.

Riba (Arabic: , [rb]) means Interest. Riba is forbidden in Islamic economic jurisprudence fiqh and
considered as a major sin. Simply, unjust gains in trade or business, generally through exploitation.
There are two types of riba discussed by Islamic jurists: an increase in capital without any services
provided and risktaking, which is prohibited by the Qur'an, and commodity exchanges in unequal
quantities, prohibited in the Sunnah.
[edit]Background
Riba was forbidden in the Medinan society of Muhammad, just like in the medieval Christian world.
Historically, the consensus of Muslim jurists understood that any loan that involved an increase in
repayments was forbidden, and as such, the Islamic state prohibited it. This prohibition was reconsidered
with the advent of European influence during the Age of Enlightenment.
The word is a Quranic term. One of its applications is "interest" or "usury" on loaned money. The Quranic
term is not limited to money but as well includes all loan transactions in which the debtor returns a sum of
goods in excess or above the original loan, be it money, eatable or any other item or goods; anything in
excess of original is considered riba if items exchanged are of the same kind (such as gold for gold). Riba
is any increment on a loan or debt, either preconditioned or in rescheduling.
Riba is considered amongst the Seven heinous sins (Al-Saba al-Mubiqat - ) , namely:[1]

Believing in gods other than Allah.

Magic.

Murder.

Riba/usury.

Unlawfully taking orphans' money.

Fleeing the battlefield.

Accusing chaste, pious women.

The Qur'an states:[2]

3:130 O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you
may be successful.

2:275 Allah has permitted trade and has forbidden interest

Mohammad said in his farewell sermon: "God has forbidden you to take Riba, therefore all riba obligation
shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer
inequity. God has judged that there shall be no riba and that all the riba due to `Abbas ibn `Abd al Muttalib
shall henceforth be waived.".[3]
The Qur'an explicitly prohibits riba, and since the Qur'an is an undisputed source of guidance for Muslims,
all Muslim authorities unanimously agree on prohibition of riba. There is no difference of opinion between
any school of thought on the prohibition of riba in Islamic shariah.
The Qur'an mentions that the person who deals with riba ( )will stand (on judgement day) as one who is
beaten by Satan into insanity.[4] Here, Qur'an makes it clear that "trade" and "riba" are not the same and
that God forbade "riba" and allowed "trade".[5] It further states that whoever accepts the guidance of God
must immediately stop dealing in riba, and those who return to riba after God's guidance has reached are
dwellers in fire because God destroys "riba" and will reward those who give to charity.
Mohammad cursed the one who deals with riba. From Jabir: Mohammad cursed the receiver and the
payer of riba, the one who records it and the two witnesses to the transaction and said: "They are all alike
[in guilt]." [Sahih al-Muslim, Sahih Al-Bukhari, Tirmidhi, Ibn Majah, Bahiqi and Musnad Ahmad]
Islamic shariah considers riba as a tool of oppression and a means to unjustly take the money of
others[6] by exploiting their needs and circumstances. Hence, it forbids a riba-based system altogether
and promotes charity as an alternative. Therefore, Mohammad said: "God has judged that there shall be
no riba" [Last Sermon]
The crimes of dealing in riba are so serious that God has declared war against those who deal in it.
[7]

Mohammad has cursed anyone who deals with riba, the one who takes it, the one who pays it and the

one who records it, as their sins are considered equal under the Quran. [8]

Riba is considered to be a greater sin, for Muslims, than that of eating pork or drinking alcohol.
Mohammad declared the practice of riba worse than adultery, worse than "to a man committing adultery
with his own mother".[9]
[edit]Etymology
The word was linguistically used by the Arabs prior to Islam to refer to an increase. In commercial
practice, it referred to the increase on loans, namely, interest.
The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart." When
currencies of base metal were first introduced in the Islamic world, paying a debt in a higher number of
units of this fiat money was not considered riba; jurists were concerned with the real value of money
(determined by weight only) rather than its numerical value. For example, it was acceptable for a loan of
1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight of gold (the value in terms of
weight had to be same because all makes of coins did not carry exactly similar weight), therefore having
the same real value.
[edit]Prohibition

