Islamic Banking And Impacts Of Riba On Economy Finance Essay

The actual significance of involvement or Riba as it is used in the Arabic linguistic communication means to excess or increase. In the Islamic nomenclature involvement means effortless net income or that net income which comes free from compensation or that excess earning obtained that is free of exchange. Shah Waliullah Dehlvi a great bookman and leader have given a really concise and precise definition of involvement. He said,

“ Riba is a loan with the status that the borrower will return to the loaner more than and better than the measure borrowed. ”

Riba is considered amongst Seven major Sins ( Al-Saba al-Mubiqat – O§U„O?UZO?O?UZ O§U„U…U?O?U?U‚O§O?U? ) , A viz. ,




Devouring Riba,

Unlawfully taking orphan ‘s money,

Fling from battleground and

Accusing chaste believing adult females.

Allah swt provinces in Koran:


3:130 O you who have believed Allah, do non devour vigorish, doubled and multiplied, but fear Allah that you may be successful.


2:175 Allah has permitted trade and has forbidden involvement

Riba is an economic issue in position of the fact that all faiths have prohibited and restricted Riba. All three major faiths i.e. , Islam, Christianity, and Judaism strongly condemned and prohibited Riba. Later, the some of Hebrews and Christian Church abandoned the prohibition of Riba that led the world into the economic lawlessness as u see today.

On the footing of the rules led by Islam, it is clear that fiscal system should be harmonizing to Shariah, should be plus backed instead than debt backed, free from Riba, voluntary aid, Zakah and Sadaqah are the chief characteristics of Islamic finance system.

The intent of this study is to acquire knowledge about Allah ‘s and Prophet ‘s strong commentary on prohibition of Riba, why Muslim Economicss differs from adult male made Torahs and systems in specifying economic job. In this study I tried to explicate the immoralities of Riba, its impacts on the economic system and how Islam helps us to screen out this job.

Table: Example OF RIBA


1.A First Revelation ( Surah al-Rum, verse 39 )

That which you give as riba to increase the peoples ‘ wealth additions non with God ; but that which you give in charity, seeking the good will of God, multiplies manifold. ( 30:39 ) .

2.A Second Revelation ( Surah al-Nisa ‘ , verse 161 )

And for their pickings riba even though it was forbidden for them, and their unlawful appropriation of other peoples ‘ belongings, We have prepared for those among them who reject faith a dangerous penalty. ( 4:161 ) .

3.A Third Revelation ( Surah Al ‘Imran, verses 130-2 )

O trusters, take non doubled and redoubled riba, and fear God so that you may thrive. Fear the fire which has been prepared for those who reject religion, and obey God and the Prophet so that you may have clemency. ( 3:130-2 ) .

4.A Fourth Revelation ( Surah al-Baqarah, verses 275-81 )

Those who benefit from riba 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 riba ” while God has permitted trade and out riba. Hence those who have received the warning from their Lord and desist, may hold what has already passed, their instance being entrusted to God ; but those who revert shall be the dwellers of the fire and abide therein for of all time. ( 275 ) .


( Riba al-Nasi’ah & A ; Riba al-Fadl )

From Jabir: The Prophet, may peace be on him, cursed the receiving system and the remunerator of riba, the 1 who records it and the two informants to the dealing and said: “ They are all likewise [ in guilt ] . ” ( Muslim, Kitab al-Musaqat, Bab la’ni akili al-riba Washington mu’kilihi ; besides in Tirmidhi and Musnad Ahmad ) .

From Abu Hurayrah: The Prophet, peace be on him, said: “ On the dark of Ascension I came upon people whose tummies were similar houses with serpents seeable from the exterior. I asked Gabriel who they were. He replied that they were people who had received riba. ” ( Ibn Majah, Kitab al-Tijarat, Bab al-taghlizi fi al-riba ; besides in Musnad Ahmad ) .


The major focal point of this study is on the possible impact of Riba on the economic system. Here I tried to explicate the immoralities and negative impacts of Riba on economic system,

1 ) Reduced Economic Productivity Rate ( Negative impact of Riba on Savings-Investment )

Investing rests straight on nest eggs. As monetary values steep up, nest eggs dip and with that the capacity for investing. Uncertainty about future rising prices may deter investing and economy, or may take to decreases in investing of productive capital and increase nest eggs in non-producing assets. e.g. selling stocks and purchasing gold. Today western economic systems subsidize loans over investing in equity because involvement payments are non nonexempt while dividends are. This puts investors at a disadvantage and gives banking a leg up. This can cut down overall economic productiveness rates, as the capital required to revise companies becomes more elusive or expensive.

2 ) Money Supply

Most of the economic experts by and large agree that high rates of rising prices and hyperinflation are caused by an inordinate growing of the money supply. It should be maintained at a rate that would about maintain monetary values changeless. Interest based system consequences in rising prices, and negative impact of rising prices coupled with loose authorities outgos and an exploitatory banking system, is a certain formula for catastrophe.

