Quest Journals

Journal of Research in Business and Management

Volume 10 ~ Issue 1 (2022) pp: 37-44
ISSN(Online):2347-3002
www.questjournals.org

Research Paper

RIBA (USURY) and its Effect on the Global Economy

Mustapha Sidi Attahiru, PhD
Department of Business Administration
Faculty of Management Sciences
Usmanu Danfodiyo University Sokoto, Nigeria

Abstract:
The negative impact of Riba (interest or usury) on the global economy remains the topic of discussion to the
academicians and businessmen all over the world. Using Islamic approach, this study examines the effect of
Riba on the global economy. The sample of this study comprises of Traders, Bank staff and Customers in Sokoto
State, Nigeria. Survey questionnaire was administered to 300 respondents through simple random sampling and
only 173 were used for analysis. PLS-SEM 3.0 was used for data analysis.The study found that there is
significant relationship between Riba and destruction of global economy. This indicates that transaction in
businesses associated with any form of Riba would result in higher level of economic devastation. The study
suggests the alternative to Riba in solving the economic problem. This research is significant as there is need
for continuous research on the effect of Riba and its solution to the economy. While this paper sets the stage,
there is however, the need for future research.
Keywords: Riba, Economy, Islam

Received 04 Jan, 2022; Revised 13 Jan, 2022; Accepted 15 Jan, 2022 © The author(s) 2022.
Published with open access at www.questjournals.org

INTRODUCTION
Riba is an Arabic word which is translated as 'usury' or 'interest' and it refers to unequal exchanges or
charges and fees for borrowing that can result in the payment of interest (Ayub, 2021). The concept of Riba has
attracted passionate attention and been studied by philosophers, religious scholars, lawmakers, administrators,
and economists, regarding almost all its economic, social, moral, and religious aspects (Eyerci, 2021).This is
because conventional theory of transaction considers Riba as back bone of the economy, while Islamic theory of
transaction declares Riba destructive to the economy (Ahmad, Amjad, & Aslam, 2018), Islam prohibits the
receipt or payment of interest on any form of lending or borrowing that includes but not restricted to: bank
account, loans taken for property purchases among others (Ayub, 2021).
Riba was prohibited by Islam because of its harmful effect on the personal, social and economic life of
people, it is alsoconsidered dishonourable, disrespectable, uncharitable, unjust and the source of many evils
(Eyerci, 2021). Accordingly, Habib (2018) categorized the destructive element of Riba as; (1) harmful for the
borrower, society and economy in which he operates since the borrower pays interest to the lender irrespective
of the profit or loss of the economic activity for which the money was borrowed. If the profit of the business is
less than the interest payment, or if there is a loss, then the borrower still needs to pay the interest and may go
out of business. (2)The lender is paid a fixed interest amount. If the business does very well, the interest amount
still stays the same, so the lender cannot benefit from the high profits. (3) Allocation of resources in the interest-
based system is inefficient since it is linked to the creditworthiness of the borrower and any collateral the
borrower can provide rather than the productivity of the economic activity or the skills of the borrower.
Another poisonous element of Riba was highlighted in the speech of Nigeria‘s former President
OlusegunObasanjo at the G8 summit in August 2000 as quoted by Komlik (2017, p.1), where he said: ―All that
we had borrowed up to 1985 or 1986 was around $5 billion and we have paid about $16 billion yet we are still
being told that we owe about $28 billion. That $28 billion came about because of the injustice in the foreign
creditors‘ interest rates. If you ask me what is the worst thing in the world? I will say it is compound interest.‖
Islam as a religion has a solution to all the problems including Riba and what is related to it since it covers all
aspects of human life. Islam is not only a doctrine of worship but also an integrated system that governs all
rules, values, obligations, manners and practices to ensure the integrity and justice between human beings (Ali,
Noordin, & Achour, 2018). In this regard, using content analysis this study highlights the position of Islam on

*Corresponding Author: Mustapha Sidi Attahiru, PhD 37 | Page

 RIBA (USURY) Andits Effect Onthe Global Economy

the issues affecting Riba and its solution. This paper is divided into six sections. The first section is the
introduction, section two is the literature review, while section three is the methodology, section four highlight
the findings while section five is the discussion and section six comprises of conclusion and suggestion.

