Riba (Interest) – Explained
In the conventional literature, interest is seen as the time value of money, as described by the common expression: "time is money". However, Islamic scholars contend that time is not money, but "time is life".
Therefore, money in Islam is seen simply as a medium of exchange - with no intrinsic value in itself - so it is impermissible to lend money and earn a guaranteed rate (interest) on the money.
The Arabic word riba literally means "an addition to" or "excess" over the original price of the good or service.
Riba in the Qur'an and aḥadīth (sing. hadith)
The definition of riba can be clarified and understood further, by looking at its representation within the Qur'an and ahadith.
"O those who believe, fear Allah and give up what still remains of the Riba if you are believers. But if you do not do so, then be warned of war from Allah and His Messenger. If you repent even now, you have the right of the return of your capital; neither will you do wrong nor will you be wronged." Al Baqarah 2:278-9
The above verse confirms the seriousness of engaging in riba transactions. However, not all forms of excess are forbidden, since the Qur'an explicitly permits trade:
"Seized in this state they say: ‘Buying and selling is but a kind of interest', even though Allah has made buying and selling lawful, and interest unlawful." Al Baqarah 2:275
It is also important to keep in mind, that riba can take the form of exchange of goods:
Abu Sa'id al-Khudri (r) reported Allah's Messenger (p) as saying: Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, salt by salt, like by like, payment being made hand to hand. He who made an addition to it, or asked for an addition, in fact dealt in riba. Sahih Muslim
Classification of Riba
Jurists have categorised riba as follows:
Riba al-Nasiyah: This is also known as riba al-Quran and riba al-Jahiliya. It has been defined by leading scholars, as per below:
"That kind of loan where specified repayment period and an amount in excess of capital is predetermined." Imam Abu Bakr Hassas Razi
"Every loan that draws profit is one of the forms of Riba" Sahabi Fazala Bin Obaid
"Every loan that draws more than its actual amount" Abu Ishaq az Zajjaj
Riba al-Fadl: This is also known as riba al-Hadith. It involves excess received when two alike commodities are exchanged. This is explained further in the Sahih Muslim hadith, shown above ("Gold is paid for by gold....")
Riba and Inflation
Inflation, defined as a continuous rise in prices, can reduce the value of money. Assume that person X provides a $100 loan to person Y, to be paid back in 12 months time. However, if prices have increased by 10 per cent during that time, the value of that $100 will be worth less to the lender (person X). In such a case, can person X charge an excess or premium to take into account the loss of value of money? The Islamic opinion is against the charging of any premium. Scholars contend that although it is unfortunate that person X has lost some value, this is not the fault of person Y (borrower), hence the borrower should not be burdened with this excess.
Riba: Jewish and Christian Prohibitions
The prohibition of riba is not unique to Islam. It is also unequivocally forbidden in Christian and Jewish traditions:
"Do not charge your brother interest, whether on money or food or anything else that may earn interest." (Deuteronomy 23:19)
"He does not lend at usury or take excessive interest. He follows my decrees and faithfully keeps my laws. That man is righteous; he will surely live, declares the Sovereign LORD." (Ezekiel 18:8-9)
"Then Jesus went into the temple of God and drove out all those who bought and sold in the temple, and overturned the tables of the money changers and the seats of those who sold doves. And He said to them, 'It is written, 'My house shall be called a house of prayer,' but you have made it a 'den of thieves.'"(Matthew 21:12-13)