Prohibition of Riba and Gharar in Islamic Banking

Abstract

Prohibition of Riba (interest), Gharar (uncertainty) and Maysir (gambling) are the fundamental principles of Islamic banking and key differentiators to differentiate it from conventional banking practices. Presence of these elements in financial transactions lead to excessive debt creation, speculation, negative growth and create large disparity between the wealthy and needy. This is against the principles of Islam; hence, there is a strict prohibition to protect the society from the impact of instability, unemployment, inflation, and it promotes economic efficiency and social justice. The economic rationale behind eliminating Riba (interest) is to establish a banking system based on the value of justice, social responsibility, equality, stability and growth. The Islamic banking system encourages risk and return sharing amongst the investor and entrepreneur to share equitable returns based on capital proportion and the services offered. It promotes the theme `Banking for Everyone', whereby there is no discrimination in offering banking services to people of different social standings. The objective is to minimize the gap between rich and poor and to establish socio-economic justice and to achieve other ethical and religious goals.