Riba explained: Understanding ‘interest’ in Islamic finance
What do we really mean when we use the Arabic term riba? The literal translation of the word is “increase, addition or growth,” though it is often translated as “usury.” English speakers typically understand usury as the charging of an exploitative interest rate. But riba refers to any excess value in transactions that our Sacred Law has prohibited. The prohibition of those transactions is determined with the aid of interpretation of the text of the Qur’an and Sunnah and through inferences and extension by qualified scholars of fiqh al-muamalat.
There are two common types of riba recognized by almost all Muslim scholars: riba al-fadl and riba al-nasee’ah.
The latter term, riba al-nasee’ah, is commonly referred to as compound interest. It is the most egregious type of riba in the marketplace. Riba al-fadl is called the riba of surplus. It refers to trading goods for one another in unequal amounts (e.g., gold, silver, wheat, barley, etc.).
Some have said that Prophet Jesus (peace be upon him) evicted the money changers from the Temple in Jerusalem for engaging in riba al-fadl. Jewish pilgrims arriving in Jerusalem were required to pay the Temple tax but preferred to use the half shekel since it was the only silver coin that did not feature the image of a pagan Roman emperor. The money changers of the Temple made a business of receiving silver coins of greater value and giving silver half shekels in return. The usurers took more silver from the pilgrims than they gave—the definition of riba al-fadl.
Knowing the rules of riba is an essential part of our faith. Just look at the example of our pious predecessors. Omar ibn al-Khattab (RA) prohibited buyers and sellers from even setting foot in the marketplace without first knowing the rules of riba. He did this out of a profound sense of responsibility toward those who were most vulnerable—people who could be exploited without knowing it. And he also knew that avoiding riba was fundamental to the implementation of God’s command to stand up for justice. Economic justice sometimes gets lost in the discussion about Islamic finance, but it shouldn’t be.
And if you need more reason to watch out for riba, refer to what God says about it in the Qur’an. In it, He declares war on the one who takes riba:
O you who believe, give up what remains of your demand for riba if you are indeed believers. If you do it not, take notice of a war from God and his Messenger. (Qur’an 2:278 – 2:279)
Do the rules of riba even apply today? Absolutely. Not only did our classical jurists warn against doing business before learning what protects riba, but qualified, credentialed scholars like the members of the Accounting and Auditing Organization for Islamic Financial Institutions, or AAOIFI, say the same. Of course, even though the rules are timeless, there are certainly modern circumstances that we need to take into consideration as we apply to rules regarding riba to our daily transactions. Groups like AAOIFI help us to do that, and that’s why we follow them at Azzad.