of riba

The Qur'an deals with riba in 12 verses, the word appearing eight times in total, three times in 2:275, and
once in 2:276, 2:278, 3:130, 4:161 and 30:39.[10]
The Mekkan verse in Surah al-Rum was the first to be revealed on the topic: And whatever Riba you give
so that it may increase in the wealth of the people, it does not increase with Allah (Quran 30:39)
The other Medinan verses: And because of their charging Riba while they were prohibited from it (Quran
4:161) Those who believe do not eat up Riba doubled and redoubled (Quran 3:130)
Culminating with the verses in Surah Baqarah: Those who benefit from interest shall be raised like those
who have been driven to madness by the touch of the Devil; this is because they say: "Trade is like
interest" while God has permitted trade and forbidden interestGod deprives interest of all blessings but
blesses charity.... O believers, fear God, and give up the interest that remains outstanding if you are
believers. If you do not do so, then be sure of being at war with God and His messenger. But, if you
repent, you can have your principal.... (Quran 2:275-280)
Jurists do not consider the first two verses as clear prohibitive verses on the matter, whereas the latter
two have been understood to prohibit Muslims from riba.
Tabari quotes a number of Tabi'een, who state the verse from Surah al-Rum refers to a gift whereas alJawzi quotes Hasan al-Basri as stating it refers to riba. [11] Either way, there is insufficient indication from
this verse that riba is prohibited, if it does indeed refer to riba.

The second verse refers to the Jews and their taking of riba, which leaves it unclear if such a prohibition
applies to the Muslims.
The next verse is seen by many as prohibiting riba, including Ibn Hajar al-Asqalani. [12] However it appears
that recourse to some traditions relating to Amr ibn Aqyash are required for the prohibition as the verse
itself could be interpreted as expressing a preference against interest.
The verses from Surah Baqarah are seen as categorically forbidding riba. The backdrop to these verses
was the dispute between Banu Thaqif and Banu Amr ibn al-Mughirah over riba due on loans between
them. As such, the jurists historically agreed on the prohibition of riba from these verses and termed it riba
al-nasia, distinguishing it from the interest in exchanging like goods in different quantities, mentioned in a
number of narrations, riba al-fadl.
As such, some jurists saw riba forbidden early in Mecca, some in the year 2 AH and some after the
opening of Mecca, but the majority agreed on its prohibition.
Some of the modern jurists, like Abduh, Rashid Rida, Shaltut, Sir Syed Ahmed, Fazl al-Rahman, Tantawi
and Qardawi have tried to legitimize bank interest. [13] The earlier ones legitimized it for awqafand state
that investment schemes during the late period of the Ottoman rule. They were the first to introduce the
notion that riba al-nasia was permitted. Those who followed them remained minority voices whilst the vast
majority of modern jurists prohibit it also. The modernists proposed a number of legal arguments that
have been heavily criticized for using false legal reasoning, mixing hikma and illah, selective historical
readings of the commercial contracts at the time of Muhammad, and misapplication of principles (mafhum
al-mukhalifah).
They also advanced non-legal rational arguments such as the necessity of modern finance, necessary for
efficient allocation of resources, commercial interest not being the riba prohibited in Islam, no violation of
justice or exploitation these days and interest rates are not very high, to name but a few.[14] Most of these
arguments have been criticized by modern writers, including Siddiqi, Zarqa, Khan & Mirakhor and Chapra,
a good case in point being the published Supreme Court of Pakistan Judgement on the matter.[15]
[edit]Rationale

of the prohibition

As an exchangeable term with riba, interest is defined by Ismail Ozsoy, professor of economics in Fatih
University, Istanbul, as "an unearned or unequally distributed income." Riba or interest is unearned when
the realized income that is earned out of the loan is less than the interest rate, and it is unequally
distributed income when the realized income is higher than planned.
Ozsoy argues that the main characteristic of interest is that either the borrower or the lender would
absolutely and inevitably be subjected to a loss and an injustice in any case, for its rate is fixed at the very
beginning, but it is impossible to predict the outcome of the business at which the loan is used, profit or

