REVIEW ARTICLE
“ISLAMIC LAWS ON RIBA (INTEREST) AND
THEIR ECONOMIC IMPLICATIONS”

by,
Shabrina Rahma Anindya
20140420052

UNIVERSITAS MUHAMMADIYAH YOGYAKARTA
ECONOMICS FACULTY
ACCOUNTING DEPARTMENT
IPAcc
2016
The purpose of this research paper is to identify the Riba in transaction whereas it’s pessimistic repercussions and why the elimination of Riba in financial transactions is critically important. The characteristics of any financial transaction have some basis which differentiates it in Conventional or Islamic financial transaction and the most vital thing is called Interest or Riba. In this research we will discuss about the Riba (Interest), why it is essential to eliminate Riba, what are the pros and cons of it to the society and the harms it can create. We will also discuss the differences that how riba based system, if replaced by the Islamic economic and financial system can help the society as well as what primarily could be the optimistic effects after the elimination of Riba from the system. Shariah Rules are the basis of any contract and essential to derive and allow rulings based on the principles of Quran & Sunnah.
Riba (Usury) is one of the most hatred things in the eye of Allah SWT. In Quran, Allah SWT has mentioned very clearly that those who are dealing in Riba are actually in war against the Almighty. Thorough out the recent years, Islamic financial institutions are one of the most growing industries that has been accepted and appreciated by society whether Muslims or non-Muslims across the globe. Riba in financial transaction is considered as to charge a specified profit or amount within a certain period of time for a loan given to anyone. Riba is actually not limited to it. It has way broader spectrum than just limiting it to the financial transactional Riba. It is considered among seven most disliked sins.
The Islamic fundamentalist doctrine on riba states that the rate of interest is zero, a doctrine based upon the Quranic injunctions against it. 1) The word 'riba' means 'increase' as interpreted by Imam Razi, 2) which corresponds to the word 'interest' as defined by Webster's New World Dictionary. In both cases the increase refers to the amount beyond what is owed. Thus, the strictest interpreta­ tion that can be given to the word riba is that it means interest-an amount, or rate, due above the principal of a loan. The word riba, however, is commonly translated as usury' which is defined by Webster's Dictionary as "an excessive or unlawfully high rate or amount of interest." Thus, the fundamental aspect of the controversy about the doctrine of interest in Islam is whether the rate of interest is zero, in which case riba is interpreted to mean interest per se, or whether a positive rate of interest is permissible, in which case riba is interpreted to mean usury.
Probably the most common objection to the zero rate of interest on a business loan from which otherwise dividend income is lawful has been the implicit argument that such a loan involves an opportunity cost to the lender determined by the foregone profits that the lender would have earned had he invested the funds in a business investment.
There are two kinds of riba according to Imam Razi:9 (1) riba nasia or riba on credit and (2) riba fadl which relates to barter transactions. The injunctions stated by the Prophet Muhammad on riba fadl also have broad implications on riba nasia. In general, given the above kinds of issues involved in the interpretation of riba fadl it would be desirable to fully monetize transactions and remove barter trading altogether. Barter trading is inefficient by its nature and its removal through monetization of transactions would eliminate any doubts about the implications of riba fadl.
The interpretation of the Islamic laws governing market transactions which follow the pronouncements on riba fadl requiring that trading involving loans and other types of transactions be carried in spot market prices whether deliveries are intended for the spot or future periods, would present no difficulty as long as these transactions occur under conditions of constant prices and in the same currency. The same argument would hold in international trade when the exchange rate is fixed and constant prices prevail. However, the interpretation of these laws becomes more difficult when one or more of the above conditions change. These difficulties are independent of whether riba is interpreted to mean usury or interest.
Loans may be taken out for two purposes: first, for consumption and, second, for investment in a business venture. Riba is unlawful on both of these types of loans. he impact of Usury/Interest/Riba on the lives of people is certainly negative. It eliminate the social factor among the individuals and by the title of profit earning, people have just made themselves slaves of the system to continuously struggle and earn money any pay back the debts just for maximizing their greed. The urge for getting more and more has shifted the focus from permissible ways and means to any. The status race has promoted every individual to become merciless, selfish and the gesture of helping others no more prevails in the society. It creates a contra Islamic culture and society which is strictly prohibited and disliked by Allah SWT and Prophet Mohammad. Riba is also an idea for a lender which helps the needy in need so that in return the lender makes money for his own needs. Islam always promotes charity and Zakah and always appraised that the giving hand is better while in Riba based system the custom of giving money is replaced by stealing people’s money through injustice. Islam promotes a society where people are encouraged for mutual co-operation and if help each other with loans but in case one is unable to return it genuinely (because they are deserving and needy) then forgive it instead of overcharging them and collect usury.
Below are some key factors which explicitly declare the repercussion of Riba: 1. Injustice 2. Uncertainty 3. Economic Instability & Negative Growth 4. The Riba in transactions will derive the society to the mode of selfishness and greed. 5. Diminishes Human personality, Ethical and Moral Values. The more interest is added to the system and the society, the more ethical values will be vanished 6. Improper appropriation of other’s property and their rights
