3. Key Prohibitions: Riba and Gharar | Islamic Finance 101

[Music] asalam alikum and welcome to Islamic Finance 101 brief introduction to Islamic Finance with me alir cholan today we are talking about some of the key prohibitions in Islamic Finance so let's start [Music] B so when we are talking about prohibitions in Islamic Finance this is what we said before it's a part of religion or part of the dealings M and the rule here is that before we can say anything is prohibited we need to see whether there is a text from the sources of Islam to say XY Z is prohibited or that this goes against some of the aims and prohibition of the Sharia so for example it is very well known that Prophet sallallahu alaihi wasallam would sometimes go in the market of Medina and inspect the goods so one day he was passing by the grain seller and he put his hand and noticed there is some dump dampness there is some wetness in those grains and he asked him what is this and he says there was some rain so you know top part of the grain got wet so I flipped it I put a dry one on the top and the wet one down why would somebody do that because they want to show something better than what it really is and so the prophet sallallahu alaihi wasallam said don't do this but show a reality of it show that wet grain because wetness damage the grain also get the grain gets rotten more quickly so show what is it that you're selling and he said whoever deceives us is not from us in another narration when uh he was dealing with the uh business people he would say to the people don't intercept traders who are coming to the market on the edges of the town before they come and start negotiating because when these people are coming to the city they don't know the prices in the city it's not like today we have a iPhone and updates with the prices and so on so there is information symmetry here and so even if you offer correct price maybe that person later might think that you maybe cheat at them or they might hear different pric that could create very difficult circumstances So to avoid possibility of exploitation or bad blood between a Trader transparency is order of a day come to the market see for yourself when you have information and I have information in a good spirit we are negotiating with each other that is why even Omar after that uh may Allah be pleased with him said that if you don't know the rules of Islam that's the time when he was Khalifa he said don't you are not allowed to trade in our Market because you might engage in transactions that might not be permissible and so it is very important that we ask ourself if we were transported back at that time would we know basic ways of dealing or what are the prohibitions to stay away from that market so today we will just look at two key prohibitions when we are talking about Islamic commercial transactions and first prohibition is the prohibition of riba what is riba riba when you think about it is a type of increase but a type of increase that is unlawful you could say riba is also profit but profit that comes from specific type of transaction now in English sometimes we uh say uh it's either interest or Usery as as an explanation but which one is correct in reality we don't differentiate in Islam whether there is a lot of riba or a little bit of riba this is something that came in Christianity after a long time when they wanted to make RBA allowed so they were divided uh between a lot and little but in reality always the riba was any amount excess from certain transactions or the profit from the transactions where Islam doesn't want to see profit this is charitable transactions something that is non-commercial when you start profiting from that that is riba I have recorded a long class on riba on my YouTube channel trouble with riba or interest that goes in much more details but today we will look in very simple way what is it that we are talking about and consider the riba is is a huge concept I will today just focus mainly with a few examples of the profit from the loans okay so just for a very specific transaction and what did we say is the loan what kind of transaction is the loan when I give you something and I get it back same thing so money for money is a type of loan so the loans is same for same let's say monetary to monetary versus what is the sale we said it's some asset for money okay okay so think about these two just from the sale versus loan perspective sale asset for money it's a type of commercial transaction where you can profit so profitting debt is permissible versus a loan where is a monetary for monetary same money for same money in that case you cannot profit it must be one to one must be on the spot it's a charity and so on okay so hope that is very clear we see in the Quran very strong statements when it comes to the RBA where we are told that those who consume interests cannot stand on the day of Resurrection except the one who stands who being beaten by shitan into insanity this is because they say trade is just like riba but Allah has permitted trade and has prohibited interest here people were saying but this is just like this comparing trade and riba is the same and Allah is saying to them that this is something that Allah has uh prohibited versus what Allah has permitted one is the way way to have economy functioning goods and services produced circulated people earning livelihood around it and connecting yourself with the real economy an one another way is of parasite way not connecting yourself growing fictional Financial economy being secured isolated from risk not taking part not having skin in the game and way that you could potentially do exploitation and do certain Injustice and sometimes people say but is the RBA you know just who gives or take in the sah Muslim we have a Hadith where Allah's messenger curs the one who accepts the one who gives it the one who records it and two witnesses to it saying they are all the same this is a major sin