THE PROHIBITION OF RIBA

DEFINITION
 The basic principle of Islamic financial

system is the prohibition of riba (Usury).

 The Arabic word: riba , literally means growth,

excess, addition, expansion, surplus or

increase.
 Riba , from Shari’a perspective, refers to any

predetermined and conditional extra amount,

big or small, that must be paid by the
borrower to the lender above and over the
principal, for the loan to be materialized or
for an extension in its maturity.
 Riba is categorically prohibited by Qur’an and
Sunna regardless of whether the loan is taken
for the purpose of consumption or for some
production activity.
 The prohibition of riba implies that the
predetermined positive return on a loan as a
reward for waiting is not permitted by Shari’a ,
regardless whether the return is a fix or
variable percentage of the principal, an
absolute amount to be paid in advance or on
maturity, or received in the form of a gift or
prize or a service.
 The prohibition of riba applies equally to the
loans obtained from or extended to Muslims as
well as non-Muslims.
 There is no distinction between Muslims and

non-Muslims, or between individuals and

states with respect to the receipt and payment
of interest.
 Therefore, the prohibition of riba has universal

application. This is consistent with Islam being

a universal religion that preaches the unity of
mankind and the equality of all individuals,
irrespective of their sex, color, nationality or
faith.
 The prohibition is explicitly mentioned in four
different revelations (Ayaat and Sowar) of
Qur’an (2:275-76, 2:278-279, 3:130, 4:161
and 30:39) expressing the following ideas:
1. Riba deprives wealth from Allah’s blessings.
2. Riba is equated with wrongful appropriation
of property belonging to others
3. Muslim should stay a way from riba for the
sake of their own welfare.
4. When lending money, Muslims are asked to
take only the principal and forgo even that
sum if the borrower is unable to repay.
5. Despite the apparent similarity of profits from
trade and profits from riba , only profits from
trade are allowed.
TYPES OF RIBA
 Shari’a scholars have differentiated between
two types of riba .

1. Riba Al-Duyoon (Riba on Debts)

This is what the Qur’an prohibited and
refers to as a war against Allah and his
prophet . Riba al-Duyoon is known in Islamic
Shari’a as riba Al-Nasi’ah.
Riba Al-Nasi'ah
 Nasi’ah means delay, defer or wait.
 It is applied to “money-money
exchange”; money is exchanged for
money with deferment.
 Since the verses of Qur’an has directly
rendered this type of riba as haram, it
is called riba al-Qur’an.
 Similarly, since only this type was
considered riba in pre-Islamic era it has
earned the name of riba al-jahiliyya
 Riba al-nasi’ah is the real and primary
form of riba that represents
predetermined extra amount on
deferred payments due to the inability
of the borrower to pay its debt on time;
i.e., extending the period for payment
by charging more than the principal
value.
 Riba al-nasi’ah underlies most of
conventional financial products and
services.
2. Riba Al-Buyu’ ( Riba on Sales)
 This type of riba is specifically

prohibited by the Prophet (pbuh). It

gives a more comprehensive
implication to riba and is not merely
restricted to loans.
 Riba Al-Buyu’ applies to certain types

of sales transactions, both immediate

exchanges as well as credit
exchanges. It is commodity specific
and results in what is known as riba
Al-Fadhl .
Riba Al-Fadhl ( Riba on Increase).
 Also known as riba al-Sunna or riba alhadeeth
 Riba al-Fadhl is described as an unlawful excess
in the exchange of two counter-values where
the excess is measurable through weight or
measure.
 The basis for the prohibition of riba in the
exchange of commodities is the famous hadeeth
of the Prophet on six commodities
 “ Sell gold for gold, silver for silver, wheat for
wheat, barley for barley, dates for dates, salt for
salt – like for like, equal for equal, and hand-
to-hand (spot); if the commodities differ, then
you may sell as you wish, provided that the
exchange is hand-to-hand or a spot
transaction.”
 This hadeeth created a lot of confusion and
many scholars in the past or in the recent days
expressed their inability to appreciate the
reasons and the logic behind the concept of
riba al-Fadhl and its alleged prohibition
 Economically speaking it would be irrational

