Advantages And Disadvantages Of Riba

Islamic finance within compliance of Sharia law form the core of Islamic banking and have become one of the fastest growing segments of the financial industry, operating in over 75 countries (Cihak,Hesse2008). Islamic finance initially was concentrated in the Middle East and South East Asia, but is now found globally. The roots of Islamic finance stemmed from the efforts of Islamic scholars to identify alternatives to the interest based system that is prohibited and condemned by Allah within the Quran. Islamic finance also prohibits the practice of lending money for investments in tobacco, alcohol, gambling and weapons per Sharia law. In the wake of the global financial crisis however, there has been a renewed interest on the

However, the Islamic banking system was not like any other banking system. The Qur’an strictly prohibited the use of riba, or interest, so all Islamic banks must be interest-free or else the system wouldn’t be an Islamic bank system. Yet, the most important development made by the

Syariah prohibits the fixed or floating payment or acceptance of specific interest or fees (known as Riba or usury) for loans of money. The word "Riba" means excess, increase or addition, which according to Syariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). However, these principles may have been applied to historical Islamic economies and in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

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.” (Umar). From an economical perspective, what the Prophet of Islam is referring to here is the idea that only the actual value of dates should exist in any trade transaction. For example, a bank giving out a loan for 100,000 dollars with an interest of 10% means that the 10,000 interest to be paid does not actually exist in the economy and hence to the prophet this is considered riba because the bank is gaining money out of nowhere. In the Sharia, the modern day solution to this banking issue is Islamic banking which offers; “..more just and equitable distribution of resources; more responsible and profitable lending due to the necessarily closer bank-client relationship; less volatile business cycles; and more stable banking systems.” (Evans, 1987)

Holley discusses three conditions for this to happen: both sides are knowledgeable; there was no compulsion on either side, and both sides were able to make rational judgments at the time of exchange (531). With these come degrees of fulfillment, the "ideal exchange" where "both parties are fully informed, fully rational" and enter without coercion; an "acceptable exchange" where "the exchange was adequately informed, rational and free from compulsion" (532). He suggests "the primary duty of salespeople to customers is to avoid undermining the conditions of acceptable exchange" (532). I believe it should go one step above this, in between ideal and acceptable, in what I call, desired exchange- an adequately informed, rational, free from compulsion and with the best intentions at heart exchange.

The Sale of Goods Act 1979 controls English law transactions between the purchaser and the seller of goods; it also applies to contracts where involving a transfer of the property in goods or an agreement to transfer a consideration in money.

Traditionally, transactions in the commercial world have been approached on the basis that the parties are presumed to create legal obligations and the creation of meaningless documents are unthinkable.

The Islamic finance industry has been evolving and growing rapidly for the past decade. The recent global financial meltdown has open opportunity to Islamic finance to offer a new outlooks and effective solutions to economics problems. Economists are now looking to the east, learning lessons and seeing advantage of Islamic finance. Since then, serious research on Islamic financial system has been carried out and Islamic financial system has been an interesting area of discussion.

Banking is also a business activity and helps in mobilizing the money in the economy. It is a

Islam means surrender before the GOD, because they have faith only in Allah and nothing else and Islam is the complete code of life of the human beings on the earth, it does not only cover the social life of the human beings but it covers also the economy. GOD means generator, operator and destroyer, Quran came through the Revelations made by God to the prophet Mohammed (P.B.U.H) and was compiled in a book form in the life of the third caliph and provides the direction to the human beings for the right actions on the earth. The business is also the part of the right actions for all the Human beings and for the first time on the earth the Mudarbah system meaning Profit and loss Sharing business was performed by the Prophet Mohammad (P.B.U.H) for his Wife khadija (Rajiallah anhu); before the commencement of the Islam the Mudarbah types of business was not performed by the world business groups and the business transactions were performed by the small and big Merchants on that time only for the sake of benefits and with the motive of acquiring unreasonable interest. In the holy Quran, the four chapters are governed for the business transactions relating against the interest such as Sura Baqra, Sura Nisa,Sura Al Rum and lastly Sura Al Imran and emphasize on the principle of the Free interest economy. In the Islam religion the interest word is used in the Arabic term” Riba” or usury which means excess,exorbitant,pre-determined and unreasonable, because it increases the

The prosperity and peace of a society much or less depends on its economy. While for the smooth running of both, there are several instructions in Islamic Shariah and allows what is right and forbids what is wrong. When we talk about financial issues, Islamic Shariah strictly condemns Riba. The question may arise why Islam prohibits Riba? While it was already in practice before the advent of Islam and still it is a part of different economic systems throughout the world. It is simply because Islam gives respect to human beings and condemns all the attempts that are harmful and disgraceful for humanity. Therefore, Riba is not only forbidden in Islam but economic experts are also in search of its substitute. Since borrowing on interest rate creates several issues including: less efficient allocation of resources, indebtedness, unemployment and economic instability. While in society it causes injustices, inequity, poverty and imbalance etc. In this paper we are discussing how Riba causes imbalance in the society and instead Riba what Islam demands from its followers.

For interest-free banks, the mode for financing personal loans and pushing their own type of banks forwards is filled with hurdles due to the profit/loss sharing rule. Same percentage of returns is being offered by both the banks to their respective depositors, and largest fraction of their funds is forwarded towards the financing of durables. Murabaha is the mode of finance that interest-free banks make use of. Samad (2004) made contribution to the field through his comparative study of Bahrain Islamic bank’s performance against that of other conventional banks. Making use of the T-test, he explored same outcomes in terms of profitability and risk, whereas no variation was detected in liquidity of the two types of banks.

Hence this CoB is free of interest, contempt the reality that it resembles the conventional “interest” (Naughton 1999). The wonder of instituting interest-free banks and hence freeing the Islamic savings from riba had practiced the minds of Muslim philosophers for the better component of this century.

Main competitive pitch of Islamic banking is in Sharia compliant and interest free. But the real business of Islamic banking is producing profit.

From the inception of of the civilization a country the banking sector has been dominating the economic development by mobilizing the saving from the general people