Q. What is the
deifinition of Riba
according to the Holy Quran and Sunnah of the Holy Prophet ( Sallaho Alaihai
Wasallam ). Does it cover the simple and compound interest existing in
the present day financial transactions?
A. The word, Riba as understood from the Holy Qur'an and Sunnah,
is any extra payment received over and above the prin- cipal amount, regardless
of the fact that extra amount is significant or insignificant. Islam,
therefore, considers the Riba Haraam, in all of its forms.
The Fuqaha have given two interpretations of the word, Riba, : Riba-al-Nasia
and Riba
al Fadl. 
Riba al-Nasia is defined as,

"Any lending arrangment that obligates the borrower to pay a certain
extra amount over and above the payment of the principal amount against
the specified deferment".
Similarly, Imam Baihaqi reports the interpretation of
Riba by Hazrat Fuzalah Ibne Ubaid (R.A):
"Any lending arrangement which results in some benefits to the
lender, is one of the kinds of Riba". It is important to note that
the Ayahs of Holy Qur'an prohibiting interest relate to Riba al-Nasia.
"O Ye who believe, fear Allah and give up what remains of your demand
for usury, if Ye are indeed believers"(al-Baqara 278). "
If Ye do it not, take notice of war from Allah and his Apostle, but if
you desist, Ye shall have your capital sum: Deal not unjustly, and Ye
shall not be dealt with unjustly". (Al-Baqara, 279)
At the time of revelation of the above Ayahs, the prevalent form of Riba
was Riba al-Nasia. Therefore, the companions of the Holy Prophet ( Sallaho
Alaihai Wasallam ) understood the meaning of these Ayahs in terms of Riba
al-Nasia. Thus Riba al-Nasia was categorically regarded Haram in matters
of Qarz. (Loan transactions : QARD) Riba al-Fadl occurs in those commodity
exchange contracts where a contract provides payment of any extra quantity
of the commodity.
For instance, one kilogram of wheat is exchanged for more than one kilogram
of wheat, regardless of quality consideration. What matters is, that a
given quantity is to be exchanged for the same quantity. In this case,
the Hadith of the Prophet (Sallaho Alaihai Wasallam)
"Sell gold by gold, silver by silver, dates by dates, wheat by
wheat, salt by salt and barley by barley like for like and equal for equal
so he who made an addition or who accepted an addition, committed the
sin of taking interest. But sell gold for silver as you like but hand
to hand and sell barley for dates as you like but hand to hand.
Though the above Hadith mentions the incidence of Riba in six things
but the Fuqahah have extended the application of his Hadith to all commodity
transactions characterized by the same underlying reason. Whenever the
same commodity is exchanged for more (Quantity), the Riba al-Fadl will
arise. In the light of above explanation, it is clear that the word 'Interest'
as commonly understood in context of banking / finan- cial pertains to
the Riba al-Nasia. Therefore, any extra payment specified in Qard relating
contract over and above the principal amount, falls under the definition
of Riba, al-Nasia, irrespective of the rate / amount of the extra payment.
Hence, both the simple and the compound interest are prohibited as being
Riba al-Nasia.
Some people, perhaps have misunderstood the meaning of the verse, "O
ye who believe, devour not usury doubled and multiplied but fear Allah
that Ye may (really) prosper" (3:130) And have tried to argue the
permissibility of the simple interest. This is totally wrong conclusion.
As a matter of fact, the Holy Qur'an wants to root out an interest mentality
as appears from verse (2:279). Ibn-e-Jareer has reported the interpretation
of Hazrat Qatada (R.A.) in his tafseer.

"That the Holy Qur'an permits the lender to receive the principal
amount only and does not allow any addition (however small it may be)".
Q. If banking is based on interest-free
transactions, what would be its basic practical shape in conformity with
the injunctions of Islam?
A. Practically, the interest-free banking system can be structured
on tripartite arrangement, between depositors, banks and borrowers. The
nature of arrangement will very in different cases as summarised below
:
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