LITERATURE REVIEW
Islam discourages businessmen from acting immorally and highlights some bad behaviour that may
lead to exploitation, so that people avoid it with a view to having a well-behaved society and also to achieve the
pleasure of Allah (S.W.T) as follow:

RIBA (INTEREST)
Riba is an Arabic word which is translated as ―increase‖ or ―excess‖ and is, in the strictest
interpretation, an amount or rate that is due in excess of the principal of a loan (Schoon, 2016)Jurists have given
different definitions to the term Riba. For instance, Maududi (2011) defined Riba as a predetermined surplus or
excess over and above the loan received by the creditor in relation to a specified period.Setiawan (2021) said, it
is an increase in wealth that is not related to engaging in productive activity. It is also concerned with
exploitative gains made in trade or financial transactions. Riba can also mean the pursuit of illegal, exploitative
business or trade gains by assessing exorbitant rates of interest (Farook, 2021). Iqbal and Mirakhor (2017)
reported that according to Shari‘ah, technically, Riba refers to the ―premium‖ which must be paid to the lender
by the borrower along with the principal amount being a condition for the loan or for an extension of the loan
duration. Iqbal and Mirakhor (2017) further highlighted that the prohibited interest rate is defined into at least
four characteristics which include: (1) it is positive and fixed ex ante; (2) it is tied to the amount of the loan and
time period; (3) its payment is guaranteed not considering the outcome or the reason for which the principal was
borrowed; and (4) the state apparatus sanctions and enforces its collection.

2.1.1 Classification of Riba

A Riba transaction according to Ahmad et al. (2010) features one or both of the following
characteristics: a surplus (al-fadl) in the amount of one counter-value over the other in barter transactions of
specific commodities; and a delay (al-nasa or Al-nasi’ah) in the settlement of one or both counter-
values.Among the comprehensive classification of Riba was the one given by Al Jaza‘iri (2000) which says:
Riba An-nasi’ah: ―This type of Riba has two categories. One is the Riba of Jahiliyya (Pre-Islamic
period of ignorance). This is the type of Riba that Allah the Almighty prohibited by saying: ―O you who believe,
eat not Riba doubled and multiplied‖ Qur‘an (3:130).In actuality it is a man owing another man a debt on
delayed payment Then, when its fixed term is due, the lender says to the taker, You may either pay me back or I
will increase the amount of the debt (to give you more time). So if he does not repay the debt the lender
increases the debt by a percentage of the wealth and he waits for another appointment of time (for him to repay
it). This course will continue, until it earns him double compounded interest by passing the fixed term until it is
multiplied and so on. Another type of interest of Jahiliyya was when someone lends ten dinars for the payment
of fifteen dinars on short or long-term credit.
The second category of Riba An-Nasi’ah is selling something which involves Riba, like one of the two
currencies, or wheat or barley, or dates for another type of dates. This is, for example, if a man sells a weight of
dates for a weight of wheat for a fixed term or a man sells ten dinars of gold for one hundred and twenty
dirhams of silver for a fixed term‖(Al Jaza‘iri, 2000. p.214)
Riba Al Fadl: ―This is selling one type of item for the same type of item that is better in quantity. This
is like selling one weight of wheat for one and a quarter weight of wheat, for example. Similarly selling one Sa‘
of dates for one and a half Sa‘ of dates, or selling one ounce of silver for one ounce and one dirham of silver‖(Al
Jaza‘iri, 2000. p.214)
In addition Ahmad et al. (2010) opined that the literature of Riba consist of wide variety of
terminologies in common with the various methods that have been used to understand its scope and nature over
time. The most common terms and their practical application include; Riba al-buyu (the usury of trade) that
have the same meaning with Riba Al Fadl. Also Riba al-qurud (the usury of loans) which connotes that the
lender of money contracts to receive more money in return than he initially parted commonly known as an
interest bearing loan in western parlance.

