ISLAMIC FINANCE
Week 3, Tutorial 2

2. Differentiate between Riba Al-Duyun and Riba Al-Buyun. Why profit from trade is allowed but riba is prohibited?

1. Riba al-Duyun * This type of riba occurs in lending and borrowing * Any kind of addition or increase above the amount of principal whether the addition or increase are inflicted by the lenders or willingness of the borrowers (borrowers promised to return in access).

a. Riba al-Qardh * RM 1,000
1 year
RM 1,000
Year
Principal Amount
Time Factor
Principal Amount
Final Amount Paid
10% for one year =RM 100
Riba Qardh
RM 1,000
1 year
RM 1,000
Year
Principal Amount
Time Factor
Principal Amount
Final Amount Paid
10% for one year =RM 100
Riba Qardh imposed from the beginning and will be proportionate to the time taken by borrower to repay the loan

b. Riba al-Jahiliyyah * no riba at the beginning and the riba is imposed upon default * This arises when the creditor in a deferred contract of exchange, demands from the debtor an additional amount over and above that which was initially agreed to in the original contract. Riba al qardh and riba al jahiliyyah refer to ‘interest’ because they are associated with the ‘addition or increase’ and the ‘extension’ of time to maturity. * For example: Loans from the banks, credit card etc.

2. Riba al-Buyu’
- Riba al-buyu’ occurs in trading transactions.
- A transaction (trading/sale) in which a commodity is exchanged for the same commodity but unequal in amount or the same product in equal amounts but there is a postponement in delivery.
-This kind of riba may occur out of an exchange between two ribawi materials of the same kind, where the necessary rule(s) is/are not observed. Types of Riba al Buyu’ are: a. Riba al Fadhl b. Riba al Nasiah or Riba Yad

* Riba al Fadhl. * The