The moral financial lesson from Islamic Finance.

In the field of Islamic Finance there are two unlawful or ‘haram’ activities, both are in the area of ‘Riba‘ – which is often translated as ‘interest’ but is better thought of as ‘excess’.

These two are Riba al fadl, and Riba al naseeyah.

Riba al fadl is the easy one to remember, it is the charging of interest, in Christendom we call it ‘usury’, something that was once forbidden under Christian doctrine (hence the pushing of Jews into becoming the earliest bankers – they could engage in this forbidden activity for Christians who wanted to borrow – borrowing was OK, but lending was not).

Riba al naseeyah is the second tenet, and perhaps the most important, because it is an early adaptation of understanding that economic rent is a problem. This isn’t an argument for socialism or anything else, but it is an acknowledgement that Riba al naseeyah [which means ‘excess compensation] can be both a financial, societal and economic problem.

Price gouging is one aspect of riba al naseeyah, another would be deriving income …

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‘Riba’ or Interest

Often we hear that under Islamic finance ‘interest’ is illegal (it is technically ‘Haram’ or unlawful), the term in Arabic is ‘Riba’ and it doesn’t just cover interest. The basis of the anti-interest ruling is from the Surat Al Baqara Verse 275 ‘God has permitted trade & prohibited riba’ and it restricts wealth building by making money from money, rather it can only be done via investment and commerce.

However, riba is not confined to interest on loans (although that is the primary type), the full name of interest riba is ‘riba al naseeya’ (also known as riba al-Quran or riba al-jahiliyyah). There is a secondary type called riba al-fadl and this is best described as ‘excess compensation’, this can occur where one party makes too much from an exchange. A foundation in Sharia’a compliant finance is that transactions should be fixed in nature (to avoid ‘Gharar’ or uncertainty) and associated with a specific risk, so any compensation beyond what is considered the fair value is also a brand of riba. For instance, if two people exchanged 1kg of metal …

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