2.1.2 Prohibition of Riba (Interest)

But, in the opinion of Shahar, Jamlus and Shahar (2016) Islam is not the only religion that prohibits
Riba, other religions such as Christianity, Hinduism Buddhism and Judaism also prohibit it. In Christianity, both
new and old testaments references on usury or Riba was even more controversial. In the Bible, it was a reference
that ―you shall not lend him your money for usury, nor lend him your food at a profit‖ (Leviticus 25:36-37).
This is also found in Jeremiah 15:10. Prohibition of Riba was similarly found in Buddhism and Hinduism.

*Corresponding Author: Mustapha Sidi Attahiru, PhD 38 | Page

 RIBA (USURY) Andits Effect Onthe Global Economy

Usury or Riba was forbidden in an ancient Indian religious manuscript like Sutra texts. There was a time when a
law was made among the highest castes in India (Priest and Warriors) which forbade them from being usurers or
lenders. Usury was also regarded as a shameful act and practising it is a hypocritical attitude in Buddhist
Jatakas. Judaism is another religion that discourages and outlawed as well as scorned usury. It was classified as
an act of ―bite‖ it encourages lending more only to the poor and needy and prohibit money lending with interest
(Shahar et al., 2016).
The prohibition of Riba is evident in the Holy Qur‘an and many Hadith of the Prophet (P.B.U.H).
Qur‘an (2:275-276) decrees;

―Those who eat Riba will not stand (on the Day of Resurrection) except like the standing of a person
beaten by Shaitˆan (Satan) leading him to insanity. That is because they say: ‗Trading is only like Riba‘,
whereas Allah has permitted trading and forbidden Riba. So whosoever receives an admonition from his Lord
and stops eating Riba shall not be punished for the past; his case is for Allah (to judge); but whoever returns [to
Riba], such are the dwellers of the Fire – they will abide therein. Allah will destroy Riba and will give increase
for Sadaqah (deeds of charity, alms, etc.) And Allah likes not the disbelievers, sinners‖.
Qur‘an (2:278-279) further said; ―O you who believe! Be afraid of Allah and give up what remains
(due to you) from Riba (from now onward), if you are (really) believers. And if you do not do it, then take a
notice of war from Allah and His Messenger but if you repent, you shall have your capital sums. Deal not
unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than
your capital sums)‖.

Also Qur‘an (3: 130):

―O you who believe, eat not Riba doubled and multiplied, but fear Allah that you may be successful‖.

―Gold in exchange for gold, silver in exchange for silver, wheat in exchange for wheat, barley in
exchange for barley, dates in exchange for dates, salt in exchange for salt is in the same category and (should be
exchanged) hand to hand, so whoever adds or demands increase he has practised usury. The giver and taker are
the same‖ (Sahih Muslim, 1584).
Furthermore, Abu Sa`id al-Khudri narrated that: Once Bilal brought Barni (i.e. a kind of dates) to the
Prophet and the Prophet asked him, From where have you brought these? Bilal replied, I had some inferior type
of dates and exchanged two Sas (measure) of it for one Sa of Barni dates in order to give it to the Prophet; to eat.
Thereupon the Prophet said, ―Beware! Beware! This is definitely Riba (usury)! This is definitely Riba (Usury)!
Don't do so, but if you want to buy (a superior kind of dates) sell the inferior dates for money and then buy the
superior kind of dates with that money‖ (Sahih Al-Bukhari: 2312)
Another narration by Abu Sa`id Al-Khudri and Abu Huraira: Allah's Apostle appointed somebody as a
governor of Khaibar. That governor brought to him an excellent kind of dates (from Khaibar). The Prophet
asked, "Are all the dates of Khaibar like this?" He replied, "By Allah, no, O Allah's Apostle! But we barter one
Sa of this (type of dates) for two Sas of dates of ours and two Sas of it for three of ours." Allah's Apostle said,
"Do not do so (as that is a kind of usury) but sell the mixed dates (of inferior quality) for money, and then buy
good dates with that money" (Sahih Al-Bukhari:2201)
Islam did not only prohibit Riba, but also blocked all the avenues leading to the transaction in Riba.
Islam prohibits the loan giver from receiving any benefit in cash or in kind from the borrower during the loan
period unless if they are in the habit of doing so before the loan. This is because the gift given to the loan giveris
a way of persuading him to extend the repayment period and thus, accepting it may fall into Riba. Moreover, the
basic principle regarding loans is that; every loan which brings a benefit is Riba. The only loan allowed in
shari‘ah is benevolent loan. The Messenger of Allah (peace and blessings of Allah be upon him) said in the
Hadith reported by Ibn Majah (2432):
―If any one of you borrows something then he gives (the lender) a gift or gives him a ride on his riding-
beast, he should not accept the gift or the ride, unless they used to treat each other in that manner beforehand.‖
Ibn Sireen narrated that ‗Umar (may Allah be pleased with him) lent Ubayy ibn Ka‘b (may Allah be
pleased with him) ten thousand dirhams, and Ubayy ibn Ka‘b gave him a gift of some fruit from his land, but he
returned that to him and did not accept it. Ubayy came to him and said: ―The people of Madina know that I grow
some of the best fruit and I have no need of it, so why did you refuse my gift?‖ Then later on he sent him (some
fruit) and he accepted it.
Ibn al-Qayyim commented: ‗Umar refused it because he thought that the gift was because of the loan.
When he realized that it was not because of the loan, he accepted it.

