RIBA (INTEREST) IN THE HADITH

1. From Jabir: The Prophet, may peace be on him, cursed the receiver and the prayer of interest, the one who records it and the two witnesses to the transaction and said: “They are all alike (in guilt).” (Muslim, Kitab al-Musaqat, Bab la ‘ni akili al-riba wa mu’ kilihi; also in Tirmidhi and Musnad Ahmad).

2. Jabir ibn ‘Abdallah, giving a report on the Prophet’s Farewell Pilgrimage, said: The Prophet, peace be on him, addressed the people and said “All the riba of Jahiliyya is annulled. The first riba that I annual is our riba, that accruing to Abbas ibn “Abd al-Muttalib (the Prophet’s uncle); it is being cancelled completely.” (Muslim, Kitab al-Haji, Bab Hajjati al-Nabi, may peace be on him; also in Musnad Ahmad).

3. From ‘Abdallah ibn Hanzalah: The Prophet, peace be on him, said: ”A dirham of riba which a man receives knowingly is worse than committing adultery thirty-six times” (Mishkat al-Masabih, Kitab al-Buyu”, Bab al-riba, on the authority of Ahmad and Daraqutni). Bayhaqi has also reported the above hadith in Shu’ab al-iman with the addition that “Hell befits him whose flesh has been nourished by the unlawful” (ibid).

4. From Abu Hurayrah: The Prophet, peace be on him, said: “On the night of Ascension I came upon people whose stomachs were like houses with snakes visible from the outside. I asked Gabriel who they were. He replied that they were people who had received interest”. (Ibn Majah, Kitab al-Tiarat, Bab al-taghlizi al-riba; also in Musnad Ahmad).

5. From Abu Hurayrah: The Prophet, peace be on him, said: “Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother”. (Ibn Majah, ibid).

6. From Abu Huryrah: The prophet, peace be on him, said: “There will certainly come a time for mankind when everyone will take riba and if he does not do so, its dust will reach him”. (Abu Dawud, Kitab al-Buyu’, Bab fi ijtinabi al-shubuhat; also in Ibn Maja).

7. From Abu Hurayrah: The Prophet, peace be on him, said: “God would be justified in not allowing four persons to enter paradise or to taste its blessings: he who drinks habitually, he who takes riba, he who usurps an orphan’s property without right, and he who is undutiful to his parents”. (Mustadrak al-Hakim, Kitab al-Buyu)

Interest- free banks.
This is the business of doing banking business without indulging in the taking or giving of interest in all forms of financial transactions. It is usually referred to as Islamic banking.

Objectives of Interest -free Banking
The objectives of interest-free based banks may be summarized as follows

To provide a comprehensive form of financial inter-mediation on the basis of profit sharing systems.

To mobilize savings, and expand the extent of dealings within the banking sector by offering an alternative non-interest form of banking to a certain section of the community who would like to deal on that basis.

To serve its depositors and the public at large by providing competently and professionally all those pure banking services which do not involve financing and which are expected of any contemporary bank.

To undertake all types of beneficial direct investments within the framework of Islamic Law.

To undertake certain socially desirable activities on non-profit basis.

Rules Governing Interest-free Finance.
The rules regarding interest-free finance have the concept of equity and morality as their foundation. They include, but are not limited to, the following:

Any predetermined payment over and above the actual amount borrowed is unlawful/prohibited. Only one kind of loan is allowed whereby the lender does not charge any interest or additional amount over the amount lent for.

Financiers are encouraged to become partners with their finances in order to share profits and risks in the business instead of becoming creditors. The provider of funds and the user of the funds should share the risk of business ventures.

Making money from money is not acceptable. Money is only a medium of exchange, a way of defining the value of a thing: it has no value in itself and should therefore not be allowed to give rise to value.

Operations of Interest-free Banks
Interest-free banks, commonly known as Islamic banks, have devised financial products based on risk-sharing and profit principles. Broadly speaking, the areas in which Islamic banks are most active are in trade and commodity finance property and leasing.
Mobilisation of savings
Interest free-based banks mobilize funds from the public through providing various types of deposit accounts. These include:

1. Trust Accounts
These are similar to the current accounts found in the Interest-based Banks. Moneys deposited in these accounts by the owners are trust deposits. With the common consent of the depositors, the bank may make use of the funds at its own risk and responsibility in respect of profits or losses on condition that withdrawals and/or disbursement is made immediately upon demand by the depositor.

2. Joint Investment Accounts
These are deposits received from customers desiring to participate with the bank in investments. The bank takes the funds deposited in these accounts with mandate from their owners, as part of the mainstream investment pool of the bank. The owners receive a certain percentage of the annual net profits or loss realized in accordance with the conditions agreed upon on the account at the time of opening the same. Partial or complete withdrawal of funds is possible at any time.

3. Fixed Deposit Accounts
These are similar to the Joint Investment Accounts except that they are accepted on the basis of varying tenors of 3,6,9 or 12 months. Partial or total withdrawal of the deposit before maturity is permitted only in exceptional cases.

4. Specified Investment Accounts
These are deposits received from customers with instructions to the bank to invest such deposits in specific transactions. Thus, the bank merely acts as an agent for investment of these deposits in a specific manner against an administrative fee on any profits realized.

Holders of investment accounts are said to be susceptible in ending up either in profits or losses at the end of the year.

Like the Interest-based Banks, the Islamic bank opens these accounts for all individuals and for all types of legal entities.

Provision of Financial Inter-mediation.
In Interest-based Banks, the task of financial inter-mediation is accomplished by the buying and selling of money. The banks buy money from depositors by guaranteeing them a fixed interest and sell the deposits to borrowers by charging then a guaranteed fixed interest. Through this way the banks trade debt. This treatment of money as a commodity bought and sold with interest is where Interest-free Based banks wholly depart from the overall concept of banking practice. To this end has been raised the question," How, then, do Interest-free Banks perform financial inter-mediation?"
The methods of finance available may be grouped in two categories; debt finance methods and trade finance methods. The most common forms of debt finance are Mudharaba and Musharaka.

Mudharaba (Profit -Sharing System)
Mudharaba means a business partnership between two persons with one providing the capital while the other, as the active partner, will provide the effort, expertise and professionalism for a successful business performance the profits of which are shared according to a pre-agreed formulae.

The system envisages the formation of a tripartite system composed of the suppliers of savings and capital funds, the bank, which serves as an intermediary link between the suppliers of funds and the actual users of funds. The borrowers obtaining capital from the bank would share the profits of their productive engagements with the bank according to a mutual agreement while the bank in turn shares the profits so accruing to it with the depositors according to predetermined percentages. The bank's depositors do not receive any pre-agreed "interest" on their deposits.

Incase no profit is realized, the active partner would receive nothing for his efforts while the provider of capital would recover only his capital. In case of loss resulting from normal business conditions the active partner will lose nothing but his labour and effort while the provider of capital suffers the entire loss. Thus, the provider of capital takes the financial risks of the transaction and it is this finance risk which justifies his claim to a share in any profits even though a dormant partner. The active partner is however held responsible for the loss of capital should this be the result of his negligence, willful act or non-compliance with the conditions of the contract.

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