one of those destroying sin and who are these four people these are the people at the time of originating this loan are responsible for giving it a legal standing for example lot of people say but you know if I'm I don't know accountant or somebody later looking over the books of the company this is a little bit different you know as um as Scholars would say somebody later just recording something as a factual um or auditing or some something along those line they would not be included in this particular categories because they are somebody who's coming later but in this particular category we are talking about at the time just like at the time of marriage you have witness for legal reason without which marriage wouldn't be legal so here we are talking about people who are involved in RBA without which there wouldn't be that original contract the same prohibition goes to other people other religions Jews Christians you go through their books it is clearly mentioned it is clearly mentioned that you shouldn't charge RBA on food on money and these sorts of things in fact in the Old Testament the word re is used and in Europe the money lenders who th sought interest or Usery on their loans were abhor despised and condemned for centuries in fact in the 12th century pope Alexander thei would excommunicate user and they were despised this is why even Shakespeare in his Merchant of Venice talks about money lenders who were hated who demanded payment in Blood and flesh and that's why we see even in the Bible uh Jesus peace be upon him when he comes to the temple he threw out these Money Changes who used to charge people riba on the shekele silver coins when it comes to the type of riba again it's a very deep concept so some of these narrations it's important for us to know when what we are dealing and where the rules of riba come and the types of riba and so on some of the very famous one is for example when the prophet sallallahu alaihi wasallam is telling us when it comes to the buying and selling and these transaction uh when you do gold for gold silver with silver wheat with wheat Bali with Bali dates with dates salt with salt that it must be same quantity for same quantity equal for equal transaction being made hand to hand and from these and many other we we we could basically say that every time you have Transaction what is it that affects these transactions when I'm giving you $100 and I'm getting 110 I give you 100 as a loan and you are paying more later on what are the two forces that act on these transactions so we see it from Hadith there are two one is quantity so in this same for same transaction you could have increase of one okay so this is subject matter one asset one monetary asset and another same thing is returned as a payment but increased so you could have increase in price effects that transaction and also delay in when you are returning this so from this we could say that there are types of riba that deal with these two aspects of the time and delay regarding the time and also the quantity so think about this whenever you have the basic loan whether it's your conventional home loan or credit card or personal loan or students loan all of these in its core is what is money for money transaction you're giving you the money yes for these purposes but then you're getting money more and sometimes people say but I'm getting money through this way or this mechanism as as soon as it is really just a money for money at the core that gives right to more money this is what we call riba now let me give you simple example so you know uh how to differentiate at least this basic type of re so for example we say when and this is the type of ribot that you will most of your time come across which is same money for same money I call this money for money money for money which should be what charity not commercial transaction and they shouldn't be benefit from this type of a loan so the rule when it comes to money for money is that money for money should be always exchanged one for one and on the spot so for example if I'm giving you $100 as a as a loan and I'm getting 110 in one month you see what's happening here I have given you some time in exchange for increase that's why when you ask people to continue the statement time is what they going to say time is money what they mean by this they mean by with the time money grows so as a compensation for time this concept and idea that money starts giving birth is uh created so while there is something to be said about time value of money in itself that we rather prefer money now than later that's a different conversation but here what we are talking about that $100 now for 110 later is a type of increase that is not legitimate that's a way of profiting that is not legitimate now let me give you another one let's say you have a for example 10 gram of gold like a coin let's say and you you you you change it for 100 G or whatever is equivalent 100 gr of silver coins but you are paying in one week this would also not be permissible because uh although it is allowed to have uh different exchange rate between gold and silver or money one money and different money what you can't do is allow time to affect this transaction because then that could impact the exchange rate and create the profitability so when you're exchanging different types of money you must do it on the spot and the exchange rate mean it's equal to equal now what about something like this if you have a cash flow maybe it's a debt of $100 installments or you sold something however the debt is created there is a cash flow and you say I want to give you $900 now for that cash flow of10 $100 which is $1,000 so how do we conceptualize that it's a series of payment all together $11,000 and changing them today for $ 900 so in this case it's not one to1 transaction we cannot exchange 1,000 for 900 okay this gives rise to the profit in the contract where both subject matter and considerations are the same thing