Mu' meneen Brothers and Sisters,

As Salaam Aleikum wa Rahmatullahi wa Barakatuh.  (May Allah's Peace, Mercy and Blessings be upon all of you)

One of our brothers/sisters has asked this question:

Asslaam Alaykum dear brother in Islam. May Allah reward you greatly for the great help you are providing Muslims around the world with.

Following up on your discussion on entitled “Insurance Money Accident” of October 21, 2003, I would like to kindly ask the following questions:

What exactly is Riba?

Is increase in itself Riba? Or is it the injustice that others may suffer because of some conditions attached to the increase that makes it Riba?

Suppose that I borrow money from someone and invest it in profit making business transactions. I agree with the lender that I would pay him 20 percent of any profit earned.

1) Say, I borrow $1,000, after a year, I make a profit of $100. Let us make abstraction of the effect of inflation, opportunity costs and all these things to simplify the question. At the end of the year, I pay the lender 20% of the profit, that is $20. If there were zero profit, 20 percent of that would be zero; therefore, there would be no payment to the lender. Would that be Riba?

2) If the agreement with the lender is that a much smaller percentage, say 2 percent, would be paid on the principal after a year, this would be $20. Would that be Riba if the agreement included a close stipulating that the 2 percent is estimated based on market conditions of the day of the agreement, and that the percentage is subject to change according to market fluctuation.

This percentage is calculated based on past knowledge that a $1,000 investment that type of business could yield $100 profit after a year. To simplify, let us make abstraction of things like borrower protection and other such closes, unless you want to discuss these complex issues in your response.

If this is Riba, what makes it Riba?

If this were not Riba, would it be acceptable to accept future payment of Insurance compensation provided the investment is made based on money market rates?

Kindly enlighten.

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Answer:

What is riba clarification?

In the name of Allah, We praise Him, seek His help and ask for His forgiveness. Whoever Allah guides none can misguide, and whoever He allows to fall astray, none can guide them aright. We bear witness that there is no one (no idol, no person, no grave, no prophet, no imam, no dai, nobody!) worthy of worship but Allah Alone, and we bear witness that Muhammad(saws) is His slave-servant and the seal of His Messengers.

Your Statement: May Allah reward you greatly for the great help you are providing Muslims around the world with.
May Allah Subhanah reward you with the best of this world and the Hereafter for your kind comments of encouragement for our humble efforts in the propagation of the Truth. If our humble and modest efforts have helped even one brother or sister get closer to Allah and His Deen of Truth, then we would consider ourselves indeed fortunate to have been given this opportunity by the Lord Most Merciful to serve in His Cause. We hope, beg, and pray the Merciful Lord accepts our humble and weak efforts, forgives us our shortcomings, and saves you, us, and all the believers from the torment of the Hell Fire. Ameen.

Q-1: What exactly is Riba?
Allah Says in the Holy Quran Chapter 30 Surah Rum verse 39: That which ye lay out for increase (riba) through the property of (other) people will have no increase with Allah: but that which ye lay out for charity seeking the Countenance of Allah (will increase): it is these who will get a recompense multiplied.

Allah Says in the Holy Quran Chapter 2 Surah Baqarah verses 275-276:

275 Those who devour ‘riba’ (usury) will not stand except as stands one whom the Evil One by his touch hath driven to madness. That is because they say: "Trade is like ‘riba’ (usury) but Allah hath permitted trade and forbidden ‘riba’ (usury). Those who after receiving direction from their Lord desist shall be pardoned for the past; their case is for Allah (to Judge); but those who repeat (the offence) are companions of the fire: they will abide therein (for ever).

276 Allah will deprive ‘riba’ (usury) of all blessing but will give increase for deeds of charity: for He loveth not creatures ungrateful and wicked.

Allah Says in the Holy Quran Chapter 3 Surah Ale-Imraan verses 130-132:

130 O ye who believe! devour not ‘riba’ (usury) doubled and multiplied; but fear Allah; that ye may (really) prosper.

131 Fear the fire which is prepared for those who reject faith.

132 And obey Allah and the Messenger; that ye may obtain mercy.

Allah Says in the Holy Quran Chapter 4 Surah Nisaa verse 161: That they took ‘riba’ (usury or interest) though they were forbidden; and that they devoured men's substance wrongfully; We have prepared for those among them who reject faith a grievous punishment.

