What is Riba (Interest) and its Types

Rana Muneer Ahmad

The word 'riba' means to increase, to grow, to

multiply and to climb. However, in economic

context, it is generally considered as a contractual

increase on loaned money or commodity. This

word as such or its variants have been used in

numerous versus of Quran. There is, however, a

complete consensus among Muslim jurists that

only in the following eight verses of Quran, this

word has been used in its economic sense: -

What is Riba?

And from the riba-based giving (investment), you think as if your wealth

is increasing at the cost of others (borrowers), but in the sight of Allah

(from overall perspective), it is not increasing. On the other hand, when

you give something in charity to please Allah, then your wealth is

increasing (in the sight of Allah). (al-Room 30:39)

And for their (Jews’) devouring of riba even though it was forbidden for

them, and for their (Jews’) wrongful appropriation of other peoples'

property, We (God) have prepared for those among them who reject faith

a grievous punishment. (al-Nisaa 4:160-1)

O Believers! Do not charge riba on top of riba and fear God so that you

may prosper. (Aale-Imran 3:130)

People who indulge in riba shall be raised like those who have

been driven to madness by the touch of Devil. That is because

they say that a riba-based transaction is just like trading, while

God has permitted trade and prohibited riba. Hence those who

have received the admonition from their Lord and have desisted

accordingly, may have what has already passed, their case being

entrusted to God; butthose who revert to riba-based dealings,

shall be the inhabitants of the hell-fire and abide therein for

ever. (You must know that) God deprives riba from all blessings

and blesses charity; He loves not any ungrateful sinners. (al-

Baqarah 2:275-6)

O you (who claim to be) believers! Fear God and

give up riba that remains outstanding if you are

true believers. Watch out! If you do not obey this

commandment, then God declares war against

you from Himself and from His Prophet. But, if

you give up your outstanding riba, then you can

claim your principals. Neither should you inflict

harm (due to riba) to others, nor others should

do harm to you. (al-Baqarah 2:278-79)

Riba in Hadith: On the topic of riba, there is a big number of ahadith.3 Here a selection of commonly quoted

ahadith is reproduced that is divided, for

pedagogical purposes, under the following four titles: -

1. Ahadith that reinforce the concept of Quranic riba

1.1 The Prophet said: "There is no riba except in loaning." (Nasaee 4504)

1.2 The Prophet said: "Verily riba is in loaning." (Muslim 2991)

1.3 The Prophet said: "There is no riba in hand to hand (spot)

transactions."(Muslim)

1.4 At the last Pilgrimage, the Prophet said: "All of the riba of Jahilliya is annulled.

In this respect, the first riba I annul is

the riba that the borrowers owe to my

uncle Abbas; it is cancelled completely.

(Muslim)

1.5 After the prohibition of riba, all Muslims were

clear not to indulge in it anymore. However, a

dispute arose between two Muslim tribes about

the settlement of outstanding interest on previously loaned capital. The dispute

was put up to the Prophet who forbade demand and payment of that interest

too. (See Shafi 1996 p.28-9)

There are two types of riba which are Riba on credit (riba al-nasiyyah) and riba on cash (riba al-

fadhl).

1. Riba on Credit (riba al-nassiyyah)

Literally: Riba denotes increase, addition or excess.

Usury on credit (riba al-nassiyyah) refers to a stipulated increase over the loan which a debtor

agrees to pay to his creditor in relation to a specific period of time. In other word It is a fixed

charge payable by the borrower to the lender irrespective of what the loan money produces.

Types of Riba

The additional amount

is determined in

relation to the amount

of debt and the period

of the loan.

Accordingly, the

scholars consider any

advantage that is

derived from the loan

as usurious.

This type of riba is

prohibited by the

Quran in 2: 275-281,

3: 130, 4: 160 and

30:39.

Determination of the additional

amount

2:275 "Those who charge usury are in the same position

as those controlled by the devil's influence. This is

because they claim that usury is the same as commerce.

