Sunday, September 2, 2012

What Is Riba Al Fadl and Why Is It Prohibited in Islamic Economics?

The leadership and management of Islamic finance must be well aware of Riba Al Fadl and its implications in the modern world of economics and banking. In the leadership development programs the Islamic concept of Riba or interest must be taught with details in the perspective of all schools of thoughts of Fiqh.

In this treatise we will examine a type of Riba, Riba Al Fadl. This type of Riba or interest is mentioned in the Sunnah of the Holy Prophet (S.A.W), not explicitly in the Quran that is why it earned another name Riba Al Sunnah. The source of this Riba is a well known hadith of the Holy Prophet (S.A.W). The Holy Prophet (S.A.W) is reported to have said:

"Sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver, sell dates in exchange of equivalent dates, sell wheat in exchange of equivalent wheat, sell salt in exchange of equivalent salt, sell barley in exchange of equivalent barley, but if a person transacts in excess, it will be usury (Riba). However, sell gold for silver anyway you please on the condition it is hand-to- hand (spot) and sell barley for date anyway you please on the condition it is hand-to-hand (on the spot)."

In the light of above mentioned hadith the definition of Riba Al Fadl is:

It is the excess which is received in exchange of certain homogenous commodities and/or their purchase or sale is not hand to hand i.e. on spot.

There are six articles that have been mentioned in this hadith:

1) Gold

2) Silver

3) Dates

4) Wheat

5) Salt

6) Barley

These six commodities are to be bought and sold when their quantity is equal and their purchase is on spot. However, it is the matter of great debate whether only these six items are meant for themselves or they are mentioned as examples for the kinds of the six different types of commodities. Imam Abu Hanifah observes two qualities namely weight and volume in this hadith. It implies that all those commodities which have weight and/or volume are to be exchanged with the same commodities come under these rules. Imam Shafi sees two other characteristics, medium of exchange and eatable. According to him the commodities which are edible and capable of becoming currency fall under these rules. Imam Malik observes two characteristics of Eatable and preserve-able while Imam Ahmad bin Hanbal sees three characteristics of edible, weight and volume. Another opinion related to Imam Ahmad bin Hanbal coincides with that of Imam Abu Hanifah.

After this overview the leadership and management of Islamic finance can find room for their convenience in the area of Riba Al Fadl to build the modern structure of Islamic finance and banking.

Wisdom behind Prohibition of Riba Al Fadl:

The wisdom behind prohibition of Riba Al Fadl is that practically, it is not possible to create and maintain some certain standard or criterion in the exchange of the homogeneous commodities. If is allowed it will give rise to exploitation. It will open door for dispute over the matters of quantity and quality of the goods being exchanged.

So if one has to exchange homogeneous commodities one has to sell his commodity for money and then buy the other commodity of the same kind of different quality with money. This is the natural way to end all disputes.

Leadership and management of Islamic finance must be very sensitive to the matter of Riba. In their leadership development programs and seminars they should impart knowledge with sensitivity of the issue of interest. But to gain essential flexibility they should see financial matter in the light of all comparative study of Islamic schools of Fiqh to have a vast views and scope to cope with the emerging problems of Islamic finance and banking.

The Madinah Institute for Leadership and Entrepreneurship (MILE) brings senior executives and high potential leaders from all over the world for executive education to discover new dimensions in Leadership Development, Good Governance, Telecom Training, HR Performance and various other Leadership and Management practices to help them grow in their business careers. MILE is a CSR initiative of Savola Group's CSR Programs and grew to be a collaborative initiative aims to attract the contributions and support of many other companies, academic institutions, research & consulting organizations and professional groups.