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 RIBA (USURY) Andits Effect Onthe Global Economy

2.2 Conceptual Framework

This section discusses the conceptual framework of this study which is developed under the Islamic approach.
Figure 1 shows the research model indicating Economy as dependent variable and Riba as independent variable.

Riba Economy

Fig. 1.Conceptual framework

2.3 Impact of Riba on Economy

Riba was prohibited in Islam with a view to encourage Muslims in making rightful investments and
also protect the wealth of one another from unjust exploitation as well as to avoid hatred, evils and envy among
them (Gani, 2020). The prohibition of Riba is also to encourage the spirit of mercy and charity among Muslims
by willingly lending to each other without any expectation of getting more than the borrowed amount.In
addition Yunus, Kamaruddin and Embong (2018) asserted that prohibition of Riba is a kind of ritual obedience
and the reason for its prohibition by Islam is mainly to develop harmony, equality and pleasure in all human
beings. Al-Razi (2005) said Allah forbids usury because it prevents people from engaging in lawful business,
since a person can earn excess of what he has without any effort. It also eliminates kindness, charity and
sympathy among the people.
Haniffa and Hudaib (2019) highlighted that ―Riba is condemned as it is against the Islamic spirit of
justice and equity. Easy access to loans may encourage individuals to live beyond their means and possibly
spend on things that are not essential. Those who default on their loans or mortgages may risk losing their
homes if they have used them as collateral. Riba may cause companies to be declared bankrupt when they
cannot service interest on their loans, which leads to loss of employment for their employees and loss of
productive prospects for society as a whole. High interest rates may cause businessmen to be unable or even
reluctant to borrow from banks, thus hindering the growth and productivity of the business sector. Riba stifles
innovation by small businesses, as they may be reluctant to take up loans and get charged high interest rate for
new projects which are often perceived as having higher risk. Easy access to global financial institutions may
cause governments to borrow, resulting in an accentuation of macroeconomic factors like inflation and external
imbalances in addition to squeezing the resources available for development. This leads some poorer countries
to over-exploit their earth‘s resources, and subsequently to the destruction of their ecological systems. The
heavy debt burden held by some countries makes it difficult for them to recover from a depressed economy,
causing further suffering to the whole society‖ (Haniffa & Hudaib, 2019 p.27).
According to Ibn Taymiyya,―Allah has not let the rich without obliging them to give the needy;the
benefit of the rich and poor does not go straight except with this. When the rich practices usury with the poor he
is like a man who is indebted to another but he prevent him from his right and even wrong him by this increase,
while the debtor needs his debt; this is the worst type of injustice‖ (Ibn Taymiyyah, 2015, p.123). Kettell (2012)
categorised the Islamic rationale for banning Riba into five: it is unjust, it corrupts society, it implies improper
appropriation of other people‘s property, it results in negative economic growth and it demeans and diminishes
human personality.
H1 Riba is significantly related to economy