3 ) Negative Impact on the Performance of Capital in Small Businesss

Small concerns are the worst affected in interest-based economic systems. Either they are pre-emptively browbeaten by profit-sucking interest-rates, or on the other manus, they see the dusk in their babyhood. For capital to execute in a little concern is every bit easy as swimming in a morass. If it does n’t drop at one time it sinks at last. Indirectly, this besides undermines the productive geographic expedition and development of legion natural resources.

4 ) Business Hazard

No concern is riskless but making concern on involvement loans compounds the hazard since it binds the man of affairs to pay involvement at a fixed rate whether or non the concern has made net income.

5 ) Excessive Profit-Making

Taking the hazards of loss and the agenda of payments into history the man of affairs borrowing on involvement keeps a higher border of net income than he would without involvement. Often this consequences in immense but unjust additions at the disbursal of consumers and purchasers. The profit-figures of the international giver bureaus are mind-boggling. Harmonizing to conservative estimations, the external debt of all developing states stands at about $ 2 trillion or $ 2000 billion. At an mean mark-up of 10 % , loaning establishments like the IMF and the World Bank earn an one-year net income of $ 200 billion. What all this means is that forever and of all time, the poorest states of the universe will maintain their beggary bowls outstretched.

6 ) Instability in Market Demand and Supply

Riba is that excess liability created in surplus of the green goods available and does non be. Every liability is a demand in pattern, the basic regulation of economic sciences is that to keep economic equilibrium in the society, the supply side should be equal to the demand, if the demand is more than the supply, a deficit will happen. Making an excess liability means making an excess demand without increasing equal supply, this will ensue in a ne’er stoping mechanism of increasing the deficit of that green goods in the society.

7 ) Reduced Circulation of Wealth

It is a platitude that flow of wealth in a state is an index of economic wellness that active money is a blessing and dead money is a curse. In the interest-based system wealth gravitates towards an sole minority. And gets stuck. If it suits the money Masterss they may non let go of or put it. As a consequence, economic growing rate is stunted. The hapless are worse off, tierce of the universe population subsists below the poorness line i.e. earns less than $ 1 per twenty-four hours. In the economic system that has the power to concentrate resources in few custodies, Riba has played a polar function in this concentration. It is really dismaying to observe that less than four 100 persons own more than 50 per centum of the entire universe ‘s wealth, the state of affairs is declining twenty-four hours by twenty-four hours.


A banking system is a must for any economic system to boom. The primary map of Bankss is to apportion capital to back up enterprisers in seeking economic prosperity. From the Islamic position, this sort of support from Bankss in the signifier of loaning, has to be done without bear downing involvement and, therefore, being a hazard taker alternatively of hazard averter. From that, Islamic economic experts came to an involvement free banking system which will replace the current system and will be more efficient. To extinguish Riba from the economic system is the first measure that must be taken.

Goals of Islamic Economics

Goals of involvement free Islamic banking are following

Broad based economic well being with employment and optimal rate of economic growth.A

Stability in the value of money

A merely return is ensured on investing and different development projects.A

Effective rendition of all services

Socioeconomic justness and equal distribution of income and wealth.


Principles OF ISLAMIC Banking

The Shariah defines certain regulations that regulate economic construction, efficaciously forestalling maltreatment and corruptness. A planetary web of Islamic Bankss and other fiscal establishments has started to take form based on the rules of Islamic finance as laid down in the Quran and the Prophet ‘s traditions 14 centuries ago.

The regulations sing Islamic banking are simple and can be summed up as follows:

1 ) Any preset payment over & As ; above the existent sum of principal is prohibited.

Islam allows merely one sort of loan and that is Qardn Hassan whereby the loaner does non bear down any involvement or extra sum over the money Lent.

2 ) Lender must portion in the net incomes or losingss originating out of the endeavor for which the money was Lent.

Islam encourages Muslims to put their money and to go spouses in order to portion net incomes and hazards in the concern alternatively of going creditors merely. As defined in the Sharia, Islamic finance is based on the belief that the supplier of capital and the user of capital should every bit portion the hazard of concerns. This is unlike the involvement based banking system, where all the force per unit area is on the borrower he has to pay back his loan with involvement, irrespective of the success or failure of undertaking.

3 ) Making money from money is un-Islamic.

Money is merely a medium of exchange and has no value in itself, and hence should non give rise to more money, via fixed involvement payments, by being put in a bank or Lent to person else. The human attempt and inaugural involved in concerns are more of import.

4 ) Gharar ( uncertainness, hazard or guess ) is prohibited.

Under this prohibition all dealing should be free from uncertainness and guess. Parties should hold perfect cognition of the counter values intended to be exchanged as a consequence of their minutess. Besides, parties can non predetermine a guaranteed net income.

5 ) Investings should merely back up patterns and merchandises that are non out or even discouraged in Islam. For illustration, trade in intoxicant would non be financed by an Islamic bank.