and unacceptable to imagine that a person

would knowingly commit himself to a bargain
whereby he is required to give a superior
quality of his commodity to another person for
inferior quality of the same commodity. It
would indeed be unfair to expect the former to
agree to any such deal in spot exchange.
 Furthermore, there are other ahadeeth shows
that the Prophet (sws) categorically stated
that the question of riba relates to exchanges
involving credit and has nothing to do with
spot exchanges.
 What I believe now is that the Ahadeeth of

riba al-Fadhl, if properly interpreted, serve to

clarify two important aspects relevant to the
prohibition of riba: one that riba is only
applicable to credit dealings and, two, that
while dealing with loan transactions, it is
absolutely essential that what is returned by
the borrower should be identical to the item
he borrowed.
 If you give on credit gold, then receive back
the same gold: the same weight and the
same quality; and if you give silver [on
credit], then receive back the same silver: the
same weight and the same quality, because
the one who gives more or expects more,
then [he should know that,] that is exactly
Riba .’
 Likewise, if you will sell gold for silver on

credit then there is a danger of interest in it.

ADDRESSING SOME MISCONCEPTIONS
ABOUT RIBA
 As mentioned in the definition of riba

given above, anything, big or small,

stipulated in the contract of loan to be
paid in addition to the principal is riba .
 However, there have been a number of

misconceptions about riba and its

prohibition. The main misconceptions
include:
1. Modern day interest is not riba
Argument
 Interest-based commercial

transactions were invented by modern

day business thus not covered by the
riba referred to in the Qur’an . The
prohibition of riba cannot be extended
to modern day banking
 Interest is based on the premise

“money is a commodity”.
Addressing this misconception
 Interest is the rent paid for the use of
money. The lender rents you the money
at a rental rate called interest. In a
legal sense, “interest” implies that
excess amount which a creditor settles
to receive or recover from his debtor in
consideration of giving time to the
debtor for repayment of his loan.
 Thus, riba and interest are the same.
The equivalence of riba to interest has
been recognized by the majority of
Muslim scholars. They explicitly and
clearly equate riba to interest
2. There is no difference between Interest and
Profit
Argument
 Bank interest resembles profit in murabaha

Addressing this misconception

 Allah (swt) states in the Qur’an that some

people might raise the issue of the apparent

similarity of profits from trade and profits
from riba ; however, only profits from trade
are allowed.
 Generally, trade means exchange of any

goods for money. You can buy or sell goods

for money at any price.
 In murabaha , you buy an item at one price and
sell it to someone at a higher price, allowing
him to pay you for it over time.
 In riba , you lend someone some money and

require him to pay back a greater value of

money than what he borrowed.
 Murabaha prevents you from being caught in a

spiral of debt, as the amount that you pay

fixed before hand. You cannot get a situation
where you have large debts that you cannot
pay off and which rise every year due to
interest.
 Several types of risks are associated with trade

while charging riba (interest) is risk free. There

are other legal means to avoid risk of default .
3. Riba is only relevant to consumption loans,
not commercial loans
Argument
 The common practice of riba during the time
of its prohibition was the charging of interest
on consumption loans taken by poor people
to finance their basic needs. This form of
exploitation is not present in production
loans whereby in many cases, the debtor is
economically well-off and loans taken are
used to generate profit. Therefore, the basic
cause of the prohibition of riba , exploitation
and injustice, is absent
Addressing this misconception
 First, the prohibition of riba concerns the

unjustified excess, not the use of funds. The

Qur’an ic prohibition of riba includes all forms
of it without any specifications of whether it is
for consumption or production and regardless
of the financial status of a party (whether rich
and poor).
 Since riba is equal to interest, it makes no