METHODOLOGY
Sample of this study comprises of Traders, Bank staff and Customers in Sokoto State, Nigeria. Survey
questionnaire was administered to 300respondents through simple random sampling and only 173 were used as
indicated in Table 1. To improve the response rate, the questionnaires were delivered to the respondents by hand
and collected by hand on a scheduled pick-up date. PLS-SEM 3.0 was used for data analysis. This study
classified responses according to a five-point Likert scale ranging from 1 (strongly disagree) to (strongly agree).
Partial least square structural equation model (PLS-SEM) method was used and found suitable by this study
because, the research model entails considerable complexity regarding the type of relationships in hypothesis.
This study also uses latent variables' scores in the consequent analysis for predictive purposes. This study
concurrently uses SmartPLS 3 software (Hair et al. 2014).

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 RIBA (USURY) Andits Effect Onthe Global Economy

Table 1 Demographic Profile of the Total Sample

Characteristics Frequency Percentage%
Gender
Male 147 85
Female 26 15
Marital Status
Married 129 74.6
Single 38 22.0
Divorced 6 3.5
Age
18-29 14 8.1
30-39 54 31.2
40-49 40 23.1
50-59 65 37.6
Category
Traders 77 44.5
Bank staff 27 15.6
Customers 69 39.9
Educational level
Diploma/NCE 61 35.3
Degree/HND 98 56.6
Postgraduate Degree 14 8.1

RESULTS
The PLS model analysis covers two stages: (1) assessment of reliability and validity of measurement model and
(2) evaluation of structural model.

4.1 Measurement model

The reflective measurement model assesses model's reliability and validity which involves indicators
item loading, composite reliability, convergent validity and discriminant validity. Convergent validity is the
level to which items accurately represent the intended latent construct and certainly correlate with other
measures of the similar latent construct is evaluated by examining the AVE of each latent construct, as
recommended by Hair et al. (2014). To achieve adequate convergent validity, the rule of thumb indicates that
only items with loadings between 0.40 and above, and items with Average Variance Extracted(AVE) of 0.50
and above should be retained as suggested by Hair et al. (2017) and Chin (1998). Also, Bagozzi and Yi (1988)
and(Hair, Ringle and Sarstedt (2011) recommended that the composite reliability coefficient should be at least
0.70 or more.

Table 2: Measurement Model: Reliability and Convergent Validity

Average Variance Extracted
Construct Loadings Cronbach's Alpha Composite Reliability
(AVE)
Econ_1 0.713 0.836 0.881 0.556
Econ_2 0.738
Econ_3 0.792
Econ_4 0.819
Econ_5 0.809
Econ_9 0.688
Riba_1 0.771 0.913 0.929 0.593
Riba_10 0.697
Riba_11 0.863
Riba_3 0.739
Riba_4 0.733
Riba_5 0.702
Riba_7 0.812
Riba_8 0.837
Riba_9 0.758

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 RIBA (USURY) Andits Effect Onthe Global Economy

Result shows that all the requirements were met in assessing measurement model. Firstly, reflective
individual items are reliable, because all standardised loadings are above 0.6 as indicated Table 2. Accordingly,
the individual item reliability is satisfactory (Hair, Hult, Ringle, & Sarstedt, 2017). Secondly, the composite
reliabilities of all reflective constructs are greater than 0.7 indicating that the requirement of construct reliability
is met (Leal-Rodríguez, Eldridge, Roldán, Leal-Millán, & Ortega-Gutiérrez, 2015)

Table 3: Discriminant Validity

Construct Economy Riba
Economy 0.770
Riba 0.727 0.746

As indicated in Table 2, the convergent validity is achieved by the latent variables since their average
variance extracted (AVE) exceeds 0.5 level (Fornell and Larcker 1981). Also, Table 3 confirms that all the
variables met the requirement of discriminant validity. This is achieved from a comparison of the square root of
AVE versus the corresponding latent variable correlations. For discriminant validity to be satisfactory, diagonal
elements should be significantly greater than off-diagonal elements in the corresponding columns and rows
(Roldán and Sánchez-Franco 2012). In addition, as stated earlier, discriminant validity can also be achieved by
comparing the indicator item loadings with cross-loadings. To ascertain satisfactory discriminant validity, Chin
(1998) recommended that all the indicator item loadings should be greater than the cross-loadings. Table 4
below compares the indicator item loadings with other indicators.

