The literal meaning of the word “riba” in Arabic is: increment, excess, addition and surplus, while the related verb means (Iqbal & Mirakhor, 2011) : “to increase, to multiply, to exceed, to exact more than was due, or to practice usury”. In Islamic Jurisprudence, however, riba can be divided into two types:
Loan-usury (riba-al-qurud): The unlawful increment paid in kind or money over and above the sum lent.
Trade-usury (riba-al-buyu): The unjustified increment gained by the seller or the buyer if they exchanged goods of the same kind in different quantities, provided that the mentioned goods are one of the following six types, or its equivalents: Gold, Silver, Wheat, Barley, Sault, Dates.
The Basic sources of Shariah, (the Qur’an and the Sunnah) do not include sophisticated logical arguments about the banning of riba, except for stating that charging interest is an act of injustice.
Contemporary Muslim scholars, especially the economists among them, wrote extensively about the rationales behind prohibition of riba by touching on the economic and social consequences of the interest-based financial model, or by holding that modern economic theories have not justified the existence of necessity of interest rates. The following points further examine and explain some of these rationalesThis is the primal and most frequently articulated rationale for the riba-prohibition; It’s the fact that riba is a sort of social and economic profiteering. This is particularly obvious in the first type of riba, the Loan-riba, or Loan-usury.
The logic here is that the lender is guaranteed the capital plus a positive return without assuming a share of the risk with the borrower, who assumes all kinds of risks in addition to contributing his skills and labor. Yes, the lender runs a risk, the credit risk, which is the probability of default by the borrower. But this risk alone doesn’t justify the profit, for it does not relate to the probability of success or failure of the enterprise, rather, to the solvency of the borrower.
Furthermore, the act of lending in Islam is based on the principle of benevolence and charity. Hence, if capital is needed for business purposes, it should be provided on the basis of risk-sharing. In contrast, if it is needed to overcome a short-term need, it should be provided on charity basis, without any guaranteed profit whatsoever. Otherwise the principle of benevolence, which is the Sharia objective behind the loan contract, would be violated.
The second rationale is that the interest-based financial system stimulates and maintains an income distribution pattern that is biased towards wealthy people and large businesses, regardless of rational economic considerations.
An Islamic interest-free financial system supports an income distribution pattern fairly correlated to economic efficiency and productivity.
This argument stems from the fact that conventional financial institutions, in particular commercial banks, give preference, in extending funds, to wealthy individuals and large corporations, because of their credit-worthiness. While Medium-scale enterprises are not fully deprived of funds from banks, they may not obtain all their requirements, however, and usually charged relatively higher interest rates.
In contrast, small-scale enterprises in all economic sectors are discriminated against, or categorized as sub-prime, a label that indicates their poor level of credit-worthiness. Hence, conventional financial institutions either deprive them from funds altogether, or grant it at extremely higher interest rates.
As a result, the interest-based system is effectively helping large enterprises grow larger and rich entrepreneurs grow richer irrespective of their economic efficiency or productivity.
On the other hand, small enterprises with bright new ideas, and carefully studied projects with prospects of high returns would be either deprived of funds or get inadequate amount of it. Accordingly, they have much less chance to grow their activities and their incomes. This problem is exacerbated in most developing countries, where small-scale activities employ the largest portion of the total labor force, while its share in GDP is much less than medium and large-scale businesses.
The interest-free mode of financing, introduced by Shariah, leads to a different and more equitable pattern of income distribution. The following two examples illustrate how this is achieved:
“Mudaraba”, a part and parcel product of Islamic finance, is based on personal confidence of the capital owner in his partner, the agent manager; in his skills, work ethic and honesty. In consequence, economic and managerial aspects are taken into account, leading to trust-worthiness replacing credit-worthiness. Profit, when realized, would be divided between the capital provide and the entrepreneur, according to a pre-agreed ratio. In the case of loss, it is borne solely by the capital owner. This is evidently fair, because the entrepreneur, on the other hand, has lost his labor and time invested in the project.