and since there is no no profiting from that this is riba illegal profit and then when can we profit well when subject matter and considerations are two different things so for example if I sold you the house which is non-monetary and I got for you let's say 300 in 5 years 300,000 in installments over the 5 years this is now a type of a sale and is it permissible for me to buy this house for 200 and sell you 300 yes I can profit from this transaction now because as we said this is a sale another major prohibition is the prohibition of and Abu Hur states that the prophet uh sallallahu alaihi wasallam prohibited selling by way of tossing a stone to settle a sale or sale of G in those days people would have certain mechanism by which they would in uh determine the pricing you would agree that you will buy something or sell something and rather than fixing the price or agreeing on the price you would use like mechanism like for example as if I'm flipping the coin or throwing some sticks on the ground or or whatever it is to determine the price so I might sell if the coin flips go on this side it's $10 if if the other side then it's a five and so this is very unpredictable way I already committed to buy something I don't know the price okay so this creates what we call G so this is a type of uncertainty not uncertainty that is normal or expected this is a created uncertainty which also is connected with some Hazard chance risk delusion deception danger it's also any type of situation where you make somebody believes something that is false or vain or put somebody in a situation of deception you might have this because of the nature or the consequences of this results are hidden what are the sum of example because sometimes you might have certain things that you are not necessarily engaging in the transaction because of this particular profiting from deception or it's not something you can avoid or it's a present always like let's say you go to taxi and you don't know exactly the price but you have idea how it is calculated the aim is not here to profit from this inconsistencies and small details but aim is to get there get pay for that service so something that cannot be um avoided and it's not a purpose of the transaction so in these cases this sort of small level of uncertainty they are fine and also anything that is in a normal course of action and certainly like you're running a business or doing this is coming from the real business your focus is provide the products and services not to profit from these little uh inconsistencies and the major uh major uh what we call uncertainty when it comes to your business operation that you can mitigate by working hard strategizing and so on but your profit would come from actual fruit of the business so the G that we are talking about is number one it's there is some sort of ignorance or lack of transparency as I mentioned before the prophet would say don't intercept those Traders you don't want to profit from their ignorance you don't want to also profit from deception like in an example of the seller of the grain of the vet grain selling something that you don't uh don't have in a sense that that is something that you cannot deliver now sometimes people misunderstand this principle this doesn't mean that item doesn't really exist it means basically that certainty of the delivery you don't have it but for example in construction you have a contract of isna somebody will build the house if the house doesn't exist but they're fairly certain it's a something that is customarily done predictable understandable can be clearly described you go to the shop you order a coffee that coffee doesn't exist technically right they have to put it together you can still buy it you order something booked to be printed it's a printing and delivery type of a business from online that's fairly certain to to to be delivered not like this unique thing that nobody knows somewhere I need to find it or my car is stolen I'm still selling you you don't know if you're going to get it so this this is the borderline and what we are talking about selling what you don't have and anything where you have unspecified price dates delivery outcome is uncertain quality and Quant quantity there is complexity in the contracts like we have seen these cdos and some other Arrangement they're too complex and anything that is uh speculative in nature like these derivatives they violate number of uh number of uh different conditions now what is the case study that would involve uh both uh Ruba and uncertainty is for example insurance insurance when you pay for insurance you don't know what you're going to get you're paying $100 you might get more or less in some insurances where you get certain services and so on like health insurance or something like where the actual thing that is given is the product or service and so on it eliminates that money for money but there is the element of still G there so rather than transferring uh uh the risk on the third party for the payment uh you you you could have as we see in the Islamic Finance organization they are structuring taka where you are sharing uh risk and transaction is trans uh organized little bit differently looking forward to see you in the next episode and read some of your comments Salam do [Music]

In this episode, we introduce the key prohibitions in Islamic finance, focusing on the concepts of Riba (interest) and Gharar (uncertainty). Playlist of all episodes: https://youtube.com/playlist?list=PL648OdKhWVX_8PeSlT112XSaVtErfX8w2&si=hlQ5vTduS5uB_ngJ Learn More! To learn more about Islamic finance and economy and to support MMM in producing future financial literacy videos like this, consider becoming a member of our Muslim Money Matters platform. 🌐 Join us at https://www.muslimmoneymatters.com 📲 Connect with Almir on social media: 🔗 Links: https://www.almircolan.com/links 📩 Subscribe to Almir's email updates: 🌍 Website - https://www.almircolan.com