Riba is Arabic term defined for usury or interest. The word Riba means excess, increase or addition. According to Islamic terminology, interest means effortless profit which comes free from compensation or in the simple meaning, any excess compensation without due consideration. Any positive, fixed, predetermined rate tied to the maturity and the amount principal is considered Riba and is prohibited in Islamic financial systems. This prohibition is based on an arguments of social justice, equality, and property rights. Islam itself encourage the earning of profits but forbids the changing of interest because profits.
The different between the amount received by the borrower and the amount paid by him is interest. And this is exactly what the
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It does not believe in generating wealth by accumulating interest by mere passage of time. For example here is where an individual takes an interest based loan of RM100, 000 for a period of one year. He is asked to return this amount of RM3, 000 for every month of the year. This means that overall he need to pay is RM136, 000 after a year. Notice the debt growing as soon as the amount borrowed while wealth generation on the invested money is not start yet. This is due to time required for business setup, business generation and closing sales to allow the profit to flow into the company’s account. While the initial profits may only cover running costs, the interest rate of RM3, 000 per month is allowing the debt to grow while the rate of actual growth of wealth is dependent on sale of services or goods. In case if after 1 year the borrower has not made enough profit, his debt keeps increasing by passing of every month. This economic exploitation is visible at every level of economic cycle of society. People and countries end up in debt for unrealistic amount while real trade activities may never be able to generate such amounts to pay them off. The practice of Riba now has been applied in almost all sectors of the economy. It impact to macroeconomic problem such as inflation. There are many opinion stated that the interest is a compensation of inflation, but when we take a look, in fact, Riba actually will impact to the
Main competitive pitch of Islamic banking is in Sharia compliant and interest free. But the real business of Islamic banking is producing profit.
Interest earned now can be found from getting the difference between the principal and amount.
Interest is stated in terms of a percentage rate to be applied to the face value of the loan.
Term Loan has the same interest rate and same payment schedule as the Modified Debt
Rose paid 8% interest on a $12,500 loan balance. Lily paid $5,000 interest on a $62,500 loan. Based on one year:
Compensating balance = 10% → 0.10 = loan ∙ 0.10 = $11,111,111 ∙ 0.10 = $1,111,111
The reason for this difference is that interest rates are used by less and less principal, thus reducing the interest portion of the
On that loan, he paid $11,100 in interest. This interest expense is seen on line 10 of Schedule A.
This never-ending cycle of debt is the reality for most, if not all of Third World countries. In the 1970’s, Western banks loaned out huge sums of money to Third World nations with the intention of one day making profit. And they succeeded.
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)
John Stacey: That seems strange to me. Since loans are the reason interest payments are
Becoming an expert in Islamic economics and finance field is one of my long-term goals in life. I started to organize and made a plan towards achieving that dream since senior high school. The concern towards Islamic economics and finance concept, and its application for society and the country began when I was reading a book entitled Islamic banking-theory and practice. After finishing reading the book, my interest in Islamic economic and finance topics rose and strengthen my own determination to become the expert of Islamic economics and finance. The main principle of Islamic economics and finance which offers the just and ethics in economic activity, poverty alleviation through income distribution mechanism, and prevention of economic and
The impact of the change interest rates and inflation has a persistent impact on the well being of any given society. For this purpose it is the understanding that each individual in society should have an understanding of what such changes bring fourth for the man on the street. In this introduction, we are going to introduce certain key points to remember when dealing with interest rate- and inflation changes.
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.