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4.11.13

Riba : Charging more on credit sales (Murabaha) is permissible?

Riba is translated as usuryInterest. Riba is forbidden in Islamic economic jurisprudence (fiqh) and considered as a major sin. Simply, unjust gains in trade or business, generally through exploitation. There are two types of riba discussed by Islamic jurists: an increase in capital without any services provided and speculation (Maisir), which is prohibited by the Qur'an, and commodity exchanges in unequal quantities, also prohibited in the Qur'an.
The Qur'an deals with riba in 12 verses, the word appearing eight times in total, three times in 2:275, and once in 2:276, 2:278, 3:130, 4:161 and 30:39.

Usury is the practice of making unethical or immoral monetary loans. Depending on the local laws or social mores, a loan may be considered usurious because of excessive or abusive interest rates. According to some jurisdictions and customs, simply charging any interest at all can be considered usury. Other terms used for usury or usurers include loan shark, as well as Shylock which is sometimes used with an antisemitic connotation
The Qur'an states the following on riba:
“That they took riba, though they were forbidden and that they devoured men's substance wrongfully – We have prepared for those among men who reject faith a grievous punishment (Quran 4:161)”
“Those who charge riba are in the same position as those controlled by the devil's influence. This is because they claim that riba is the same as commerce. However, God permits commerce, and prohibits riba. Thus, whoever heeds this commandment from his Lord, and refrains from riba, he may keep his past earnings, and his judgement rests with God. As for those who persist in riba, they incur Hell, wherein they abide forever (Quran 2:275)”
“God condemns riba, and blesses charities. God dislikes every disbeliever, guilty. Lo! those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of riba, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Quran 2:276-280)
“O you who believe, you shall not take riba, compounded over and over. Observe God, that you may succeed. (Quran 3:130)”
“And for practising riba, which was forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution. (Quran 4:161)
“The riba that is practised to increase some people's wealth, does not gain anything at God. But if people give to charity, seeking God's pleasure, these are the ones who receive their reward many fold. (Quran 30:39).
Riba is mentioned in a number of hadith:
“Jabir said that Muhammad (pbuh) cursed the accepter of usury and its payer, and one who records it, and the two witnesses, and he said: They are all equal.”
“Narrated Abu: We used to be given mixed dates (from the booty) and used to sell (barter) two Sas of those dates) for one Sa (of good dates). The Prophet said (to us), "No (bartering of) two Sas for one Sa nor two Dirhams for one Dirham is permissible", (as that is a kind of usury). (See Hadith No. 405)”
“Narrated 'Umar bin Al-Khattab: Allah's Apostle said, "The bartering of gold for silver is Riba, (usury), except if it is from hand to hand and equal in amount, and wheat grain for wheat grain is usury except if it is from hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount, and barley for barley is usury except if it is from hand to hand and equal in amount."
“Narrated Ibn 'Umar: Muhammad said, "The selling of wheat for wheat is Riba (usury) except if it is handed from hand to hand and equal in amount. Similarly the selling of barley for barley, is Riba except if it is from hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount.

“Narrated Abu Hurayrah: Muhammad said: If anyone makes two transactions combined in one bargain, he should have the lesser of the two or it will involve usury.

Is charging more on credit sales legally permissible in Islam? In my opinion it is taking advantage of the person who does not have ready cash. On the other hand if the trader resorts to cash sales and has a high turn over he can make more profit. Considering this fact he charges more for foregoing his profits and blocking his cap
ital in a credit sale. The buyer pays for the opportunity cost foregone by the seller. Most of the time this is translated into the time value of money and the market interest rate for the time the payment is kept outstanding is loaded in the sale price of the product. In the above, the seller has to show benevolence in a credit sale for his Muslim brother by not charging more then the prevailing market price. Please elaborate the issue in the light of Quran and Ahadith since the Shariah Advisor's of Banks & financial institutions consider higher prices charged in a Murabaha transaction lawful and do not consider it as Riba.
Response:I have attempted to understand the point of view of these scholars, but have never been able to get convinced that inflated price in credit sale (Murabaha) is acceptable in Islam. The reasoning in this issue, as indeed in many other issues on Islam, could be understood either by giving technical or philosophical arguments. Technical arguments should positively present reasons from Qur'an and Sunnah to prove that despite the apparent similarity of Murabaha with Riba, the former has been allowed in Islam.