If riba were to be interpreted to mean usury, making a 'reasonable' rate of increase (interest) permissible, then the burden of determining what is reasonable would fall basically on the structure of the market: whether the market functions under competition in which prices and values are impersonally determined by the market forces of supply and demand, or whether monopoly power exists and thus unreasonable prices and rates in return would prevail.
In this system the central bank would function as a state instrument for generating and implementing models of workable competition in the money and capital markets, while the primary role of the central bank as the controller of the money supply and the credit system would be maintained as it is in mixed economies such as those of Canada and the United States.
We proceed, however, with the argument that riba means interest, the rate for which is zero as determined by Islamic law. This argument clearly has broad implications for the workings of the money market, the capital market, com­ modity markets, the foreign exchange market, and, in general, for all trans­ actions involving forward markets. A zero rate of interest will not only change the behavioral assumptions and structural conditions of these markets, but it will also have profound effects on income determination and on the applications of monetary and fiscal policies. In effect, to fully understand the implications of a zero rate of interest as an initial condition in a mixed economic system in which both the private and public sectors playa part in decision-making processes that involve the use of resources for the production of output, we must have a full­ scale theoretical model of the economy. Islam permits public enterprise. But the Islamic economic system per se is not fundamentally a socialist system. Inherent in Islam are the basic principles of property rights and freedom of enterprise.
In a non-Muslim State a model of an Islamic community interpreting riba as interest would have the following basic structure:
First, it has been a long-standing tradition that according to the laws of riba it is lawful to earn salaries and wages from different forms of employment, rent as income from land, rent from buildings and other types of physical capital (which may vary from spades to high-speed computers), profits as residual income to entrepreneurs reflecting the productivity of their enterprise and, in general, income from sales or lease of natural resources on the land or underneath it are all lawful according to the laws on riba.
Second, for a Muslim community in a non-Muslim state commercial banks and other financial intermediaries can perform all of the conventional services except acting as depositories for interest-earning savings or as sources of loans for consumption or investment purposes. Savings may be deposited in these institutions for safekeeping just as demand deposits are made for transaction purposes. Maintaining savings (time) deposits with financial institutions serves no purpose other than offering some degree of safety; these institutions by law must pay a minimum rate of interest on deposits which the Muslim community, interpreting riba as the nominal rate of interest, will reject.
Third, interpreting riba as the nominal rate of interest also requires special consideration of consumption patterns by the Muslim community and its members. Consumption will depend on current or past income (assets) of families or individuals, and interest-free loans that other members of the community are willing to make. The conventional credit system will be of limited use to the community. Since most business concerns provide interest-free loans through the conventional credit system in the form of credit cards, for a limited period the consumer can clearly use such interest-free loans up to their limits without violating the laws on riba.
Whether international economic transactions are carried out between two Muslim countries or a Muslim and a non-Muslim country, the effects of the laws on riba will clearly be the same on these transactions as long as one of the parties invokes them. Economic transactions between residents of two countries, includ­ ing their governments, fall within the framework of the balance of payments as a periodic record of these transactions. Both international trade in commodities and international capital movements fall into this framework. Further, foreign exchange markets as integral parts of international economic transactions, which exist simultaneously in all trading countries, are also affected by the laws on riba. The conduct of international economic transactions which are affected by the laws on riba may be categorized in three broad areas: (1) International trade in commodities; (2) International capital movements; (3) Operations of the foreign exchange markets.

Conclusion:
Elimination of Riba based transactions is essential and vital element for the economies to grow and prosper. Superficially the harm is not seen to the users but it’s a poison that kills all the good things and deeds from humans and the society. It spoils the character and destructs the society with its negative implications. The transformation of Riba based system to Sale/Trade based system might observe as impracticable but this is the only solution to the economic and social problems of the current time. All the arguments of conventional writers must be rebutted with solid grounds provided in Quran and Sunnah to discourage the propaganda of Riba as Faaida (Benefit). It can never be a benefit to the society because Allah SWT and his Holy Prophet has stated it as Haram and impermissible. It’s a sin that declares war against Allah SWT and it’s a sin whose least impact is having sexual relation with one’s own mother as declared by Hazrat Muhammad. It’s imperative that the Riba should be eliminated and whether in the form of cash or kind, whether it’s benefitting the parties, whether it looks prosperous to the people, the impact of it on the society can never be positive. Muslim Ummah need to abide by the Shariah rules in financial transactions as well as in their daily life if they tend to succeed in their lives and seek their economies and businesses to grow for the betterment of the Muslims.