loss, or how much either would be. Thus, it can be identified with an absolute injustice for either side of
the transaction. It does not matter whether the interest rate is high or low and whether it is called interest
or usury because the different kinds of interest or different rates change only the address, or the direction,
of the injustice; it is sometimes the payer and sometimes the receiver of interest who is exposed to this
injustice and/or financial loss.
Ozsoy bases his argument about the unfairness of interest on the Quranic verses: "O you who believe!
fear Allah and give up what remains of your demand for interest, if you are indeed believers. If you do it
not, take notice of war from Allah and His Messenger: but if you repent you shall have your capital
sums; deal not unjustly and ye shall not be dealt with unjustly" (Baqara, 2:278-279).[16]
Ozsoy argues that injustice and unequal distribution of income is an indispensable nature of interest as
well as usury, which is considered to be an excessive rate of interest. As a matter of fact, while any high
rate of interest may expose the borrower to a financial loss in hard economic conditions, any low rate may
expose the lender to a loss in favourable economic conditions where return on capital is high. This case
reveals that there is not any acceptable rate of interest, low or high, from the standpoint of the equitable
distribution of income. That characteristic of interest arises from the fact that its rate is predetermined
despite the impossibility for mankind of predicting whether or not a profit will be made, and even if, how
much it will be.
Ozsoy compares the interest mechanism to a two-bladed saw, or a knife, that cuts on both sides, such
that either the borrower or the lender must pay more than they receivedone or the other side is
unavoidably injured by the interest mechanism.
Interest is the income earned by the borrowed financial capital regardless it is in the production process or
not. Interest is the allocation, to the capital owner, of an unearned, undeserved, unborn, unavailable and
imaginary income that might be attained without producing anything and without contributing any value to
the revenue of the society. It imposes all the risks on the debtor directly and on the society indirectly but
not on the lender although it is directly related to him/her.[17]
Interest mechanism prevents the fair distribution of positive or negative outcomes of economic activities
among the lender and borrower and worsens the income distribution. This occurs either by providing the
capital owner a certain and fixed percentage of earning in any case regardless of the negative outcome of
the business, or by limiting his earning with only a predetermined amount of return in case the borrower
entrepreneur earns considerably high income out of his/her financial capital. [18]
The main reason advocated by Siddiqi and Ganameh as to the rationale of prohibition is that it is
oppression involving exploitation. In matters of consumption loans, it is necessary that those who have
wealth should assist those without, and in productive loans, a guaranteed return on capital is unjust given

the uncertainty surrounding entrepreneurial profits, whereas a return to both parties as a rate of profit
would be more equitable.[19]
Taji al-Din argues the reason appears to be the restriction in circulation of wealth among those who
already have it. Lenders would not provide loans to those they believe are unable to repay so such wealth
would be restricted to those able to service the debt. This is something forbidden categorically by the
Quran and the effects on society result in the accumulation of wealth amongst those who have it and
increase the divide between the rich and poor.
Mawdudi believes the cause relates to the undesirable resulting effect of an imbalance between
production and consumption. This is caused by the transfer of purchasing power from those with a high
propensity to consume to those with a low propensity to consume. The latter group reinvests its income in
production, increasing production and decreasing consumption demand. The cost of capital results in
increased prices of consumption goods, accentuating this process. Mawdudi believes thar this is the
source of evils in the economy such as stagnation, depression, monopoly and ultimatelyimperialism.
Interest-free loans and the prohibition of return on capital along with zakat, wages, profit and profitshare recreates this balance. The focus shifts to the entrepreneur whose activity becomes the only source
of income along with wages, giving him the upper hand in society. Siddiqi and Ganameh cite the hadith of
"income devolved on liability" in this context.[20]
Some argue[who?] that interest allows the creation of a group of people who contribute nothing to society,
simply generating income from capital. This starves society of their contribution and the rationale of
prohibition is to reverse this.
Ibn Rushd argued the rationale relates to the possibilities of cheating that exists in riba, which is clearly
visible in riba fadl.[21] Other arguments that some writers[who?] try to extract from indications on the divine
texts include the rationale being corruption, unjust acquisition of property rights, destruction, and a
detrimental personality.
Hameedullah believes the reason is the unilateral nature of the risk born in these agreements. [22] The
Islamic principle is for a reward, there must be some liability incurred; otherwise, a return is prohibited.
[edit]References

to riba in the Qur'an and Sunnah

[edit]Qur'an
The Qur'an states the following on riba:

That they took riba, though they were forbidden and that they devoured men's substan

Those who charge riba are in the same position as those controlled by the devil's influ

God condemns riba, and blesses charities. God dislikes every disbeliever, guilty. Lo! t

O you who believe, you shall not take riba, compounded over and over. Observe God

And for practising riba, which was forbidden, and for consuming the people's money

The riba that is practised to increase some people's wealth, does not gain anything at G

[edit]Ahadith
Riba is mentioned in a number of hadith:

Jabir said that Muhammad cursed the accepter of usury and its payer, and one who rec

Narrated Abu: We used to be given mixed dates (from the booty) and used to sell (bar

Narrated 'Umar bin Al-Khattab: Allah's Apostle said, "The bartering of gold for silver

Narrated Ibn 'Umar: Muhammad said, "The selling of wheat for wheat is Riba (usury)

Narrated AbuHurayrah: Muhammad said: If anyone makes two transactions combined

Additional ahadith exist regarding usury.[28][29]

