Riba and Trade: a Clear Separation

As the ideal religion Islam has provided explanations for every facet of human existence whether it has to do with worship or non-worship. Verse 3 of Surah Al-Maidah makes reference to this:

“This day I have perfected for you your religion and completed My favor upon you and have approved for you Islam as your religion.”

Financial transactions between individuals are governed by Islamic law and are categorized under the fiqh muamalah (transactions) chapter. The chapter on riba or usury which is expressly forbidden in Surah Al-Baqarah verse 275 is among the most significant in fiqh muamalah:

“Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, ‘Trade is [just] like interest.’ But Allah has permitted trade and has forbidden interest.”

There is an intriguing analogy in the verse above where the unbelievers compare riba to trade. The verse clarifies that trade is allowed while riba is prohibited. The distinctions between trade and riba will be covered in this article along with the reasons why trade is allowed and riba is forbidden.

Also read:Islamic Economic System and the Prohibition of Interest (Riba) 

Riba definition

The word riba is derived from the Arabic word ربا-يربو which means to grow or increase. The example of linguistic mean of that word is found in Surah Ar-Rum verse 39:  

“And whatever you give from riba to increase within the wealth of people will not increase with Allah. But what you give in zakah, desiring the countenance of Allah—those are the multipliers.”

The verses use of the word ليربو in the means of “Increase”.

The most straightforward definition of riba that sets it apart from trade in Islamic jurisprudence is as follows:

“Riba is an unwarranted rise in compensation that is specified in sales debts or loans where riba is involved.”

The main argument in the riba chapter according to the definition given above is that the increase obtained through riba does not qualify as legal compensation under Islamic law.

Also read:Does Islamic Financing Have to Be Cheap?

Trade and Riba: Equitable and Inequitable Transactions.

The distinction between trade and riba is demonstrated in the following example:

-Trade: For 10000 rupiah a bundle of petai (stink beans) is purchased.

-Riba: One gets 19 5000 rupiah bills in exchange for 100000 rupiah.

Every item in trade has a corresponding transaction as seen in the above example. Ten thousand rupiah for instance is the compensation for each bundle of petai in the transaction. However there is an additional 5000 rupiah in a riba-based transaction that is not reimbursed. This distinction indicates that riba is an unfair exchange whereas trade is a fair one.

Also read:The Distinction in Sharia Between Gambling and Business Risk

Riba: Risk-Free Exchange.

This is an intriguing hadith that sets trade apart from riba:

“Ismail narrated to us, saying Malik narrated to me from Abdul Majid bin Suhail from Sa’id bin Musayyab from Abu Sa’id Al-Khudri and Abu Hurairah (may Allah be pleased with them) that the Prophet (peace be upon him) employed a man to manage the land of Khaibar. The man brought ‘Janib’ dates (dates not from Khaibar), and the Prophet asked, ‘Are all the dates of Khaibar like this?’ The man replied, ‘No, by Allah, O Messenger of Allah! We exchange two or three sa’ of Khaibar dates for one sa’ of Janib dates.’ The Prophet said, ‘Do not do that. Instead, sell the Khaibar dates for dirhams and then use the dirhams to buy Janib dates.’” (Sahih Al-Bukhari: 3916)

In this hadith the Prophet (ﷺ) proposed an alternative to the direct exchange of dates for dates which entails riba: exchanging it with money first and then exchange the money with the other dates. This is justified by the fact that trading one kind of asset for another preserves the typical risks of commerce especially price swings which are a crucial component of trade under Islamic law. However by directly exchanging two riba-based assets from the same type, Riba aims to remove this risk. For instance we remove the risk of trade when we give someone a riba-based loan since we are assured of receiving the principal plus a margin with no chance of loss because no other assets are traded. This is an additional characteristic that sets Riba apart from trade.

Also read:How Malaysia Became a Leading Country in Islamic Finance

In conclusion

We can infer from the aforementioned explanation that there are notable distinctions between trade and riba with regard to fairness and the typical risks involved in trade. From a legal standpoint these distinctions render trade acceptable and riba forbidden. Let us abide by Islamic law and steer clear of haram (forbidden) transactions in order to pursue halal (permissible) income.

Wallahu alam

Riba and Trade: a Clear Separation

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References

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