Table 4: Cross Loadings

Construct Economy Riba
Econ_1 0.713 0.549
Econ_2 0.738 0.574
Econ_3 0.792 0.489
Econ_4 0.819 0.505
Econ_5 0.809 0.486
Econ_9 0.688 0.576
Riba_1 0.556 0.771
Riba_10 0.553 0.697
Riba_11 0.660 0.863
Riba_3 0.463 0.739
Riba_4 0.542 0.733
Riba_5 0.532 0.702
Riba_7 0.572 0.812
Riba_8 0.539 0.837
Riba_9 0.589 0.758

All indicator item loadings are higher than the cross-loadings as shown in the Table 4 above,
recommending acceptable discriminant validity for further analysis. Therefore, in this study, all the criteria for
attaining discriminant validity are achieved.

4.2 Structural model

The assessment of structural model includes, testing of path coefficient (hypotheses), assessment of R-
square, evaluation of effect size and assessment of predictive relevance of the study model. The study achieved
all the requirement of structural model. Therefore, bootstrapping procedure was used in assessing structural
model. Table 5 indicates the bootstrapping results which provides t-values that permit the assessment of
statistical significance relationship in the research model (Ramayah, Cheah, Chuah, Ting, & Memon, 2017). In
this situation, the results significantly support the hypothesis, which defines the direct relationship of Riba and
Economy (Beta = 0.727; t=19.661).

Table5: Result of Hypothesis Testing

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 RIBA (USURY) Andits Effect Onthe Global Economy

Hypothesis Beta Standard Error T Statistics P Values Decision

Riba -> Economy 0.727 0.037 19.661 0.000 Supported

2
In addition, the R represent the predictive accurateness of the model, it signifies the collective effects of the
exogenous latent constructs on the endogenous latent construct as proposed by Hair et al., (2014). Table 6
indicates the variance explained (R2) in the endogenous variable and the path coefficients for the study model.

Table 6: Coefficient of Determination

Construct R Square
Economy 0.529

Also, in Table 7, the result from blindfolding and Predictive relevance (Q2) of the latent endogenous construct is
higher than zero. This clearly shows that the model has predictive relevance (Chin, 1998; Hair et al., 2014;
Hayes et al., 2009).

Table 7: Predictive Relevance

Total SSO SSE 1-SSE/SSO
Economy 660.000 484.416 0.266

Discussion
This study explores the effect of Riba on Economy. Primary data was collected from the respondents
who were also the key players in business comprising of Traders, Bank staff and Customers in Sokoto State,
Nigeria.The result of the direct relationship between Riba and Economy is significantly positive. This indicates
that the negative impact of Riba that include; injustice, corruption, improper appropriation of other people‘s
property, negative economic growth and it demeaningof human personality increases with the increase in
transactions associated with Riba. Therefore, adapting to Islamic ethics at all level of businessis the only
solution to the destructive impact of Riba to the economy.

Conclusions and suggestions

The aims and objectives of Islamic business ethics are to eliminate injustice, inequality, negative
economic growth and misappropriation of wealth in the society. This study therefore discusses and examines the
effect of Riba on the economy. The significant positive relationship indicated that transaction in businesses
associated with any form Riba would result in higher level of economic destruction. Therefore, Muslims are
expected to have knowledge of what constitute Riba and its consequences so as to avoid it for the betterment of
the economy. Government and business people should collaborate in finding a solution to Riba by blocking all
avenues that may lead to Riba and also making accessible the shariah compliant businesses in the society. The
findings also suggest that, to attract the reward of this world and hereafter, people at all levels should fear God
in conducting their businesses. Furthermore, this study suggests that there is a need for more research on the
impact of Riba to the global economy.

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*Corresponding Author: Mustapha Sidi Attahiru, PhD 44 | Page