[edit]Relevance

to modern times

Siddiqi suggests the key to whether the idea of prohibition of riba is effective is whether it can produce
stability and efficiency in the economy and if it is conducive to growth and development and increase
justice and fairness.
The model of profit-sharing on the liability side of the banking system would make the financial system
more stable than using riba. The sharing arrangements between suppliers and users of resources for
producing wealth improves business cycles and stability in the economy.[citation needed]
[edit]Entrepreneurship
With the abolition of interest, Siddiqi argues that the economic focus becomes attached to entrepreneurial
activities, using the vehicle of mudarabah, resulting increasing economic activity. Although it may be
thought that without interest, incentive to save drops, Keynesian analysis indicates that savings are a
function of income and interest is minor. As such, if income can be increased, savings should increase,
even in the absence of interest.
Mannan argues that interest holds back investment in production, whereas Mawdudi points out that
projects that could be socially useful, generating a small return and prevented as interest rates prevent
capital being utilized on such projects.
Without interest, capital can be more efficiently allocated to productive projects based on the rates of
profit rather than more credit-worthy individuals. A system based on profit-sharing also harmonizes the
interests between investors and entrepreneurs increasing efficiency.
[edit]Trade

cycles

Many writers see the destabilizing effects that interest has on trade cycles. The basic idea is that different
interest rates and their variations allow for speculative institutions. Speculators hoard capital for the
purpose of chasing higher rates, which in turn deprives the deployment of capital for productive purposes.

It is argued that these vast movements of funds contribute to the fluctuations in the trade cycles and make
economic planning and organization problematic.
With the absence of interest, writers argued there will be less speculation due to the absence of the
interest rate and the reduced levels of debt that will result. That is not to say there will be no debt: noninterest modes of finance allows debt but less. Decreased levels of speculation would thus result in a
more stable environment.
[edit]Financial

intermediation

Writers like Fazl al-Rahman say the interest rate is like price in the modern economy. It is used to regulate
the demand of finance, and if the interest rate is taken to zero, the world will be faced with limited supply
and infinite demand. How would credit be allocated? [30]
The main answer to this question is that he bleieves that finance, for productive projects, can be provided
through profit-share, cost-plus basis, or leasing.
Writers like Siddiqi suggest a two-tier mudarabah model as the basis of a riba-free banking system. This
involves the bank acting as the capital partner in a back-to-back mudarabah contract with the depositor
on one side and the entrepreneur on the other side. This model can be supplemented by a number of
fixed-return models (like Ijara, Istisna, Murabaha etc.). In practice the murabaha model is the bank's
favourite, as it bears results most similar to the interest-based finance models.
However, it has been criticised as not following the possession by bank/seller requirements and risks
taken by the financier are non-existent (being insured or guarantees provided by the customer).
Additionally, Khattab has criticised the whole two-tier mudarabah system as having no basis in Islamic
law, as there are no instances where the mudharib passed funds onto another mudharib, and as such is
questionable.
Banks have demand deposits in the nature of loans to the bank and investment deposits. Some offer
guaranteed savings accounts with permission to use the funds and a discretionary reward to the depositor
as in the case of the Bank Islam Malaysia Berhad. Initially, demand deposit accounts were more common,
but over time, most accounts are now investment accounts, which reflects the confidence of depositors in
the ability of banks to generate a return.[31] Islamic banking operations are successfully operating in many
Muslim countries, including Pakistan, Bangladesh, Malaysia, Iran, Sudan, Turkey and Bahrain.
Insurance operations, starting in Sudan in 1977, have now been successfully implemented in a number of
countries from Malaysia to Jordan. The takaful mudarabah model is used, compensating premium-paying
subscribers in case they incur losses or damages without any interest-based activities.
[edit]International

finance

This article may contain original research. Please improve it by verifying the claims made and
adding references. Statements consisting only of original research may be removed. More details may
be available on the talk page. (December 2009)
Third world countries are crippled with servicing foreign debt. Often, countries are badly managed, and
given state assets financial institutions readily lend to incompetent governments regardless of the project
as they know that a guaranteed return on capital is available. This results in poor projects receiving
funding, funds siphoned away with the lenders taking no responsibility or involvement in the project or the
debtors as long as repayments are made. The resulting debt, which benefited the receiving society very
little, leads to limited spending on developing their infrastructure and human capital as large amounts of
future revenue are spent on debt servicing.
The replacement of interest-bearing debt with interest-free debt and public sector projects financed
through profit-sharing mechanisms would alleviate many of these problems. [citation needed] Countries adopting
interest free financing have no problems interacting with the International Monetary Fund or other
international financial institutions.[citation needed]
[edit]Accounting

concept of interest

Some writers argue for an accounting concept of interest to evaluate projects and investments. As a tool
for comparing projects with countries where the interest rate is operated, however, it is argued that it is
hard to see why a profit rate cannot be used.
Others argue the need of a bank rate for monetary policy. Siddiqi suggests two variables that can
alternatively be used: mark-up in sales with deferred payment and ratios used in sharing modes of
finance. These ratios can be used to manipulate the rates of profit. They can be determined through
market forces or set by governments in public interest, as is legislated in Sudan and Pakistan.