The Prohibition of Ribā and the Use of Ḥiyāl by Islamic Banks to Overcome the Prohibition

in Arab Law Quarterly
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This article discusses the meaning of ribā according to the opinions upheld by both the majority as well as minority of Islamic scholars. Although Islamic scholars are in agreement about the prohibition of ribā, they do differ with regard to its meaning. This divergence of opinions translates into such questions as whether the interest charged and paid by today’s conventional banks is ribā. While the majority of Islamic scholars are of the opinion that current bank interest is ribā, a small but convincing minority of scholars do not consider bank interest to be ribā. The need for Islamic banks arises from the majority’s interpretation of ribā. This article also evaluates the most popular products provided by Islamic banks and the validity of ḥiyal (pl. of ḥīlah) involved in adopting them.

The Prohibition of Ribā and the Use of Ḥiyāl by Islamic Banks to Overcome the Prohibition

in Arab Law Quarterly

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5

See Nabil A. SalehUnlawful Gain and Legitimate Profit in Islamic Law: Ribā Gharar and Islamic Banking (Cambridge: Cambridge University Press1986) 13.

7

See in general Salehsupra note 5 at 13 27-29.

10

See Salehsupra note 5 at 15.

16

See generally Salehsupra note 5 at 35-36.

18

Mohammad H. Fadel‘Riba, Efficiency, and Prudential Regulations: Preliminary Thoughts’Wis. Int’l L.J. 25 (2007): 655-702at 658 (quoting various classical authorities to the effect that the verse prohibiting ribā was revealed against the practice of merchants who sold on credit and when the maturity date came and the debtor was unable to pay the merchants would increases the payment. See notes 9 and 11. The author terms such ex-post increase as ribā. If the increase is determined ex-ante (e.g. before or at the time of the transaction) it is not ribā according to the author. It is equivalent to any ordinary transaction. The ex-post and ex-ante distinction seem to be highly formalistic and may undergo the same criticism as that against the majority view on ribā.). However some authors belonging to the majority group may consider ribā al-jaḥilyya to be the only prohibited type of ribā. See also Saleh supra note 5 at 27-30.

25

Ibid. p. 102.

27

See Salehsupra note 5 at 97-99.

28

Mahmoud A. El-GamalIslamic Finance: Law Economics and Practice (Cambridge: Cambridge University Press2006) 69-70.

30

El-Gamelsupra note 28 at 83-84. In a personal interview with a friend the author learnt that before the existence of Islamic banks in Bangladesh local Islamic scholars devised a somewhat similar loan transaction using bai‘ salām to avoid ribā. For example when the father of the author’s friend needed to borrow money he would receive cash (say $100) from the money-lender and on the due date repay the money lender say 100 kilos of wheat or paddy the price of which being more than $100 (e.g. $120). Of course the money-lender was mainly interested in the profit (20% in the example) he made by selling the wheat or paddy. A similar ḥīlah is used even today in a number of jewelry shops that sell gold. The author’s wife went to a jewelry shop in Oman to exchange some old jewelry for new designs. Of course the sales and buying prices in the exchange will differ. Instead of exchanging old jewelry for new and charging the difference in price the salesman gave the author’s wife money for her old jewelry (lower price per gram) and then charged her for the new jewelry (higher price per gram). Such a transaction falls under the definition of ribā al-faḍl even when the quality of gold in the old and new jewelry differs. The purpose of this double transaction (ḥīlah) is to avoid ribā. Because the exchanged commodities belong to the same genus and are governed by the same ‘illah; any increase in price is considered ribā i.e the money lender and jewelry shop are receiving more than what they are giving.

33

See Schachatsupra note 29 at 79.

35

See Schachatsupra note 29 at 81.

36

See Horiisupra note 3 at 319-322.

44

See Horiisupra note 3 at 324.

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