However, GOD permits commerce, and prohibits usury.

Thus, whoever heeds this commandment from his Lord,

and refrains from usury, he may keep his past earnings,

and his judgment rests with God. As for those who persist

in usury, they incur Hell, wherein they abide forever.

The hadith of the Prophet (pbuh) states: “Jabir said that Allah’s

Messenger (pbuh) cursed the accepter of interest and its payer, and one

who records it, and the two witnesses, and he said: They are all equal.”

Riba usually arises when the parties to a loan contract deal with

properties which are perishable and homogeneous such as gold, silver,

money, dates, salt, etc.

When lending these properties the creditor is not allowed to charge the

debtor for their use.

In contrast, a person may charge another for the use of his usable

property such as a house or a car.

•A question may arise that if a person can charge another

for the use of his house why shouldn’t he charge him for

the use of his money.Question

•House and money belong to two different types of

properties. While a house is a usable property that can be

used many times, money can only be used once. For

example a person who uses his money to buy a computer

cannot use the same money to buy another thing. The

same applies to other homogeneous properties such as

rice, sugar, oil, etc.

Answer:

These properties can only be used once and

therefore, Islamic law prohibits renting money

which amounts to usury and allows renting a

house and other usable properties.

•It is allowed to lend or borrow money. While lending these

properties, any condition for additional return is

considered usury. Assigning time value to money is

equivalent to accepting that money can be rented out.

Usury therefore amounts to renting money. Furthermore,

when a house is rented it is certain that the tenant would

get benefit or usufruct from the house.

Money, on the other hand, had to become part of an

enterprise and combined with efforts in order to give

benefit/profit. The money would have to be invested and

there could be the possibilities of profit and loss. Charging

an extra amount for the time, irrespective of the outcome of

the enterprise is considered injustice. Instead of renting

money Islamic law recommends profit and loss sharing

contracts.

Some writers have differentiated

between usury and interest on the

ground that:

Usury involves loans for

consumption while the interest

involves loans for production.

They argue that

Interest, is an extra charge imposed

on a debtor who borrows money for

productive purposes such as

investment, industry and trade.

Usury and interest any difference?

Usury is an extra charge imposed

on a debtor who borrows money

for consumption such as his own

personal day-to-day needs.

Interest is a reasonable charge for

the use of money employed in

productive purposes while usury is

unjust and forbidden.

•This view however could not be maintained. A debtor

who borrows money for investment, trade, and

business may face one of the four possible situations:

Observation on this opinion

1) He may make enough profit to

pay the capital and interest and

keep the balance.

2) It is also possible

that he may make

profit enough to pay

for the interest while

he may not get any

share of the profit.

3) There is the

possibility that he may

not earn any profit in

which case he has to

return the capital and

pay the interest. He

may suffer losses.

In these three out of

four possible

scenarios, the

transaction is not fair

to the borrower. Even

in the first example

the transaction is not

fair to the creditor as

it is possible that the

debtor may keep a

larger share of the

profit for himself and

return a smaller

percentage to him.

Thus: charging interest on loans granted for

productive purposes could also be exploitative

and unjust to either or both of the parties. It is

therefore argued that riba covers all types of

loans where interest is charged whether they

are made for consumption or production

purposes.

Exploitative nature of granting loan for

business

•If a loan (qardh) is granted for investment purposes:

•The lender is only guaranteed his capital and he cannot

claim any share in the profit.

He is also protected from any loss

made by the borrower.

Islamic law prohibits the stipulation of

any condition in a loan contract that

would benefit the lender. Any loan

that generates conditional benefit to

the lender is prohibited.

•It is recommended that loan should not be granted for

investment purposes. The parties instead should enter

into musharakah or mudharabah contracts where they

have to share profit and loss on equitable terms.

Granting loan for investment

purposes

The shares of fund owner and fund user in a musharakah or mudharabah are tied

and connected to the underlying economic activities. They are entitled to receive

a certain pre-determined percentage of the actual profit made by the

investments.

