Riba

Introduction:
Riba is an Arabic word which literally means “to increase" or
“to exceed". In contextual terms, it is used to refer to the
excess amount charged for borrowed money. Charging
interest for loans and debts is considered as Riba. It is
expressed as an unfair, inequitable, exploitative gain, and is
strictly prohibited under Islamic law.

Riba in Sight of Shariah:

In Islamic law, Riba is further classified into two major
categories i.e Riba al Fadl and Riba al Nasiah.
Riba al Fadl is associated with the trading of unequal
amounts of the same asset or material or/and a delay of the
delivery of one of the items, for instance, exchanging 1 kilo of
dates for 2 kilos. However, as modern economic system is
moving away from trade and swap systems, this form of Riba
has become less prominent today. ‘Ubaadah ibn As-Saamit’
narrated that the Prophet (peace be upon him) said: “Gold
for gold, silver for silver, wheat for wheat, barley for barley,
dates for dates, and salt for salt, the analogous by their
analogous, the same amount by the same amount exchanged
immediately from hand to hand. But if these kinds are
different, then trade as you wish provided that this is done
(exchanged immediately) hand to hand.” [Muslim]

Riba al Nasiah is Riba that arises from an unfair increment

upon returning borrowed money or things in order to delay
it. For example, when a customer borrows $1000 for a year
and is required to pay the lender $1050 in return.
Abu Sa'id al-Khudri reported that the Prophet (peace be upon
him) mentioned gold and silver and then said: ‘Do not sell
anything of these that is not present in return for what is
present.’ Related by al-Bukhari, hadith No. 2,177; Muslim,
hadith No. 1,584.

Islam condemns Riba:

Islam distinctly forbids Riba in all its forms and declares its
practice equal to disbelief in Him. Prophet (peace be upon
him), has also clearly prohibited it. Scholarly consensus also
agrees on the illegality of dealing in Riba. Surah Aal-E-Imran
(3:130):
"O you who have believed, do not consume riba, doubled
and multiplied, but fear Allah that you may be successful."

Why does Islam forbid ‘Riba’?

Islam forbids Riba in all its forms because it gives rise to
inequality and exploitation. Those who take Riba lose values
and noble ethics and develop malicious qualities like
greediness, miserliness and love for this world. They
compromise their noble values in return for surplus amounts
charged on their money. Surah Al-Baqarah (2:275):
“Those who consume interest will stand ˹on ‘Judgment Day˺
like those driven to madness by Satan’s touch. That is
because they say, ‘Trade is no different than interest.’ But
Allah has permitted trading and forbidden interest. Whoever
refrains—after having received warning from their Lord—
may keep their previous gains, and their case is left to Allah.
As for those who persist, it is they who will be the residents
of the Fire. They will be there forever”. Moreover, those
involved with Riba are self-centered, liars, and deceitful.

Harmful Effects on Economic System:

An economy based on taking interest retards development
and further worsens the condition of poor in the society.
Imposing interest rates on the principal sum of money or the
cost of goods causes increase in prices, which, in turn, lead to
inflation. Companies borrowing with interest can lead to
financial problems that may cause the entity to liquidate. For
similar reasons, the monetary system of indebted countries
and stock markets also become instable. The interest system
also causes bankruptcy and economic crises due to inability
of investors to pay the debts back to the banks and the
banks, in turn, stop financing these projects. Surah Al-
Baqarah (2:276):
"Allah destroys riba and gives increase for charities. And Allah
does not like every sinning disbeliever."

Harmful Effects on Political System:

High interest rates causes the borrowing countries to fall
under the mercy of the lending ones. They try to take control
over the former and enforce unfair conditions on them and
use up their resources.
Riba in Current Era:
Conventional banking operates on the principle of lending
money with interest. Another common example of Riba is
borrowing loans for buying homes or merchandise often
involving paying interest over time. Bonds are issued by
governments to collect finances for their economic affairs.
The bonds not only assure repayment of the principal
amount but also the interest i.e. Riba. Interest rates are
manipulated by Central banks to control inflation and
economic growth. Many savings and fixed deposit accounts
accumulate interest as a bonus for depositing money.
Corporate financing involves companies taking loans from
financial institutions to raise capital and paying interest to
lenders. Interest is a central component for most global
economies functioning on a debt-based system including
international trade and finance institutions like the World
Bank and International Monetary Fund, which give loans with
interest-based repayment framework. Abu Huraira (RA)
narrated:
"The Prophet (‫ )ﷺ‬said: 'A time will come upon people when
they will consume riba.' It was said, 'All of them?' He said:
'Whoever does not consume it will be affected by its dust.'"
(Sunan Abu Dawood, 3331; Graded Sahih by Albani)

Prevention of Riba and Islamic banking:

The IMF has also recommended that finance for
development projects in developing countries should be
raised by the system of business partnerships with the
developed countries, which designs a fair allocation of profit
and loss. Islamic banks should be established that operate on
Shariah-compliant principles, concentrated on investments,
leasing, and trade financing rather than interest-based loans.
Mudarabah and Musharakah are mechanisms that allow
parties to share profits and losses rather than paying interest.
Assets are provided on lease with payments structured as
rent instead of interest. Instead of lending money for
purchases Murabaha allows banks to purchase assets and sell
them at a markup. Investors can give funds to businesses in
exchange for ownership shares and share profits and losses
to avoid repayment of interest-bearing debt. Qarz e Hasn or
Benevolent loans are provided without interest to support
individuals or projects. Riba-free trade should be promoted.
Interest-based government bonds should be replaced with
Sukuk. Sukuk are asset-backed securities where investors
earn returns through asset ownership and profit-sharing, not
interest payments.

Conclusion:

Incorporating Riba-free principles into political and economic

policies, governments can lay foundation of a system that
emphasizes on equity, justice, and long-term economic
stability, prospering society as a whole. However, this can
only be achieved by the coordinated effort across different
sectors to establish alternatives to conventional interest-
based systems.