Riba

The prohibition of riba is the foremost issue in Islamic banking and finance. The literal definition for riba is “excess”, “increase”, or “growth”.

In Islamic banking and finance context, riba is often equated with interest. It is not inaccurate to equate riba with the interest rate but the term riba has a broader definition.

The following are the definitions of riba given by some scholars;

Abu Bakar ibn al Arabi – riba is excess in return of which no reward is paid.

Abu al Ala al Maududi – a predetermined excess or surplus over and above the loan received by the creditor conditionally in relation to a specific period. Riba contain the following elements:

i) Excess over and above loan capital

ii) Determination of the excess in relation to time

iii) Stipulation of the excess in the loan document

http://hazariba.com/DefinitionRiba.shtml - a forced increase of value in the medium of exchange (money/commodity) that is loaned or swapped.

Engku Rabiah Adawiah – an increase or excess which accrues to the owner in exchange or sale of a commodity or by virtue of a loan arrangement, without giving in return equivalent counter value to the other party.

From the above definitions, we can see that any excess earned over the principal amount is considered riba if it is earned without putting in any effort and without assuming any economic risk. The difference between riba and profit is that profits are earned from a productive economic activity whilst riba is earned without doing anything.

Socio-economic justice is one of the main objectives of the Islamic faith. The definitions above show that riba guarantees that only one or some of the contracting parties benefits from the transaction at the expense of the other parties. Therefore, Islam prohibits riba to ensure that the principles of just and equity is preserved, enabling all contracting parties to share the benefits equitably.

Types of riba:

Riba al fadl – excess accruing in sale or barter transaction

Riba al nasiah – excess accruing from a loan transaction (similar ribawi items) in relation to time

Prohibition of Riba in Quran:

1st stage – Surah al Rum verse 39 (Makkah) – call to abolish interest bearing loans and give alms instead.

2nd stage – Surah al Nisaa verses 160-1 (Madinah) – riba was also prohibited to the Jews (reminder)

3rd stage – Surah Ali Imran verse 130 (Makkah) – stronger prohibition

4th stage – Surah al Baqarah verses 275-281 (Makkah) – Strict law prohibiting riba, establishes clear distinction between trade and riba and defines riba as any increment (however small, whatever the reason) added to the principal. Instructing to only receive principal and waive repayment if borrower is in hardship. Cites the consequences for indulging in usury.

Hadith on the prohibition of Riba

Sahih Muslim, Book 010, Number 3854: Abu Sa'id al-Khudri (r) reported Allah's Messenger (pbuh) as saying: Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, salt by salt, like by like, payment being made hand to hand. He who made an addition to it, or asked for an addition, in fact dealt in riba. The receiver and the giver are equally guilty.