A fund provider cannot claim a certain fixed rate of interest irrespective of the

amount of profit made.

In contrast, in usury the return to the usurer is fixed in advance. The usurer is

guaranteed a certain cost for his fund irrespective of the actual outcome from

the investment.

This pre-determination of

return to the usurer ignores

the economic realities on the

ground and therefore

introduces distortion into the

market. Particularly, when we

consider that the pre-

determined interest is added

to the cost of production and

the prices of goods.

Comparison between Islamic

economy and usury based

economy:

1) An Islamic economy is an

exchange-based economy,

economy where goods, assets

and services are exchanged

for money. In a usury-based

economy the principal

economic activity is the

exchange of money now for

more money later.

2) Islam wants a society of investors and entrepreneurs

while a usury-based economic system creates a society

of lenders and borrowers.

3) Islamic transactions connect the fund to a real asset-based economy. When

there is inflation the loss in purchasing power of a currency is compensated

by the increases in the value of the assets. In contrast, usury-based

transactions create artificial money in the system without any corresponding

increase in the real goods and products which leads to inflation.

Fadhl literally means excess or surplus. Usury

in sale (riba al-fadhl) was not known to the

pre-Islamic Arabs and was prohibited at a later

stage by the hadith of the Prophet (pbuh).

Usury in sale takes place when a ribawi

commodity is exchanged for an unequal

amount of the same commodity or when the

amounts are equal but one of the counter

values is delivered later. The hadith states:

2. Riba in Cash (Riba al-fadhl)

"Abu Said al-Khudri (Allah be

pleased with him) reported

Allah’s Messenger (pbuh) as

saying: Gold is to be paid for

by gold, silver by sliver, wheat

by wheat, barley by barley,

dates by dates, salt by salt,

like for like, payment being

made hand to hand. He who

made an addition to it or

asked for an addition, in fact

dealt in usury. The receiver

and the giver are equally

guilty.”

In another hadith narrated

Abu Said Al-Khudri and Abu

Huraira (Allah be please with

them): Allah’s Apostle (pbuh)

appointed somebody as a

governor of Khaibar.

That governor brought to him an excellent kind of dates (from

Khaibar). The Prophet (pbuh) asked, “Are all the dates of khaibar

like this? He replied, “By Allah, no, O Allah’s Apostle! But we barter

one Sa’ of this (type of date) for two Sa’s of dates of ours and two

Sa’s of it for three of ours.” Allah’s Apostle (pbuh) said, “Do not do

so (as that is a kind of usury) but sell the mixed dates (of inferior

quality) for money and then buy good dates with this money”.

• Gold, silver, wheat, barley, dates, and salt are also called ribawi

properties.

The Zahiris have

maintained that riba

al-fadhl may only

happen with regard

to those six specific

commodities. They

do not extend the

hadith to other

commodities.

All other Fiqh Schools

are of the opinion

that the hadith is of

general application

and is not necessarily

confined to these six

items but could be

extended to other

commodities through

analogy (qiyas).

Juristic opinions on ribawi commodities

a) Riba al-nasiyah is

prohibited by both

the Quran and the

Sunnah while riba al-

fadl is prohibited by

the Sunnah only.

b) Riba al-nasiyah

may happen in cases

of loan where the

parties are the lender

and the borrower

while riba al-fadhl

may happen in a sale

contract where the

parties are the seller

and the purchaser.

The differences between riba al-nasiyah and riba al-

fadhl:

c) In cases of debt it is possible

that a debtor voluntary returns

an additional amount t the

creditor while in exchange of

ribawi commodities against

each other any addition by any

of the parties is prohibited.

d) Riba al-nasiyah arises

in relation to time while

riba al-fadhl may also

arise in a spot transaction.

e) Riba al-nasiyyah is

considered bad in itself

(haram li-dhatihi) while

riba al-fadhl is considered

bad for the sake of others

(haram lii ghairihi) as it

leads to riba alnasiyah.