The word Riba is derived from the term Raba which means to grow, therefore it is the growth of money by time. It also means excess, increase or addition. Linguistically, the word Riba has been used by the Arabs to denote the increase in loan in exchange for time.
Riba exists in a loan contract where the lender charges an additional amount on the principal and also in an exchange contract where homogeneous commodities are exchanged at unequal counter values. This basically occurs in amwaal Ribawiya, as mentioned in the Hadith of the Prophet ﷺ.
Prohibition of Riba in some twelve verses of the Qur’an and several hadith of the Prophet ﷺ is the central principle that necessitates the establishment of Islamic banking to serve the financial needs in the present days.
Many people misunderstand the meaning of Riba and the extent of its prohibition. Some argue that the interest charged by traditional banks is not the Riba referred to in the Qur’an and Hadith. While others argue that Riba as practiced during the time of the Prophet ﷺ was only usury, i.e. the excessive form of interest, thus, the prohibition does not apply to present day bank interest.
Some others argue that only the compound interest is prohibited and not the simple interest while some argue that commercial interest is acceptable as it is taken for profitable purposes.
There is a confusion in the use of the word Riba and Usury too. However, due to lack of a better word, some tend to translate Riba as usury. Usury generally implies only the excessive form of increase, whereas Riba implies all forms of increase in a loan contract.
Similarly, translating Riba as interest does not provide a comprehensive meaning of Riba. The word interest captures only a type of Riba, not all forms of Riba.
According to hadith of the Prophetﷺ there are seventy three types of Riba. Traditionally, interest only refers to the Riba in a loan contract and this form of Riba is more relevant to the present-day banking system.
The verses of Riba were revealed in the Qur’an in four stages, starting with judgment of value and ending with total and clear prohibition.
In the first revelation which is in Quran 30 verse 39, prohibition of Riba is not directly stated, but Allah ﷻ shows His discontent in the wealth that is acquired by acceptance of Riba. At the second stage, in Quran 3 verse 161, the prohibition is also not specific, but the practice of Riba is condemned and the Riba-takers are compared with those who will be severely punished.
At the third stage, in Quran 3 verses 130-132, the prohibition is made clear for compounding Riba that is double and multiple amounts, but not confined only to these types. At the fourth and final stage, in Quran 2 verses 275-281, all forms of Riba are conclusively prohibited and believers are commanded to give up what remains from Riba. From these verses it is clear that only the principal is eligible for repayment and any amount of increase (Riba) over that is totally prohibited.
In Quran 2 verses 278-27 Allah says, ‘O you who believe! Be afraid of Allah and give up what remains (due to you) from Riba (from now onward), if you are (really) believers. And if you do not do it, then take a notice of war from Allah ﷻ and His Messenger ﷺ but if you repent, you shall have your capital sums (principal).
There are many hadiths that explain different types of Riba and give rulings on its prohibition. During the farewell pilgrimage, the Prophet ﷺ gave a speech saying, ‘All Riba is annulled. But you will get back your principal amounts. Neither shall you wrong nor shall you be wronged against. Allah has decreed that there shall be no Riba’ (Ibn Hisham, v.2, p.603).
Riba is not limited to monetary increase. The Prophet ﷺ asked the lender not to receive any form of gift or favour from the borrower. He ﷺ said, ‘When one of you grants a loan and the borrower offers him a dish, he should not accept it; and if the borrower offers him a ride on an animal, he should not ride, unless the two of them have been previously accustomed to exchanging such favours mutually (Sunan al-Bayhaqi, v.5, p.350).
There are two types of Riba; Riba An-Naasi’ah which is also known as Riba Al Quran or Riba Al Jaahiliya or Riba of Debt/Time. The second type is Riba Al Fadl also known as Riba of Trade or Riba As-Sunna.
Riba An-Nasii’ah is where money is exchanged for money with deferment, especially practised in debts, when one delays to pay, more time is added and the amount of money is increased in return. Conventional Banking system that we have today operates on this basis. In this type of Riba, the time value of money is considered in interest charged by the banks.
Riba Al Fadl is where money is exchanged for money hand to hand but in different quantities, or homogenous commodities are exchanged un-equally as referred to in the Hadith. As reported in Sahih Muslim, the Prophetﷺ said: Gold for Gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, like for like, hand to hand, in equal amounts and any increase is Riba.
Muslim also narrated that one day Bilal visited the Prophetﷺ with some high quality dates, and the Prophetﷺ inquired about the source. Bilal explained that he traded two volumes of lower quality dates for one volume of higher quality. Upon which the Prophetﷺ said: “This is precisely the forbidden Riba! Do not do this, instead, sell the first type of dates, and use the proceeds to buy the other”.
The first hadith talks about the exchange of gold for gold or silver for silver in equal measures. The scholars who support Qiyas (analogy) as a source of Shari’ah equate Gold and silver to day today currencies that are used for trading e.g GB pound, Us Dollars, Euro, Riyal, Dirham, shillings etc. hence un-equal exchange of the same currency is Riba. E.g. 100 Dollars for 95 Dollars or 100 Dollars for 150 Dollars.
In a narration found in Ibn Majah and Al-Hakim, the Prophetﷺ said that there are seventy three types of Riba, the least of which is equivalent (in sin) to committing incest.
Riba is also prohibited in other major religions; Christianity, Judaism and Hinduism due to the fact that interest allows an unjust increase in a lender’s wealth at the expense of the borrower.
If interest is charged, the borrower is burdened with a higher amount than the actual borrowing even if the reason for borrowing fails.
The nature of interest today is very much same as it was during the Prophetﷺ’s time, and before hence there should be no confusion that interest charged today is not the one prohibited in the teachings of Islam.