Riba (Usury): Prohibition in Islamic Finance

Riba, or usury, is the practice of making unethical or immoral monetary gains through interest, explicitly prohibited in Islamic finance. It contrasts with Gharar, which pertains to excessive uncertainty and risk.

Riba, commonly referred to as usury, constitutes any excess compensation over and above the principal amount of a loan that is considered unethical or immoral under Islamic law. Rooted in religious doctrines, Riba is strictly prohibited in Islamic finance due to its exploitative nature. This includes any form of interest, which is seen as unfair enrichment at the expense of the borrower.

Types of Riba

Islamic scholars typically classify Riba into two main types:

• Riba al-Nasi’ah: This involves interest on lent money, where the borrower pays back more than the principal amount over time.
• Riba al-Fadl: This refers to the surplus that may arise in the exchange of goods without immediate transfer and equal counter-exchange.

Special Considerations

Given its explicit prohibition, the following special considerations are made to avoid Riba in Islamic finance:

• Sharia-Compliant Contracts: Financial products and contracts must comply with Sharia law, hence clearly structured to avoid interest.
• Profit and Loss Sharing Models: Models like Mudarabah (profit sharing) and Musharakah (joint venture) serve as alternatives.
• Islamic Banking Practices: Banks engage in trade and leasing arrangements, ensuring they operate within the permissible bounds of Sharia.

Historical Context

Historically, Riba has been discussed and prohibited in ancient religious texts:

• Qur’an: Emphasizes the ethical prohibition against exploiting others through interest.
• Torah and Bible: Usury is also condemned in various verses within these scriptures.

Applicability

Riba’s prohibition extends across multiple financial instruments and practices:

• Personal Loans: Any personal loan involving interest is prohibited.
• Corporate Finance: Businesses must seek Sharia-compliant financial products.
• Investment Products: Securities and funds must be evaluated for Riba compliance.

Comparing Riba and Gharar

While both Riba and Gharar are prohibited in Islamic finance, they address different aspects of financial ethics:

• Riba (Usury): Focuses on the prohibition of unjust gain through interest.
• Gharar (Uncertainty): Concerns with prohibiting excessive uncertainty and risk in contracts.

Related Terms

• Murabaha: Cost-plus financing without interest.
• Sukuk: Islamic bonds structured to comply with Sharia law.
• Takaful: Islamic insurance which shares risk collectively.

FAQs

Why is Riba prohibited in Islam?

Riba is prohibited because it is seen as an exploitative practice that leads to unfair gains at the expense of others, thereby harming social justice and equity.

How do Islamic banks make money without charging interest?

Islamic banks make money through permissible structures like profit-sharing, leasing, and trading activities that comply with Sharia law.

Can Muslims give or take loans for interest-bearing purposes in non-Muslim countries?

Despite local laws, Muslims are still obliged to avoid interest-bearing transactions to adhere to their religious principles.

References

1. Siddiqi, Muhammad Nejatullah. Riba, Bank Interest and The Rationale of Its Prohibition. Islamic Research and Training Institute, 2004.
2. El-Gamal, Mahmoud A. Islamic Finance: Law, Economics, and Practice. Cambridge University Press, 2006.

Summary

Riba, or usury, is pivotal in understanding the ethical dimensions of Islamic finance. Its prohibition underscores the importance of equity, fairness, and justice in economic transactions, setting Islamic financial practices apart by promoting non-interest-based models.

Through careful consideration of historical contexts, types, applicability, and alternative financial instruments, Islamic finance navigates the complex landscape of modern economics while adhering to its fundamental principles against Riba and Gharar.