6 ) Justice and Equality, by pulverizing elite-class system and supplying equal chance and justness


The cardinal viability of any province depends on its economic system. Riba is the basic portion of the western economic system and for Muslims this is unacceptable. We have to interrupt new land, in happening a feasible alternate model instead than happening the latest fast one to set another name for Riba. On the footing of the rules led by Islam as mentioned above Islam clearly describes how the fiscal system should be, it should be harmonizing to Shariah, Islamic economic system promotes compassion and it discourages egoism. It states that one is free to make trade and do wealth every bit much as he likes, but the hapless has the right to part of his wealth. This right is legislated by Allah swt by the manner of charity, zakat, hibba, heritage and Baitul Mal ( Welfare system ) . Following are the different installations given by Shariah Torahs, in the Islamic economic system, to get the better of the jobs in the conventional economic system,

a ) Qard ul Hassan

This is a loan extended on the footing of good will, and the debitor is merely required to refund the borrowed sum merely. However, the debitor may, pay an excess sum beyond the chief sum of the loan ( without assuring it ) as a item of grasp to the creditor.

B ) Mudarabeh ( An Interest Free System of Partnership )

It is a system that relays to a great extent on net income sharing. This system is derived from the Arabic term Mudarabeh, a system where both the loaner and the borrower are every bit exposed to put on the line because of the fact that the loaner portions net incomes or losingss with the borrower are every bit. The net income in this instance is the replacement for the involvement.

degree Celsius ) Musharakah

In Arabic the word Musharaka means to portion. This construct is usually applied for concern partnerships. The net income made is shared on an agreed ratio, while losingss incurred will be divided based on the equity engagement ratio. This construct is distinguishable from fixed income investment. The direction of the undertaking in a Musharaka is shared. It avoids two of the chief jobs of the conventional economic system, involvement rates and income inequality.

vitamin D ) Murabahah

Murabahah is the Islamic version of equal net income where no 1 is hurt or damaged during concern minutess. Murabahah is a cost-plus contract in which a client, wishing to buy something like equipments or goods, requests the Islamic bank to buy the points and sell them to him at a cost plus declared net income. By this technique a party necessitating finance to buy, gets the necessary finance on a deferred payment footing. The finance supplier does the buying of the needed goods and sells them on the footing of a fixed markup net income. Thus the demand for finance of the 1 in demand is met.

vitamin E ) Bai-Salam

A contract in which beforehand payment is made for goods to be delivered subsequently on. The marketer undertakes to provide some specific goods to the purchaser at a hereafter day of the month in exchange of an beforehand monetary value paid at the clip of contract. It is necessary that the quality of the trade good intended to be purchased is to the full specified go forthing no ambiguity. The objects of this sale are goods and can non be gold or Ag or currency. Salam covers about everything that is capable of being decidedly described as to measure, quality and craft.

degree Fahrenheit ) Zakah and Sadaqah

Zakah is one of the basic rules of the Islamic economic system, based on societal public assistance and equal distribution of wealth. In add-on to the mandatory payment of Zakah, Muslims are encouraged in the Quran to do voluntary parts to assist the hapless, destitute, and other societal public assistance intents. This voluntary part is called Sadaqah or Charity.

Zakah is one of the five pillars of Islam and a part paid one time a twelvemonth on nest eggs at the rate of 2.5 % . This giving is to cleanse your money and ownerships from greed. Zakah is expected from every Muslim person. It is paid on the net balance after a Muslim has spent on basic necessities, household disbursal, due credits and revenue enhancements.

g ) Tawarruq

Tawarruq is a funding strategy that has been used from the clip of classical Islamic Jurisprudence. Tawarruq is an Islamic-based merchandise which allows clients to raise financess. Widely used as a funding & A ; money liquidness direction tool, tawarruq is an plus sale to a buyer with deferred payment footings. The buyer so sells the plus, such as a trade good, to a 3rd party to acquire hard currency. Harmonizing to the legal experts, tawarruq can be defined as a individual who buys a trade good at a deferred monetary value, in order to sell it in hard currency at a lower monetary value, usuallyA to a 3rd party, with the purpose to obtain hard currency. Tawarruq is the manner through which some Islamic Bankss provide personal funding to ease the supply of hard currency to clients. Tawarruq is really flexible and allows the bank clients to barrow money for non specific points.

H ) Ijara

Ijara is similar to a conventional rental. The bank buys the plus for the borrower and so leases it out with a rental fee. The bank maintains ownership of the plus during the life of the ijara and must supply for its care. The borrower does non hold the option to buy the plus, except in the instance of a Ijara Washington Atina, where this is stipulated at the start. The ijara is chiefly used for client funding of autos, lodging and equipment.


The decision of this study can now be summarized. The chief illnesss of the conventional economic system are involvement rates and income inequality. Riba is cardinal to the current economic system and for Muslims this is unacceptable. Shariah prohibits Riba in all of its signifier. The sovereignty of states is dependent on their economic system ; we can state that the modern twenty-four hours bondage is economic bondage. Islamic economic system promotes compassion and it discourages self-centeredness. Islamic Shariah promotes Charity and forgiveness. Profit-sharing is promoted by sharia law. The banking system given by Islam is the best in the universe and solutions and regulations given in Quran and Hadith are the right and harmonizing to the demands of the clip and these should be followed.