Ubada ibn al-samit: The Prophet, peace be upon him, said: '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, and hand-to-hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand'. (Muslim, Kitab al-muqasat; also in Tarmidhi). 12

2.0.3 SCHOLARS VIEW 1. Abdul Rahman aljaziri According to Abdul Rahman al Jaziri in his al-fiqh 'ala al-madhahid al-arba'ah, a compendium of the juristic opinions of the four dominant schools of Muslim jurisprudence, he define riba as increase in one of the homogeneous equivalents being exchanged without this increase being accompanied by a return. In simple words, riba is defined as unjustified increase in the capital. This definition, incomplete as it is, reflects the usual and typical understanding concerning the definition of riba. 3 Not all increase or excess is prohibited. Generally speaking, profit can also be considered as increase but obviously, profit gained from lawful trade is halal. Indeed, it is encouraged. 2. Muhammad ibn 'Abdallah ibn al-arabi (Quran commentator and Maliki jurist) Riba literally means increase, and in the Quranic verse (2:275) it stands for every increase not justified by the return. ( Ahkam al-quran, Cairo: Isa al-babi al-halabi, 1957, p.242). It should be clarified here that the 4 waiting! involved in a loan is not considered by the jurists to be a return justifying the increase (interest) on the principal amount. 3 Muhammad Umar Chopra, Riba in the Quran.Jhadith and Fiqh 13

3. Ibn al-'arabi Ibn al-'arabi emphasize on the requirement of iwad (equal counter value or compensation) in the contract of sale so that it does not fall into riba. This is in line with the legal maxim 'al-ghorm bil ghorm', (no reward without risk) and 'al-kharaj bil daman. ( in any benefit lies liability). Ibn al-'arabi says that every increase, which is without iwad or an equal countervalue is riba. 4 Therefore, it seems that some scholars put much weight on the requirement for iwad. When there is no consideration for the extra money except 'time postponement' or 'waiting', there is high possibility that the contract is tainted by riba. 4 See Ziaul Haque, The Moral Economy of usury, interest and profits.pp.10. He quoted the statement from the original work of Abu Bakar Muhammad ibn Abd Allah alarabi 14

2.1 CLASSIFICATION OF RIBA 2.1. Riba al-nasiah This type of riba happens when the specified increase is in return for postponement of, or waiting for, the payment. For example, buying one kilogram of wheat in winter against one and half kilogram of wheat to be paid in summer. As the half-kilogram, which has been added to the price, was not accompanied by an equivalent value in the commodity sold and was merely in return for the waiting, it is called riba al-nasiah. 2.2. Riba al-fadl Riba al-fadl is applicable in sale and purchase of certain restrictive items where excess in profit is not allowed. 5 The increase mentioned is irrespective of the postponement and is not offset by something in return. For example, this happens when ten carats of gold are exchange for twelve carats of similar gold product. The four schools of jurisprudence unanimously held that riba al-fadl as prohibited. One of the wisdom behinds its prohibition is to prevent defrauding or deception of less sophisticated persons. The prohibition of riba is laid down clearly in the Holy Quran and the Sunnah of the Prophet S.A.W and there is no question on that. The conflicts or problems 5 Hamid Sultan 15

faced by scholars are the correct definition of the riba. As mention earlier, there is no clear-cut definition of riba provided in the Divine revelation. Therefore, the scholars have to resort to ijtihad to interpret the term riba, which was so strictly prohibited in the Divine revelation. In order to interpret riba, the scholars have referred to the Holy Quran and Sunnah of the Prophet S.A.W for guidance. From these divine sources, the scholars realize that riba is related to certain transaction relating to certain ribawi items and extension of time as exchange for money. Riba is synonym with money for money. In other words, money become the commodity and generated more money. For example, if A borrow $100 from B, A has to pay B $200 at a later date. This is one example of riba. In this transaction, B gained extra money by doing nothing except giving loan to A. Therefore, in this transaction, money alone has generate more money. In Islam, money cannot generate money since money is merely a medium of exchange. In order to get more money or profit, there must be some elements of effort or risk taken. If A buy a rabbit for $100 and sell it for $200, he earned the extra money through his effort and by taking risk. Such transaction is allowed since it falls under business. 16