Musharaka is another pillar of Islamic financial products, that allows for large and small capital providers to come together in various forms of partnerships. Partners will share realized profits among them according to a pre-agreed ratio.
Jurisprudence rules allow partners with less contributed capital to obtain the same share ratio, in realized profits, as partners with more contributed capital, or even more, according to skill, experience or managerial effort considerations.
On the other hand, loss is incurred by all partners according to their shares in the company’s total capital. Such scheme carefully protects and maintains justice and equity between partners.
We’ve mentioned in the introduction that usury (riba) is divided into two types: loan-usury, and trade-usury. In both types of riba, we notice that there’s an item exchanged for another item of the same kind (e.g. dates for dates, gold for gold), or of another kind that has the same characteristics (e.g. gold for silver, dates for wheat).
We can generally describe usury transactions as “homogeneous” for it involve exchanging goods of the same kind, or of the same characteristics. This exchange in homogeneous kinds of goods leads to an absurd and irrational form of economic activities.
riba-based transaction, as mentioned earlier is simply selling a good in exchange of itself at a higher price. While each commodity may have different relative price with any other good, it can have only single price in respect to itself in any given period of time, provided that its quality remains the same in the same period. Consequently, this preposterous financial transactions result in an unimaginable situation characterized by extreme scarcity.
For instance, in the case of gold, if those who acquired it first or possessed larger shares of it started to sell it in exchange for gold at a higher rate, they would continue to accumulate gold. The more gold they acquire the more they will lend on riba and on the other hand less sources of gold will be available to the borrowers. Taking the weakened repayment position of borrowers into account, lenders may further exploit the situation by increasing the price or the interest rate in order to acquire more and more gold.
This process if continue indefinitely, it will eventually end up with putting the existing resources of gold under the control of certain individuals, assuming the total quantity of gold is fixed. Given this phenomenon, it is very reasonable to expect that resources, particularly most dear and durable ones, sooner or later will accumulate into the hands of a small number of usurers.
This kind of selfish behavior would result in abnormal economic situations: On the side of lenders there would be extreme accumulation of economic resources while on the part of borrowers there would be acute shortage and deficiency in most essential resources.
In this context, it is plausible to expect that trade or profit based economy in general, fosters resources to flow from where they are in plenty to where they are in scarce, from where they are relatively idle or less productive to where they are productive and usefully utilized, while, in the case of riba, resources flow in the reverse order, from where they are in scarce and dear, to where they are already concentrated.
In this article, I summarized some of the rationales articulated by Muslim economists and jurists, for the prohibition of riba. This includes: the social and economic injustice that riba brings about when the lender exploits the need of the borrower to profiteer. Another rationale is the irrational income distribution pattern that discriminate against un-wealthy people regardless of their skills, work ethic, and experience. And last but not least, is that it leads to accumulation of most important resources in the hands of a small number of usurers, leaving the majority in dire need.
Abu Saud, Mahmoud (1980), “Money, Interest and Qirad”, in Khurshid Ahmad (ed.), Studies in Islamic EconomicsJeddah, International Center for Islamic Economics, King Abdul Aziz University
Ahmad, Khurshid, (ed) (1994), “Elimination of Ribafrom the Economy”, IPS. Islamabad.
Chapra, Umer (1985), “Towards Just Monetary System”, Leicester, The Islamic Foundation.
Iqbal, Zamir, and Abbas Mirakhor. An introduction to Islamic finance: Theory and practice. Vol. 687. John Wiley & Sons, 2011.
El-Gamal, Mahmoud Amin (2001), “An Economic Explication of the Prohibition of Riba in Classical Islamic Jurisprudence”. Available at: El-gamal
Nur, Elmi, “RibaVersus Profit in An Exchange Economy: Conceptual Foundations for Stable Financial System in Islamic Perspectives”
Ahmad, Abdel-Rahman, “Riba, Its Economic Rationale and Implications”