An Economic Maxim to distinguish Sharīʿah Commercial debt financing from ribā Financing

Abstract

It would have been also correct but less clear to entitle this paper (an economic explication of the Quranic Verse “Allah has permitted trading and forbidden ribā”). A most prominent characteristic of Islam’s economic system is the prohibition of ribā while providing legitimate financing alternatives; one of which is financing integrated with sale for a deferred price. Here the seller as trader provides commercial financing that includes a profit as part of the deferred price which is a debt on the buyer. An age‑old question that is still alive today is : what is the difference between debts that include permissible profit to the providers of financing and debts that include prohibited ribā to financiers? The paper answers this question by providing a maxim derived from surveying detailed fiqh rulings. That maxim distinguishes the economic characteristics of permissible commercial (for profit) debt financing from ribā debt financing. This paper is addressed to economists, fiqh specialists and other interested parties including the educated public, so all concepts are simply explained. The suggested maxim is a restatement and development of what Dr Sami Al‑Suwailem has already written about and concluded since 1423 H/ 2002 G, in several writings. Ribā discussed in this paper is what fiqh specialists call “Ribā of debts” to which the above Quranic verse refers. This maxim is not meant to replace detailed fiqh rulings required to achieve validity of a given transaction. Rather, it is meant to highlight the common denominator that distinguishes permissible Debt-based Sharīʿah commercial transactions Debt-based from prohibited ribā financing .