Islamic financing is an emerging model of financing in the global financial markets.
Required:
i) Explain the term Riba in Islamic Finance. (2 marks)
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Riba in Islamic Finance refers to any predetermined interest charged by the lender to a borrower which the lender receives above the capital amount granted by the lender whether the borrower makes money or not the interest is paid at the predetermined level. This is absolutely forbidden in Islam.
ii) Explain the THREE (3) perspectives from which Riba can be viewed as forbidden or unacceptable in Islamic Finance. (3 marks)
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- Borrowers perspective
With the borrower, it becomes unfair when the borrower struggles to raise the requisite revenue and finance to pay for the interest when the profit generated is less than the predetermined interest cost. This can stress the cash flow and finance of the borrower but pass on undue benefit to the lender, which is considered unfair in Islamic law. - Lenders perspective
The unfairness nature of Riba to the lender emanates from the lower real value of what the lender receives during an inflationary period or environment. This will often generate returns, which is less than or below inflation making the lender lose on real return basis but to the benefit of the borrower. - From the economy’s perspective
This can generate or lead to inefficient allocation of resources in the economy and contribute to instability. Capital will flow to the most credit worthy customers, which might be the areas rather than the areas that will make the most use of resources or capital.