Islamic concept of Riba: Riba al Nasia and Riba Al Fadal

The Concept of Riba:

In quran it is stated

Whatever Riba (increased amount) you give, so that it may increase in the wealth of the people, it does not increase with Allah; and whatever zakah you give, seeking Allah's pleasure with it, (it is multiplied by Allah, and) it is such people who multiply (their wealth in real terms)." (Al Quran 30: 39)

In these verses God encourages people to pay zakat on Excess resources rather than paying riba on the excess resources. In the eyes of God riba do not increases the wellbeing of the society. Zakat and riba are contrary to each other.

"Those who take riba (usury or interest) will not stand but as stands the one whom the demon has driven crazy by his touch. That is because they have said:"Sale is but like riba", while Allah has permitted sale, and prohibited riba. So, whoever receives an advice from his Lord and desists (from indulging in riba), then what has passed is allowed for him, and his matter is up to Allah. As for the ones who revert back, those are the people of Fire.There they will remain forever. [2-275]

 

Riba and Bai distinguished:

As is evident from this quranic script that people used to consider both riba and bai as similar, however, in the eyes of god they are two different structures opposite in nature. Here we describe bai as economic equality whereas riba as [simple] inequality. In the context of barter exchange, using examples we describe their differences. Because of human perception, economic equality may exist between two dissimilar objects for example three kilogram chicken meat may economically equal one kilogram mutton. In this case, there exist difference in weight- on one hand its three kilogram whereas on the other hand it’s just one kilogram. This can be considered as riba but in the eyes of God it is economically equal [bai]. Similarly three literes of Gasolene may economically equal one litere of bio diesel. In this case again one can consider it inequality on the basis of large volume on one side whereas smaller volume on the other side. Moreover, two dozen bananas may economically equal one dozen oranges. In this case inequality is obvious however in the eyes of god economic equality exist. In the above examples, transactions were considered as inequal [riba] however in the eyes of God economic equality [bai] exists.

The Nature of Riba:

Now we turn our attention towards riba [inequality]. Riba is pure increment for example a loan of 10 gram gold to be paid in one year for 11 gram gold. Here 11 gram gold is more than 10 gram gold and therefore economic inequality exists. Similarly, a loan of 100kg Potato of certain kind for six month against 110kg Potato would constitute inequality and therefore riba. Islamic economists consider the quranic verse on riba to be applicable only on economic contracts involving deferment in payment either in kind or in money. However, Concept of riba can be further elaborated by considering the riba al fadal i.e increment in economic exchange on spot basis.

Riba in Spot Exchange: Riba al Fadal

The Prophet said, "Sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver, sell dates in exchange of equivalent dates, sell wheat in exchange of equivalent wheat, sell salt in exchange of equivalent salt, sell barley in exchange of equivalent barley, but if a person transacts in excess, it will be usury (riba). However, sell gold for silver anyway you please on the condition it is hand-to-hand (spot) and sell barley for date anyway you please on the condition it is hand-to-hand (spot)."

Riba al fadal clearly indicates that for example selling one byzantine dinar containing 5 grams of Pure Gold for 6 grams of Pure Gold would constitute riba [Inequality] , similarly selling silver coins of Persian origin for more than the silver they contain would constitute riba [inequality]. This clearly sets the monetary rule of Islam. Islam did not accept the greater value of coins due to its issuing authority here Byzantine Empire or Persian Empire. Islam considered the monetary assets no more than pieces of gold and silver. Riba in all its form is prohibited and cannot be the source of income for Muslims.

        Concept of Time-invariance of Economic Objects:

To further elaborate the principle of riba, the nature of economic objects should be understood in the context of timeline. There is varying nature of economic object that makes it difficult to compare itself on timeline. On the extreme case, economic objects could be time-invariant such as gold, silver, palladium and their nature do not alters with the passage of time. On the other hand, vegetables such as tomato, dates, and wheat they get rotten with the passage of time. However, their biological nature makes them available for centuries without significant change of their nature. Alternately, those objects like residential properties or agricultural land looses their quality with the passage of time such as residential properties require maintenance and similarly agricultural land loses its fertility. One classic economic objects are monetary objects such as Pakistani rupees, their nature is undefined overtime because of their abstractness. Riba should only be applied on time-invariant economic objects.