Islamic Banking Essay

1838 words - 8 pages

MODULE 1 ; ISLAMIC ECONOMIC SYSTEM

LESSON 4 ; THE BASIC PROHIBITIONS

EXPLAIN WHY RIBA AND GHARAR IS PROHIBITED IN ISLAMIC ECONOMIC SYSTEM , GIVING AND EXAMPLE .
Technically RIBA includes all forms of income which is not earned by an individual { un earned income } it is not restricted to usury .
Islam has categorically prohibited unearned income , for the sake of convenience we can only site the source of prohibition {QURAN 2:278-279}.
Some scholars have gone on to distinguish between interest on load { RIBA AL NASIAH } and interest that is over and above {excessively } the load paid in kind { RIBA AL FADL} .
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Fundamentally the lender stand RISK free , he lend out the money and he is sure of his return whatever happens to the entrepreneur .
Entrepreneur bears the risk and undertakes the business but he is also burdened by the likelihood of business failure that is likely to damage him altogether.
Financial institution that does not undertake any risk apart from lending out the money stands to gain a guaranteed sum .

There has been continuing debt affecting developing countries , this has led them into incurring further debts or over using their resources in order to extinguish their debts. Leading to un healthy economic situation to them and the rest of the world .
There is the issue of interest rate volatility that affects financial stability in investment market affect long term vision of entrepreneurs .

THE CONCEPT OF GHARAR

The Arabic word GHARAR is broad that literally means deceit, risk , uncertainty that might lead to destruction or loss.
GHARAR in Islam refers to any transaction of probable objects whose existence or description are not certain, due to lack of information and knowledge of the ultimate outcome of the contract or the nature and quality of the subject matter of it.

For example, the Prophet (PBUH) has forbidden the purchase of the unborn animal in the mother’s womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver.

Islam has clearly forbidden all business transactions, which leads to exploitation and injustice in any form to any of the parties of a contract.

It seeks protecting the different parties from deceit and ignorance by forbidding GHARAR in any commercial exchange contracts that are not free from hazard, risk or speculation about the essential elements in the transaction to either party, or uncertainty of the ability of one party to honour its rights and obligations.

It requires that all Islamic financial and business transactions must be based on transparency, accuracy, and disclosure of all necessary information so that no one party has advantages over the other party.

The rationale behind the prohibition of GHARAR is to ensure full consent and satisfaction of the parties in a contract.
Full consent can only be achieved in full disclosure and transparency and through perfect knowledge from contracting parties of the counter values intended to be exchanged.

The prohibition of GHARAR protects against unexpected losses and the possible disagreements regarding qualities or incompleteness of information.

SHARIAH promotes the principle of profit-loss sharing between banks and entrepreneurs as an approach to encourage the spirit of brotherhood and cooperation in business relationships.

Mutual risk-sharing could help absorbing the weight of...

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