Norms Relating to Riba, Gharar, Tawun

Most scholars agree that the major characteristic or

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Most scholars agree that the major characteristic or efficient cause (‘ illah ’) on the basis of which one may extend the rules of riba to other commodities by analogy is “their being in the nature of money” or ‘ thamaniyya ’. Thus, rules of riba would apply to anything that serves the functions of money, such as, paper currency or IOUs. 10 Islamic Banking
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Norms relating to Riba, Gharar & Ta’wun : Norms Relating to Riba Riba in Exchange There are now two conditions for exchanging money for money: hand-to- hand, and in equal quantity. This is known as a currency exchange contract (‘ aqd al-sarf) , where money is traded at the current exchange rate. Any violation of the hadith will result in one of two forms of forbidden riba: (A). riba al-fadl: where money is exchanged for money hand-to- hand, but in different quantities, or (B). riba al-nasiah: where money is exchanged for money with deferment. The latter form (riba al-nasiah) underlies most of conventional financial products. In the conventional financial system, financial intermediation is effected through lending, and the time value of money is reflected in interest payments. This is unequivocally a case of prohibited riba. 11 Islamic Banking
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Norms relating to Riba, Gharar & Ta’wun : Norms Relating to Riba Exchange / Transfer of Debt (Rescheduling) Debt originates with a loan. Debt also originates with a sale and other transactions wherever the payment of money is deferred to a future date. Going by the Quranic prohibition of riba in debt, no increment is permissible when the debt is repaid or settled. At times settlement of debt involved its replacement with a new increased debt. This has been condemned as the worst form of riba or riba al-jahiliyya. Note that this form of charging riba corresponds to the compounding mechanism used in case of interest-based debt. Therefore, it follows; (i) when a debt is exchanged for money, it must be at par; and (ii) when a debt is exchanged for debt, it must also be at par. 12 Islamic Banking
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Norms Relating to Riba: Exchange / Transfer of Debt Late Payment Penalty In deferred payment sale, once the debt is established, it is repayable at par. Charging an increase for further deferment of the payment of such debts as a function of time (e.g. a late rental payment in a lease, or a late installment payment in a credit sale) would constitute riba al-jahiliyya. The opposite rule, in which the amount of the debt is reduced due to prepayment, is prohibited too as compounding and discounting are two sides of the same coin. Such discounting with an objective to earn riba must be clearly distinguished from the benevolent act of “forgiving part of the loan”. Discounting of debt with a commercial motive makes the rate of discount dependent on time and is an explicit part of the contract.
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