Thread by @SafdarAlam

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THREAD
An important type of Riba, and what it means.

Riba is actually not very well understood in Islamic law. We all know about interest, but there are several hadith about Riba which we have failed to understand very well, if at all.

Riba has many different types, we mainly know it as interest, or money on money. However, one of the other definitions is that of Riba al Fadl, meaning Riba that can occur in trade.

We will look at one example, and I will give my thoughts on the importance behind it.

Hadith, from ibrahimm.com

And a similar hadith from alhadith.co.uk

Ok, so the superficial meaning is clear – do not trade lower quality dates for higher quality in different quantities – this amounts to Riba.
But, there is much wisdom to be discovered here – the problem is

– the problem is that it is not always apparent in first glance. Sometimes we have to work at it.
If we think a little deeper, we can see the real benefit in this.
There are 2 key benefits in following the advice in this hadith:
1) it prevents a layman being taken advantage of

of in a market where he does not know the market price of goods and
2) it prevents manipulating market prices to deliver (normal) Riba, which is interest.

So let’s talk about how it does each of these things.

PROTECTS LAYMAN
Let’s imagine person A has 2 bags of

of High Quality dates (HQ) and wishes to exchange them for some bags of Low Quality (LQ) dates, but he does not know the market price of either.

Further, let us assume the fair market price for HQ is £10 and for LQ is £5.

He approaches trader A and asks how many bags of LQ the trader will give for the 2HQ that A owns. We know he should say 4, but instead, he sees a chance to make an unfair profit, and he says 3.
Now, if A goes ahead, he is making a loss, clearly.

But he would NOT KNOW he is making a loss.
Now let us assume, he follows the hadith and asks the trader how much A can sell the 2HQ for. Instead of the correct market price of £20 for 2 HQ, the trader says £15. They go ahead.
Now with this £15, A asks the price of LQ,

and the trader says £5 (which is indeed the market price) so A goes ahead and buys 3 bags.
Now, A has STILL been manipulated, because he still got 3 LQ bags instead of 4. So the hadith did not help him here.
Ok, now let us imagine an open market with several traders, and not

just one.
Now, when A goes to the first trader, and is informed that the first trader will pay £7.50 for HQ, now he can go to other traders and ask their prices. Now, unless they all want to rip him off, he will find out he can actually sell HQ for £10 each.

Now he will sell his 2HQ for £20.
Next, he asks all the traders the price to purchase LQ from them, and they all say £5 each, as before, so he buys 4 bags from any trader.
Here, we can see the clear benefit of this hadith.
So this hadith protects the consumer in the following

type of market
1) Where the consumer wishes to barter or exchange goods of one type for another
2) Where there are several price providers in the market and
3) where at least one price provider is honest!

FIRST CONCLUSION
In fact, once we discover that the wisdom of this hadith is fully revealed in the above conditions, we conclude that these conditions are also very important ones to exist in a market that claims to act in transparency for the benefit of the customer/layman.

SECOND BENEFIT - PREVENT PRICE MANIPULATION TO HIDE RIBA
Now, this hadith has a second angle, to do with another type of Riba (interest). Remember dates were also used as a form of currency, and indeed are one of the six commodities

mentioned in another famous hadith, along with gold, silver, barley, salt and wheat.
So, given that dates can be used as a currency, and that dates come in good and lower quality, let’s see how this hadith prevents this Riba.
Let’s imagine, that A wants to give a loan to B

and charge Riba. Clearly they cannot outright agree to pay interest, so they must find another “smarter” way to hide it somehow, within another transaction

(sound familiar ??)

So A delivers a loan (claiming to be interest-free) to B of £10, and they agree (very quietly) that B will deliver £20 back to A after one week’s time.
So the plan is that B will deliver £10 in cash (this is a Qard ul Hassan,

so only the principle of £10 is repayable), and now they scratch their heads, because somehow B has to pay the extra £10.
So they hatch a cunning plan. B will deliver 2HQ to A (worth £20) and A will exchange these for 2LQ (worth £10).

This means that B has effectively given A an “extra” £10. Now, you and I, and every observer who has a brain cell, knows this is a way to circumvent Riba.
But A and B will say “this is not Riba, this is genuine trade!!” (sound familiar huh?)
OK, now, to highlight their duplicity,

they are forced to follow the hadith. Now, B has to sell the 2HQ to A, and they must agree a price.
All the other traders know the price is £10 each, and thus wait for A to deliver £20. But, A tries to agree a price of £10.
There will be uproar!!

Another trader will step in and say to B, “No, I will pay you £15 for these 2 HQ, that is £5 more than A is offering!”

Of course, this guy is also trying it on. Now, hopefully, another honest trader will say “No, I will pay you the market price which is £20”.

So what will B do? Will he accept the best price he is offered, which is the market price, which is £20?

Maybe he will, but that is not what he wants. Because what can he do with this £20? He can buy 4LQ. But then he is where is started off

And more importantly, A’s situation has not changed. Sure, he has received back the £10 of the interest-free loan, but their plans for A to receive an extra £10 have failed.
What this means is this – if you have two parties insisting on a closed transaction, occurring off market

– then you know something is cooking.

They are up to something.

Otherwise why not follow the advice of this hadith, which is to (effectively) take precautions to ensure the trade occurs at a genuine market price.

Now, in case you did not know, every single Murabaha, Tawarruq and Commodity Murabaha transaction occurs like I have described. You have (at least) two parties agreeing to buy and sell an asset, at a price that is NOT market price, that nobody would ever pay on an open market.

And, although this does not often occur as a sell and buy-back between just two parties, we now see 3 and four parties colluding together to achieve exactly the same thing.

So, what is this hadith really saying?

It is saying this – if you do not want to be ripped off, try not to barter one good for another (or conduct a sale transaction) where you have no clue what you are doing, and can be easily lied to. Try to operate in an open market where the market price is transparent, and then

take the best price.

Another way to look at it is like this; this wisdom inherent in this hadith only becomes apparent in an open market, with several price providers, and looking to do genuine trading.

In other words, this is INFORMING US of the conditions to exist for a market to be fair, transparent and genuine.

Sometimes you are unable to do this, not all markets are open and liquid, in which case, take care!

However, if there is an open market with transparent pricing and liquidity, and you STILL insist on doing a transaction that is OFF-MARKET price, and with only one specific market trader, then – something is fishy and you are up to something like Riba.

Now, this fishy business is exactly what occurs in every single Murabaha based financing transaction in Islamic banking. If a Tawarruq has 3 or four transactions then every one of these breaks the rules of being a genuine transaction

And there is only one reason to execute a transaction that is not genuine as we have seen above - it is to hide something In this case it is to hide RIBA
So, we have seen how a simple hadith about exchanging dates has direct

and absolute ramifications for the superficial trading we see occurring in Islamic banking every day.

There is real wisdom in all Hadith about Riba and Riba comes in many forms.

However, dishonesty and manipulation, is reflected in the characteristics in transactions

And this hadith on exchanging dates captures it beautifully.

/THREAD

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