difference whether the loan is for consumption

or business purposes, and whether the loan is
given (or taken) by a commercial bank,
government, corporation, or an individual.
 Lending in Islam is considered as "a benevolent
act with a view to helping someone in need. If
someone needs capital for commercial
purposes, then capital should be given in a
risk-sharing basis and if someone needs funds
to overcome some short term need, then such
need should not be exploited and the borrower
should not be put under undue burden
4. Inflation justifies interest
Argument
 It is argued that a debt when repaid at a later
date may have lower purchasing power due to
persistent increase in the general prices of
goods and services (inflation). Hence, the
borrower, in essence, repays less, which
would be unfair to the lender if he is not
compensated for the loss of purchasing
power.
 Indexation, which means price adjustment to
take account o inflation, is needed to adjust
the value of the loan to compensate for the
change in the value of money due to
inflationary pressure so that there is no
injustice to the lender.
Addressing this misconception
 First, rates of interest are not based on rates of

inflation, although there may be some kind of

correlation. Actually, several studies have
illustrated that interest is one of the causes of
inflation. A better way to reduce inflation is to
stop charging interest to begin with
 If surplus on loan amount is only attributable

to actual value loss due to inflation, there will

be no commercial incentives to banks
 With regard to indexation, it is justifiable from

Shari’a perspective for wages to face the

inflationary rise in prices. But the majority of
scholars oppose indexation of financial assets
based on the following arguments:
1. Islam considers any excess of the loan’s
principal as riba . So only the original amount
lent should be repaid.
2. The presence of inflation will result in the
decline in the purchasing power of lender’s
money whether it is given to the borrower or
not.
3. The factors that lead to inflation are beyond
the borrower’s control, so why the borrower
should be held responsible
4. Even if indexation is allowed there is no
perfect index to fully and fairly capture the
loss of the value.
 However, one solution to protect the
purchasing power of money lent, the lender
and borrowers can agree that the loan can be
denominated in terms of some relatively stable
commodities such as gold or diamond, or a
strong currency. Thus, the lender can lend a
certain quantity of gold to the borrower who is
obligated to return the same quantity when it
is due.
 Another solution to overcome the decline of

the value of money is the Islamic way of profit-

and-loss sharing partnership, so both parties
share the risk.
5. If it is not excessive, it is not riba
Argument
 It has been stated in Surat Aal-Imran (3:130) -
“O those who believe do not eat up riba
doubled and redoubled”. Thus, if the rate of
interest is not excessive (e.g. doubled) then it
does not constitute riba and therefore not
prohibited
Addressing this misconception
 Verses of the Qur’an on the same subject
matter must be studied in relation to each
other; e.g., Al-Baqarah (2:278) – “ O those who
believe fear Allah and give up whatever
remains of riba, if you are believers ”
 Every amount, regardless of magnitude, over
and above principal is riba
 We must understand the Qur’an as a book of
guidance that directs us to the core of values;
otherwise, Qur’an will be misinterpreted. For
example, verse 41 in Surat Al-Baqarah (2:41)
states “ Do not sell My verses for a little price ”.
Does this imply that one can sell verses for a
high price?
 The expression “doubled” only meant to show

how bad the practice of riba, and emphasize

the added severity of the sin due to its
excessiveness.
6. Riba is Allowed under Dharura (Necessity)
Argument
 Under dharura circumstances, the haram is
permissible. If it is permissible to consume
pork to save one’s life from dying of hunger,
riba is allowed under dharura too.
Addressing this misconception
 First, there is a misunderstanding of dharura .
 Dharura is applied only to life-threatening
circumstances. To identify dharura that
necessitate riba the individual debtor must
answer the following two questions with
absolute sincerity: Is the purpose of the riba -
based loan to protect an absolute necessity?
Have all other permissible alternatives been
exhausted?
 At the institutional level, removal of riba from
the economy does not imply that financial
institutions will have to give charitable
(interest-free) loans. The role of loan giving
and taking in Islam must be well understood.
 While giving a benevolent loan is highly

commendable, the taking of a loan is

discouraged and limited to cases of absolute
necessity. Islam provides means of financial
intermediation in the form of profit and loss
sharing
7. Interest represents an opportunity cost which
cannot be denied
Argument
 Interest rate is just a compensation for the
opportunity cost of the lender during the time
of loan.
 According to this argument, the lender could
use his money to consume goods or services
or could benefit from investing this amount
today. The postponement of consumption or
investment involves sacrifice and hence, the
individual deserves compensation for giving
up the satisfaction he would get from
consumption today or the return he would get
from investment.
Addressing this misconception
 The notion of interest as a reward for deferring

consumption is rejected in Islam.

