What is Riba in Islam?

by Mohammed Ayub

The Arabic word 'riba' can be roughly translated as the concept of exceeding, or increasing. It is very commonly translated to mean 'usury' or 'interest' and refers to unequal exchanges or charges and fees for borrowing that can result in the payment of interest. At its very core, riba refers to exploitative gains in wealth and money.

The unanimous opinion of Islamic scholars is that Islamic Sharia law prohibits the receipt or payment of interest. This includes:
  • any interest received in a bank account
  • interest on any form of lending or borrowing
  • loans taken for property purchases with an interest element
  • loans taken out for educational courses (ie degree or Masters) with an interest element
Riba, or interest, is forbidden because it goes against the principles of social justice and equitable transactions that are at the centre of Islamic finance. Islamic finance relies heavily on ethics and mutual beneficiaries. Where interest is paid, only the recipient of the interest receives any benefit from the interest money.

According to Surah Al 'Imran, verses 13--132 in the Quran:

"O believers, take not doubled and redoubled interest, and fear God so that you may prosper".

Receiving or paying interest is deemed to be a major sin in Islam. For anyone who has receives interest monies into their bank account, they should look to donate the money to a charitable cause. The charity that you donate to can use the money to relieve hardship and poverty.

There are two main types of interest. The most common form of riba is interest on a bank loan or debt that is over the original loan amount the lender charges. For example, A borrows £100 from his friend, B. A then repays £120 over ten months, with the additional £20 being charged as interest by B for the loan. Any loan from any lender falls into this category. This is known as riba al-nasiyah.

The second type of interest is an exchange contract or sale. This occurs where the sale amount includes an additional sum of money that can be constituted as riba- al-fadl as there is an additional fee payable.

The main reason riba is prohibited is the concept that it makes the rich richer and the poor poorer. There is an inequality in the dealings between the parties that is frowned upon in Islam. Interest is seen as perpetuating and often increasing the gap between rich and poor humans in society.

Islam prohibits any transaction that is seen as exploitative, and profiting from lending is seen as exploitative.

Many Muslims in Western societies are unaware that there are financial services and products that are compliant with Sharia law, and they therefore continue to accrue debts and interest on credit cards, mortgage loans, and bank loans.

As mentioned above, one of the best ways to use any monies received in the form of interest, is to donate the interest monies to charity. What this means is that the recipient of the interest does not profit from the interest monies, instead the donation is used by the charity to serve the poor.

Many Muslims accrue interest by default when using commercial or personal accounts. Most western banks automatically pay account holders any interest accrued on money they hold.

In Islam, riba monies from interest can be donated to charity. The donor must make clear to the charity that the donation money is interest money and not zakat or sadaqah. Riba monies can be spent by charitable organisations on buying essential supplies for the poor. The donation money cannot be used to purchase Qurans or to build a mosque.

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