From whatever I have heard and read in the literature of the people who consider it legal, there is no technical argument at their disposal to make that claim. The Council of Islamic Ideology allowed Murabaha as a way of doing financial business only as a second best alternative. One can see a definite lack of conviction in their statement while proposing Murabaha. The Report says; "...it needs to be pointed out that these alternatives [i.e. Murabaha etc.] ... are no more than a second best solution from the viewpoint of an ideal Islamic system."

From the point of view of philosophical understanding of Murabaha's acceptability, we have to look into the reason why riba has been prohibited in Islam and find out whether Murabaha fares any better in that respect. The apparent reason why the Almighty has prohibited riba is that the lender demands from the borrower that he should pay back the principal amount to him plus a pre-determined interest even if he is in no position to do it. This is quite clearly showing lender's complete lack of concern for the plight of the borrower. If during the period of the loan, the borrower gets bankrupt, the lender would still demand not just the principal but interest as well. It is quite unimaginable how a humane soul can ever get into that kind of a financial arrangement.

In view of the above, when we look at the Murabaha arrangement, it appears to be completely the same. In case of Murabaha, the borrower, euphemistically the buyer, acquires an asset from the lender, the seller. Because the borrower/buyer cannot afford to purchase the asset on cash, he goes for this credit arrangement with inflated price. Call him by whatever name, the buyer/borrower is exactly in the same state of helplessness if the relevant asset gets destroyed. The lender/seller would demand from him the orgiinal spot price (principal) plus the mark up (interest/riba). His plight, like in the case of riba arrangement, would fall to deaf ears, because the 'pious' lender in this case has used the right terminology and has not given a riba-based loan but has entered into an Islamically legitimate Murabaha transaction. If your conscience is satisfied that this kind of an eye-wash is halal, please go ahead and support it. I, on my part, don't have the courage to do that.

The supporters of Murabaha present two conditions in it which they think distinguishes it, to them quite clearly, from riba. One condition they present is that unlike in the case of riba where cash or cash-like circulating asset is involved, in Murabaha a real commodity is involved. The other condition is that in Murabaha they don't allow mark-up on mark-up, where as, they believe, in riba interest on interest is also charged.

As for the condition of real asset, it really is inconsequential whether the commodity is real or unreal. The important thing is that if the commodity in question is destroyed while the borrower/buyer hasn't paid the amount, who is going to be responsible for the loss? The answer is obviously that it would be the borrower. How then is it different fro riba? What difference has the realness of the commodity caused to the transaction? What relief has been offered to the borrower/buyer?On the point that in Murabaha mark-up is charged only once and no further mark-up is charged even when the bowwower/buyer defaults, I would say that not committing a double sin doesn't make a single sin valid. It's like claiming that since General Pervez Musharraf has done many good things after assuming power therefore his military coup was legitimate. What is wrong is wrong and no amount of virtue following that wrong can make it right.

I would also like to point out that this policy of not charging mark-up on default is not even being practised by the institutions who are doing what they call Islamic banking. What they do is that they charge additional mark-up from the defaulters but don't add it to the revenues of their banks but give it on charity instead. In other words, they do charge what they themselves consider haram but give it somebody else. How could that be justified?
SOURCE: http://www.khalidzaheer.com/qa/109

Instruments of Islamic banking in operation:  http://jang.com.pk/thenews/may2008-weekly/busrev-05-05-2008/p6.htm

Non-equivalence of interest and Riba? Other Point of View.......

Elaborating the contents of verse 39 of Surah Al-Rome, Abdullah Yusuf Ali defines Riba as “any increase sought through illegal means, such as usury, bribery, profiteering, fraudulent trading, etc. All unlawful grasping of wealth at other people’s expense is condemned” as it represents Riba.

Riba is generally the outcome of the weakness, ignorance or lack of bargaining power of one transacting party which is abused by the other.

Riba pertains not only to capital but also to wage payments, rent accruals and profit charges. Under this topology, an industrialist or a landlord who pays his workers less than their “due” share of wages, a businessmen or trader who fails to pay the taxes due to him and a doctor or a lawyer who charges “abnormally high fees” are all indulgent in the practice of Riba.


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