 Saving by itself should not be rewarded by an

increase in capital. The ability to save is a

reward by itself.
 There may be some alternative uses to the

loaned fund but there is no guarantee that

these uses would guarantee a return.
 Furthermore, as Muslims, we should not

consider only the material aspects but also the

non-material dimensions such as the rewards
in the hereafter.
8. Interest as a compensation for risk element
Argument
 Lender faces different economic risks
including the default of the borrower,
unanticipated changes in economic
circumstances such as rapidly rising inflation.
Taking all these risks should be compensated.
Addressing this misconception
 It is always true that lenders may face
different types of risks whether he lend his
money or not.
 Shari’a -based contracts provide rules and
regulations that protect both lenders and
borrowers in ways other than charging
interest.
9. Interest is a reward for money as a commodity
Argument
 The advent of interest-based lending has
introduced a fourth function of money:
“money as a commodity”
 It is argued that, just as a merchant can sell
his commodity for a higher price than his
cost, he can also sell his money for a higher
price than its face value
 Similarly, just as a person can lease his
property and can charge a rent against it, he
can also lend his money and can claim
interest on it
Addressing this misconception
 Islam rejects the notion that money is a

commodity
 The prohibition of riba dictates that money

should never be treated as a commodity

 There are differences between money and

commodities
◦ Money is not an objective in itself. Treating
money as a commodity (trading in money)
goes against the original wisdom behind its
creation (medium of exchange.
◦ Money has no intrinsic value. It, in itself,
cannot be used for direct fulfillment of
human needs.
 ◦ Commodities can have different qualities while
money is perfectly homogeneous.
◦ In a commercial transaction, specific
commodities are identified for exchange
whereas money is generic.
 Treating money as commodity directs economic
activities towards money out of money, and
against providing real goods and services. In the
contemporary world economic setting, most of the
money that is transferred around the world in
daily basis is for purely financial transactions, and
has no link to transactions in the real economy.
 Another critical repercussion of the prevailing
monetary system (which treats money as a
commodity) is that the system, by design,
promotes inflation
10. Time Value of Money
Argument
 Time value of money (time preference) is an
important concept of modern conventional
financial system. In simple terms, it means
that money has a time value. Having money
now is more valuable than having it at some
future time. A rational person would prefer to
have BD1000 today rather than having it later
because the BD1000 today may not be same
as BD1000 tomorrow.
 Sacrificing present consumption for future
consumption must be compensated.
Addressing this misconception
 Islam does not permit the reward for time but

allows reward for efforts and risk-taking

activity in business. Because money in Islam is
just a medium of exchange, it cannot earn
more money by itself without putting it into
real productive actions such as sale, lease,
investment.
 Time value of money is recognized by Shari’a

but only on sales contracts not in debt

contracts. There is a great distinction in Shari’a
between investment and lending. Since time by
itself, without any economic activity does not
yield any return, it is actually the economic
activity that is undertaken during the time,
which creates the yield.
 Lending does not constitute, by itself, a
productive economic activity. But, investment is
an economic activity that needed to be
compensated for any profit or loss received
during the time.
 Investment is different from pure riba -based

risk-free debt. A seller in a trade, whether on

spot or deferred payment basis, is free to charge
any price and the profit that accrues to him is
legitimate (halal). There is a possibility that his
“spot” price may be lower than his “deferred”
price. Such price differential is obviously due to
deferment and is recognized as the time value of
money. Such time value of money is acceptable in
the Islamic framework. What is not permissible is
the time value of money in the context of debt.
 Nevertheless, when the buyer in a deferred-
payment sale decides to defer his payment
beyond the due date for payment, neither he
nor the seller is allowed to increase the price.
Price is now in the nature of debt and a debt
cannot be replaced by a higher or lower debt. A
higher debt replacing a lower debt results in
riba on the old debt.
 Shari’a applies Islamic time value of money in

