The Essence of the Islamic Banking System Essay

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Introduction

Islamic banking system is different from the contemporary banking system. Islamic banking system adheres to Quran instructions. This essay briefly examines the types of riba and gharar which are prohibited in the Islamic banking system.

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Riba

Riba is any form of interest that applies to loans whether in credit or cash – it is the excess on top of the original quantity. Riba is prohibited in the Islamic banking system – this is in accordance to the Quran and Sunnah which prohibit acquisition of interest from money lent out. Riba can be divided into many types; upon examining the writings of Rashid Rida, Nyazee showed riba to be of two types (Nyazee, 2009, p. 30). Riba of the Quran is called Riba An-Nasiyah and riba of the of Sunnah is called Riba Al Fadl.

Riba An Nasiya: This is the primary type and is also called Riba Al Jahiliya. Riba An-Nasiyah was an interest charged on a debt after its repayment was postponed once or twice. Upon the expiry of the repayment period, the creditor could allow the debtor more time for repayment but with an added amount on top of what would have been paid (Shafaat, 2005).

Riba Al Fadl: This is the secondary type and also called Riba An Naqd, Riba Al Hadees or Riba Al Bai. Riba Al Fadl specifically applied to sales. Riba of the Sunnah could be either riba nasa or riba al-fadl. Riba nasa was applicable in the case of delays while riba al-fadl was for the cases of excess which could be quantified (Gulf African Bank, 2011, p. 1).

Riba Al yad: Basically, this riba is the same as riba al-fadl. It involves sales whereby commodities are exchanged but in unequal values. This riba applies when two people exchange two sets of goods which are of different values one of the parties will lose as he/she will receive low value goods (Glossary 1).

Gharar

In the context of Islamic banking system, gharar is excessive uncertainty. Islamic banking system does not advocate for excessive uncertainty when executing transactions. Any transactions executed in an Islamic banking system are void of excessive uncertainty and speculation. It is a requirement that all the contracts entered into in an Islamic banking system are as clear as possible in all aspects (Fidomes, 2011, p. 1). Any transactions which involve some kind of gambling (maysir) are therefore not allowed under the Islamic banking system. Most of arrangements in the conventional banking systems are speculative and are therefore prohibited in the Islamic banking setting (Ayub, 2009).

Gharar can be divided into three types, that is, Gharar Fahish, Gharar and Gharar Mutawassit (Glossary, 2011, p. 1). Gharar may also be of the following classes: Gharar-fil-Sifah; Gharar-fi-al-Ajal; Gharar-fi-al-Miqdar; and Gharar-fi-al-Taslim with their respective meanings being “uncertainty with respect to characteristics of the goods; uncertainty with respect to time of the delivery; uncertainty with respect to quantity of goods; and uncertainty with respect to delivery of the goods” (Glossary, 2011, p. 1).

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Conclusion

In conclusion, prohibition of riba and gharar under the Islamic banking system offers some form of protection to the parties in a business contract.

References

Ayub, M. (2009) Understanding Islamic Finance. New York, NY: John Willy and Sons.

Fidomes, S.A. (2011) Prohibition of gharar (excessive uncertainty) and maysir (gambling). Web.

Glossary. (2011) Glossary of Financial Term – G. Institute of Islamic Banking and Insurance. Web.

Gulf African Bank. (2011) Riba and its types. Gulf African Bank. Web.

Nyazee, I.A.K. (2009) The Prohibition of Riba Elaborated. Institute of Advanced Legal Studies. Islamabad, Pakistan: The Federal law House.

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IvyPanda. 2022. "The Essence of the Islamic Banking System." May 19, 2022. https://ivypanda.com/essays/the-essence-of-the-islamic-banking-system/.

1. IvyPanda. "The Essence of the Islamic Banking System." May 19, 2022. https://ivypanda.com/essays/the-essence-of-the-islamic-banking-system/.


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IvyPanda. "The Essence of the Islamic Banking System." May 19, 2022. https://ivypanda.com/essays/the-essence-of-the-islamic-banking-system/.

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