Islamic Finance Blog & Articles
Learning about the concept of Riba will provide you a better understanding of its application in the 21st century. The blog written below will talk about Riba and ways to be free from riba to control the choices you make in life.
What is Riba (Interest)?
Riba is a concept in Islam that essentially relates to the idea of growth or excess. In other words, it is referred to the interest on loans or deposits.
The two types of riba are: loan contract and exchange contract.
Loan Contract (Riba al-Nasiyah)
It is the most common form of riba. This pertains to the increase in the borrower's payment to the lender beyond the loan's original amount due to the delay in payment.
It is not important if the increase above the original loan amount is established at the beginning of the contract or at its the end. Any increase or additional amount to the original loan amount lend is termed Reba. This may involve interest negotiated in advance as a condition of the loan. This sort of riba is termed riba al-Quran.
Common examples of Riba al-Quran:
Exchange Contract (Riba al-Fadl)
This kind solely covers goods such as rice, wheat, oil, sugar, etc. If two individuals exchange the same commodities in uneven quantities, the excess would be riba.
There are two major requirements to classify a sale as possessing riba:
Hence, the commodities must be exchanged simultaneously, on the spot. If one of the goods is delayed, it is Riba. Next, the quantity must be equal for identical commodities.
Why is Riba forbidden in Islam?
For several reasons, Riba is forbidden under Shari'ah law. It is intended to guarantee equity in exchange. It is intended to ensure that people can secure their money by illegalizing unfair and unequal trade.
Islam is aimed at promoting charity and serving people with kindness. Illegalizing riba eliminates feelings of selfishness and self-centeredness that might generate social antipathy, hostility, and distrust. The Shari'ah law provides opportunities where individuals are urged to do charitable work - to lend money without interest.
Ways To Free Yourself from Riba
1) Avoid Credit and credit cards
We cannot avoid the reality that we live in a world in which credit cards are common.
Credit cards are one of the ways to get big cashback and cash discounts, only if you pay it every month promptly. The ease of swiping cards may lead to a debt potential since the immediate reward of spending future money might be very appealing. You can avoid debt from rising by paying your balance every month, but your debt and interests will grow if you simply pay the minimum and continue to make purchases.
Credit cards are an example of Riba from a Muslim standpoint. They are the pillar of consumerism. It pushes you to spend even without the money. By being an active credit card user, you indirectly support the traditional banking system with practices riba.
So, drop those credit cards and instead use cash or debit cards. This is the safest method to prevent Riba completely.
2) Open a Shariah-compliant savings account
A Shariah-compliant savings account provides the same daily banking services as mainstream accounts. But they do not return your money or provide overdraft facilities as Islamic law is against the principle of the payment or charging of interest. Any invested money will not be used to generate interest or to invest in prohibited businesses. Any investment is kept separate from other bank accounts.
3) Apply for interest-Free loans/Islamic bank loans
There are Islamic bank loans that do not take interest on loans. Instead, the bank utilizes an equity participation system. This is analogous to profit sharing. This system means that if an individual or business gets Islamic bank loans, the individual/business will repay the loaned amount without interest and instead share its profits to the bank. If the individual/business did not profit, then the bank does not earn or benefit.
4) Minimize Interest-Bearing Liabilities
Getting loans for home renovation are also additional interest-bearing obligations that you must take into account. If your furniture or smart TV is out of budget, be prudent by budgeting and spending wisely on items you need instead of items you want. You will commit to a 2-year home renovation loan repayment that involves Riba simply because you want a piece of new furniture that only loses value over time.
5) Seek Dividends and Capital Appreciation, Not Interest
Concentrate on high-yielding dividends or undervalued stocks with the potential for substantial future capital growth. It is strongly advised to avoid instruments possessing riba such as bonds and fixed deposits.
In Singapore, MUIS has responded to whether or not it is permissible to invest in the stock market in Singapore.
MUIS does not approve or promote any specific stocks or investment portfolios. You are fully accountable for how your money is invested. It is safer for newcomers to the stock market to concentrate on Shariah-compliant firms. There are detailed financial requirements that firms must follow to be listed as Shariah-Compliant.
How to deal with the Riba (interest) which you owe?
If you owe Riba (interest), clear the debt off as much as you can all at once.
If you firmly believe that Allah's guidance is vital for success in the Hereafter, then resisting interest despite the prevailing traditional banking system is your means of obtaining Allah's favor. It may be challenging, but Allah, on the other hand, guarantees eternal life in the Hereafter.
How to deal with the Riba (interest) you already own?
It is acceptable to spend the Riba you already own through charity donations. Rewards will now no longer be acquired for doing so; however, through doing charitable activities using the Riba(interest) you own, your wealth could be cleansed, and you may have removed the Riba in a manner that doesn't give you self-benefits. Through this, you'll be cleaning your self of the impermissible, and be rewarded.