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Home arrow Business & Finance arrow The art of RF (riba-free) Islamic banking and finance
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Business Finance

In the early days of Arabia, and with the growth of commerce and intercommunity and international commerce and trade, people were in need of capital to finance their growing trading and business activities. Moneylenders would apply a system that stipulates the time at which the loan had to be paid back. The borrower would pay a monthly interest (the cost of using or renting the money, or riba/ribit/interest/usury), and the loan would balloon for the borrower to pay the original amount at maturity. If the borrower could not pay it back for any reason — including reasons that were out of the borrower's control, such as crop failure due to a drought, a windstorm that affected the caravan and resulted in losses, or a severe downturn in the economy — the lender would agree to extend the term of the loan, but the extension would be conditional on increasing the amount of the original loan. In today's banking practices, this is known as an “interest-only term loan with a balloon payment” at the end of the term. If an arrangement is not reached, the lender would immediately foreclose on the collateral property. These loans have been used since the times of Moses (pp) and Jesus (pp) by the moneylenders and money changers. When the loans could not be paid back, the moneylenders would confiscate the farmers' land and properties, rendering them poorer and enslaving them by requiring them to pay the loans back with their labor.

The following is an outline of the RF business law (based on the Shari'aa, which can also be called the Judeo-Christian-lslamic law) as depicted from the Qur'aan and the tradition (Sunnah) of Prophet Muhammad (pp).

1. The law (Shari'aa) requires full documentation in writing and in the presence of witnesses when credit is granted:

2:282 О You who have attained to faith! Whenever you give or take credit for a stated term, set it down in writing. And let a scribe write it down equitably between you; and no scribe shall refuse to write as God has taught him: thus shall he write. And let him who contracts the debt dictate; and let him be conscious of God, his Sustainer, and not weaken anything of his undertaking. And if he who contracts the debt is weak of mind or body, or is not able to dictate himself, then let him who watches over his interests dictate equitably.

2. In “on-the-spot” trades (called in the law “hand-to-hand”) of ready and available merchandise, there is no need for a full contract, but the transaction must be confirmed by witnesses:

2:282 If, however, [the transaction] concerns ready merchandise which you transfer directly [on the spot] unto one another, you will incur no sin if you do not write it down. And have witnesses whenever you trade with one another, but neither scribe nor witness must suffer harm; for if you do [them harm], behold, it will be sinful conduct on your part. And remain conscious of God, since it is

God who teaches you [herewith] — and God has full knowledge of everything.

2:283 And if you are on a journey and cannot find a scribe, pledges [may be taken] in hand: but if you trust one another, then let him who is trusted fulfill his trust, and let him be conscious of God, his Sustainer. And do not conceal what you have witnessed for, verily, he who conceals it is sinful at heart; and God has full knowledge of all that you do.

3. The law (Shari'aa) strictly prohibits riba in all transactions and encourages an RF lifestyle. The Qur'aan has ruled in a clear way that riba is haram and is strictly prohibited:

2:275 Those who eat riba stand as those who have been touched and electrified by Satan, because they claim that buying and selling is like charging riba ... but be on notice that God has allowed buying and selling transactions and He has forbid riba. For those who receive God's admonition and stop the practice of charging riba, they will own what has happened before this admonition reaches them, and his case will be in the custody; and those who return to charging riba (ribit/interest/usury) for the use of money (interest/ usury), they will be the acquirers and owners of hellfire and in there they will remain to eternity.

Prophet Muhammad (pp) has further explained and elaborated on the prohibition of riba in the Qur'aan. In Islam, according to the Judeo- Christian-Islamic Shari'aa law, the offense of charging, taking, paying, or even acting as a witness in a riba-based transaction is considered one of the worst seven offenses in the faith.[1],[2][3]

To establish a universal and standardized legal code for and to regulate business transactions, the law (Shari'aa) identifies the following two types of riba, based on the Hadeeth of Prophet Muhammad (pp).

  • [1] In the saying of “. . . the seven most devastating Sins,” the Prophet Muhammad (pp) counted: “believing in partnership with God, murder . . . and eating riba . ..” as reported by Bukhari, Muslim, and others [al Targhib wa al Tarhib, v. 3, p. 1].
  • [2] The Prophet Muhammad (pp) said: “Four [persons] very truly God will not make them enter Heaven . .. and the eater of riba ...” as Al Hakim reported [Al Targhib wa al Tarhib, v. 3, p. 5].
  • [3] The Prophet Muhammad (pp) said that God put wrath on (cursed) the eater of riba and its payer, and those who witness and transcribe the contract involving riba; this was reported by Bukhari and Muslim.
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