Riba
Riba is the prohibited increase at the centre of Islamic finance: an unjustified excess in a loan or in certain exchanges. It is broader than the English word "interest" and is not limited to excessive rates.
Also called: riba' · interest in Islam · usury in Islam
The Qur'an prohibits riba in strong terms, and jurists divide it into two main kinds. Riba al-nasi'ah arises from deferment, and covers any increase stipulated in return for time on a loan, which is the basis of the modern prohibition on loan interest. Riba al-fadl arises from unequal exchange of certain commodities of the same kind, and shapes the rules on gold, silver and currency.
The rule is about how a return arises, not how large it is. A lender may not stipulate any benefit for lending: one per cent is as objectionable as thirty. A seller, an investor or a lessor may earn a profit, because each takes on the risks of ownership or of the venture. Most of the structures in Islamic finance, from murabaha to ijarah to mudarabah, exist to replace a loan with one of those relationships.
Critics, including some scholars, argue that certain structures replicate interest in substance while avoiding it in form. That debate is sharpest around tawarruq and bay' al-'inah.
In practice
Riba is not a usury cap. Pricing a product off a market interest-rate benchmark does not by itself make it riba, and a very low fixed return on a loan does not make it acceptable.
Example
A lends B US$10,000 for a year on condition that B repays US$10,300. The US$300 is riba because it is a stipulated return for lending. If A instead buys a US$10,000 machine B needs and sells it to B for US$10,300 payable in a year, having genuinely owned it in between, the US$300 is sale profit.
Commonly confused with
| Term | How it differs |
|---|---|
| Ribbit | Ribbit is the Jewish-law prohibition on interest between Jewish parties. The two share a logic — a loan may not earn a return for time — but they belong to different legal systems with different exceptions and structures. |
See also
- Riba al-Nasi'ahRiba al-nasi'ah is riba arising from deferment: any increase stipulated in return for time on a loan, and the deferral of delivery in an exchange of like commodities that must be settled on the spot.
- Riba al-FadlRiba al-fadl is the unlawful excess in a same-kind exchange of specified commodities — originally gold, silver, wheat, barley, dates and salt — which must be traded in equal amounts and hand to hand.
- QardQard is a loan of fungible property — usually money — that the borrower must repay with its equivalent, with no stipulated benefit to the lender. Any benefit the lender requires as a condition of lending raises a riba problem.
- MurabahaMurabaha is a sale in which the seller discloses its cost and the agreed profit to the buyer. Islamic banks use it to finance purchases by buying an asset and reselling it to the customer on deferred terms.
- RibbitRibbit is the Jewish-law prohibition on receiving or paying certain forms of interest on a loan between Jewish parties.