Shari'ah Non-compliance Risk Management and Legal Documentations in Islamic Finance

Chapter 3

The Major Risk Elements of Sharī`ah Non-Compliance Risk and Its Causes in Islamic Finance Operations

3.0. INTRODUCTION

If we look at the risk from the point of view of Sharī`ah, we can identify a few elements or components of risk: riba, gharar, deception, inequality, duress, and others as explained briefly next.

3.1. THE MAJOR RISK ELEMENTS OF SHARĪ`AH NON-COMPLIANCE RISK

3.1.1. Riba

Riba literally means increase, addition, expansion, or growth. However, not every increase or growth is prohibited by Islam. The increase in good deeds is encouraged by Sharī`ah. Riba technically refers to the “premium” that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity. Based on this connotation, riba has the meaning of “interest” in banking.

3.1.1.1. Types of Riba

Riba is divided into two types: riba al duyun/al-nasi`ah and riba al buyu/al-fadl.

3.1.1.2. Riba al Duyun/al-Nasī`ah

The term nasi`ah comes from the root nasa`a, which means to postpone, defer, or wait. It refers to the time that is allowed to the borrower to repay the loan in return for the “addition” or the “premium.”1 In riba al-nasi`ah there is a fixing rate or return in advance paid as precondition to grant the loan whereby the lender will get a reward against his waiting, which is not permitted by Shari`ah. From a Sharī`ah perspective, the reward generated from the loan is not allowed, whether the rate obtained is small or ...