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Understanding Riba (Interest) in Islam: A Comprehensive Overview

In this article, we delve into the concept of Riba as defined in Islam, exploring why it’s prohibited, its meaning and history, the misconceptions surrounding it and its differences with other financial terms.

“Riba” is an Arabic term often equated with interest, but its meaning can vary based on the context. But a foundational understanding of Islamic financial principles can help us better understand its definition and applications in areas like conventional loans, mortgages and business finance. 

Defining Riba (Interest) 

The root meaning of “Riba” in Arabic is “increase” or “growth”. Within the realm of Islamic law, it typically points to two central ideas: riba al fadl and riba al nasiah.

Riba al Fadl involves trading unequal amounts of the same commodity, such as swapping 1 kilo of dates for 2 kilos. With modern economies moving away from barter systems (the exchange of goods and services for other goods and services without exchanging any form of money), this form of Riba has become less relevant.

Riba al Nasiah is Riba that occurs when a lending contract includes a condition where the borrower repays an additional sum due to a delayed repayment. For example, when a customer borrows $1000 for a year and is required to pay the lender $1050 in return. 

Islamic Teachings on Riba

The Quran and Sunnah contain several warnings against Riba. For instance, the Quran states:

“O believers, fear Allah and forgo the remaining interest if you truly believe.” (2:278)

“… if you don’t, be informed of a war against you from Allah and His Messenger. But if you repent, you may have your principal…” (2:279)

Hadiths from the Prophet (peace and blessings be upon him) also emphasise the gravity of Riba, suggesting its widespread practice in future societies and condemning both parties involved in riba transactions.

This includes one such recount, where Jabir said that Allah’s Messenger (PBUH) cursed the accepter of interest and its payer, and one who records it, and the two witnesses, and he said: “They are all equal.” (Sahih Muslim) 

Why is Riba Prohibited? 

Several theories attempt to explain the prohibition of riba in Islam. Some scholars, emphasising unwavering faith, believe we must accept Riba’s prohibition even without clear reasons, viewing it as an act of worship. While others search for logical reasons, suggesting that interest can destabilise prices, cause inflation or widen societal wealth gaps. They argue that while Riba might offer short-term benefits, its long-term harm outweighs any potential advantages

Historical Perspective on Riba 

Interest-based transactions aren’t new. For instance, in ancient Greece during Aristotle’s time, a 12% interest rate was deemed fair. The same rate was adopted in Rome. Yet, historically, exorbitant interest was viewed as unethical.

England, during various reigns, enacted and intensified laws against usury. Unfortunately, the stance towards interest softened in recent centuries, influencing other English-speaking countries like the US, Canada and Australia, as well as other parts of the world. 

Today, banking and interest-bearing loans are normalised globally as a part of the conventional financial system, which makes it hard for Muslim communities, especially in non-Muslim majority countries, to access Shariah compliant finance services. However, there are also several financial institutions in the West that are trying to be more inclusive of local Muslim communities by offering loan opinions without Riba.

Misconceptions Surrounding Riba 

Given its intricate nature, Riba can sometimes be mistaken for other financial concepts. This includes: buy now, pay later schemes, admin fees, debentures (a type of financial contract), securities (a way of investing), asset financing and purchase order financing

However, these can exist without involving Riba, though they may at times incorporate it. 

Distinguishing Riba from Profit 

While Riba might resemble profit at first glance, they are fundamentally different. Consider lending $10 and receiving $12 versus buying a product for $10 and selling it for $12. Both yield a $2 gain, but Islam prohibits the former while permitting the latter.

Think about regular home loans. They usually make you pay extra money – interest – when you pay back over time (riba al nasiah). But in Islamic banks and financial institutions, they can’t charge interest. Instead, they make money by investing in properties and then renting them.

Riba vs. Usury

While usury typically refers to exorbitant interest rates, Islam doesn’t differentiate between “interest” and “usury” – both are forbidden. Some modern Muslim thinkers suggest differentiating the two based on potential exploitation. However, this viewpoint deviates from the Quran’s broad prohibition and historical records. Moreover, even seemingly small interest rates can have hidden exploitative facets.

Ultimately, rulings meant to protect individuals remain valid, irrespective of shifting societal perspectives. Just as the consumption of alcohol and acts like adultery remain prohibited in Islam, regardless of personal views, the prohibition of Riba stands firm.

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