such a way that exists in mudharaba contacts

where rabbul-mal has the right to a share of
the venture’s profits because he has given up
current consumption or the ability to invest the
funds elsewhere ( but at the same time rabbul-
mal may suffer loss too)
THE RATIONALE BEHIND PROHIBITION OF
RIBA (INTEREST)
 For Muslims, the prohibition of riba as
evidenced in the Qur’an and Sunna should be
sufficient. However we can attempt to
articulate some rationale or reasons for its
prohibition to better appreciate the wisdom
behind the injunction
 Although the responses to the misconceptions

stated in the previous section constitute

important rationales, some of the additional
rationales for the prohibition of riba are
provided as the following:
1. Riba is a cause of injustice and exploitation
 Riba is considered a form of injustice and

exploitation, which contradicts the core

Islamic teachings of social justice.
 It is unjust for lenders to guarantee return

with no involvement in risk.

 Because riba entails taking advantage of a

man’s inferior economic position it breeds

hatred, jealousy and ill-will towards the rich
 This behavior kills the spirit of cooperation

in the society and discourages people from

doing good to each other.
2. Riba leads to the creation of materialistic
society
 In Islam, incurring debt is discouraged. The

Prophet (pbuh) refused to offer salat-ul

janazah of a person who died indebted.
 Lending is a charitable act. Borrowing

money should be limited to cases of dire

needs.
 On the other hand, permitting riba enables

lending to become a viable business. Banks

are motivated to lend as much as possible.
They exploit man’s inherent greed to spend
beyond their means by offering credit which
will result in negative repercussions
 Easy availability of credit cultivates a
materialistic society. People have to work
harder and harder for longer hours, and may
exercise unethical business practices in order
to repay bank debt. All this leads to less
emphasis on the family, negative effect on
social relations amongst the people which
leads to social ills
 The banks in essence exercise “control” over

people who become “enslaved” to the banks.

3. Riba discourage productive work
 Interest-based financing results more

wealth collected by lenders without exerting

much effort or contributing to productive
activity.
 Money by itself is not part of capital in

economic definition and hence, is not a

productive resource.
 From an Islamic point of view, money

should not be rewarded. Money functions as

a medium of exchange or a store of value
and cannot be utilized for fulfilling human
needs directly. It can only be used for
acquiring goods or services, which have a
fundamental use.
 Managerial and entrepreneurial skills along
with the productive use of money are the
essential factors in converting it into capital.
The lenders of the money have no input in
the conversion process and thus, they do not
deserve a reward. Riba encourages the
creation of wealth with no effort from its
provider at the cost of borrower. The value of
work is reduced.
4. Riba impedes healthy economic development
 Riba generates negative effects on production

since it is security oriented rather than growth

oriented.
 Lending is confined to established businesses

with known creditworthiness and adequate

security (collateral) not profitability. Banks are
not willing to experiment new and unproven
methods of production, especially for small-
scale enterprises and agriculture
 Utility of certain projects is with reference to

criteria other than profitability and benefit to

society, like financing of luxurious or wasteful
consumption and/or production
 Lenders preferred to finance large-scale
businesses, which results in domination of
big businesses over smaller entrepreneurs.
This behavior will curtail competition and in
turn will affect product variety.
 Riba discourages innovation since potential

entrepreneurs without security to pledge are

denied credit.
5.Riba increases the disparities in income and
wealth
 The rich (who are most likely to be the lender)

take advantage of the need of the poor (the

borrower) for money by charging interest,
which adds to the burden of the borrower. As
a result, the rich becomes richer and the poor
becomes poorer. Thus, riba increase wealth
inequality among the members of the society.
 Lacking collateral and established economic

standing, poorer segments of the economy are

at an economic disadvantage when competing
for credit to finance economic activities. As a
result, wealth and income disparities increase
among the society members, which generate
envy and hatred among the society.
6. Riba discourages partnership
 A loan provides a fixed return to the lender

regardless of the outcome of the borrower’s

course of action. From an Islamic point of
view, it is much fairer to share in the profits
and the losses.
 The supplier of capital has the right to a

return, but this return should be equivalent

to the risk and effort involved in the project
for which the finances are supplied.
Therefore, Shari’a promotes profit and risk
sharing.