Sahih Al-Bukhari Hadith 3.382 Narrated by Ibn Shihab

that Malik bin Aus said, "I was in need of change for one-hundred Dinars. Talha bin 'Ubaidullah called me and we discussed the matter, and he agreed to change (my Dinars). He took the gold pieces in his hands and fidgeted with them, and then said, "Wait till my storekeeper comes from the forest." 'Umar was listening to that and said, "By Allah! You should not separate from Talha till you get the money from him, for Allah's Messenger (saws) said, 'The selling of gold for gold is Riba (usury) except if the exchange is from hand to hand and equal in amount, and similarly, the selling of wheat for wheat is Riba (usury) unless it is from hand to hand and equal in amount, and the selling of barley for barley is usury unless it is from hand to hand and equal in amount, and dates for dates, is usury unless it is from hand to hand and equal in amount.' "

And Malik related to me that he had heard that a man came to Abdullah ibn Umar and said, "Abu Abd ar-Rahman, I gave a man a loan and stipulated that he give me better than what I lent him." Abdullah ibn Umar said, "That is ‘riba’."

Malik related to me that he had heard that Abdullah ibn Masud used to say, "If someone makes a loan, they should not stipulate better than it. Even if it is a handful of grass, it is ‘riba’."

Al-Tirmidhi Hadith 2826 Narrated by Abu Hurayrah

Allah's Messenger (saws) said, "’Riba’ has seventy parts, the least important being that a man should marry his mother."

A simplistic definition of Riba would be: any fixed increase in the exchange of one’s wealth or property or commodity within a stipulated period of time will be considered ‘riba’ in Shariah.

Q-2: Is increase in itself Riba? Or is it the injustice that others may suffer because of some conditions attached to the increase that makes it Riba?
An increase in the commodity exchanged in itself would definitely be ‘riba’. It there is even an iota of injustice suffered in the exchange of a commodity by a condition attached whereby it being increased unjustly, it would constitute ‘riba’.

Q-3: Suppose that I borrow money from someone and invest it in profit making business transactions. I agree with the lender that I would pay him 20 percent of any profit earned.

1) Say, I borrow $1,000, after a year, I make a profit of $100. Let us make abstraction of the effect of inflation, opportunity costs and all these things to simplify the question. At the end of the year, I pay the lender 20% of the profit, that is $20. If there were zero profit, 20 percent of that would be zero; therefore, there would be no payment to the lender. Would that be Riba?

On the face of it, the above transaction would be absolutely legal and would not constitute ‘riba’ provided that if you lost money, the person who loaned you the money would share in your loss at the agreed percentage of 20%.

It would be considered a business partnership whereby the two partners agree that the profits and loss will be shared in the agreed ratio of 80%-20%.

But if the repayment of the loan was fixed in a way that the borrower would have to pay 20% of the invested capital, regardless of whether the borrower made a loss or a profit; then it would constitute a definite case of ‘riba’.

Q-3: If the agreement with the lender is that a much smaller percentage, say 2 percent, would be paid on the principal after a year, this would be $20. Would that be Riba if the agreement included a close stipulating that the 2 percent is estimated based on market conditions of the day of the agreement, and that the percentage is subject to change according to market fluctuation.
Beloved brother in Islam, the distribution of the percentage is not what make it a ‘riba’ transaction; but rather a fixed guaranteed increase over a stipulated period of time is what constitutes a ‘riba’ transaction.

If two people enter into a partnership and agree that the profits and losses will be shared 98%-2%, there is absolutely no harm, and the transaction would be legal in the sight of Shariah.

But if they enter into a partnership whereby the party who borrows the money has to guarantee the return of the capital + a 2% (or any number) fixed increase, regardless of whether the borrower makes a loss or a profit; that would constitute a case of ‘riba’.

Q-4: If this is Riba, what makes it Riba?
Any deal or transaction where the same commodity is exchanged with an increase (regardless of the percentage) within a stipulated period of time would make it a ‘riba’ transaction.

Q-5: If this were not Riba, would it be acceptable to accept future payment of Insurance compensation provided the investment is made based on money market rates?
We are obviously not qualified to give our opinion on complicated financial matters regarding the various versions of Futures, money market rates, or its derivatives. Slight variations within the transaction could determine whether it is Shariah based or not. We are neither qualified, nor would it possible for us to give a general opinion on these specific and detailed financial transactions.

Sahih Al-Bukhari Hadith 3.267 Narrated by An Numan bin Bashir

The Prophet said "Both legal and illegal things are obvious, and in between them are (suspicious) doubtful matters. So whoever forsakes those doubtful things lest he may commit a sin, will definitely avoid what is clearly illegal; and whoever indulges in these (suspicious) doubtful things bravely, is likely to commit what is clearly illegal. Sins are Allah's Hima (i.e. private pasture) and whoever pastures (his sheep) near it, is likely to get in it at any moment."

Whatever written of Truth and benefit is only due to Allah’s Assistance and Guidance, and whatever of error is of me. Allah Alone Knows Best and He is the Only Source of Strength.

Your Brother in Islam,

Burhan