What Is Riba in Islam, and Why Is It Forbidden?

What Is Riba?

Riba is an Arabic word that means “to increase" or “to exceed" and is commonly used to refer to excessive charges for borrowing money. Charging interest for loans is deemed riba, or an unjust, exploitative gain, and is forbidden under Islamic law.

Understanding Riba

Riba is a concept in Islamic banking that refers to charged interest. It has also been referred to as usury, or the charging of unreasonably high interest rates. 

Riba is prohibited under Sharia law to ensure equity in commerce. 

(Another form of riba prohibits the simultaneous exchange of goods of unequal quantity or quality.)

Islam aims to encourage charity and helping others through kindness. It discourages acting upon motives of selfishness and self-centeredness, which can create social antipathy, distrust, and resentment. 

By making riba illegal, Sharia law creates opportunities and contexts in which people are encouraged to act charitably by loaning money without interest.

Riba vs. Murabaha

Murabaha, also referred to as cost-plus financing, is an Islamic financing structure in which the seller and buyer agree to the cost and markup of an asset. The markup takes the place of interest.

As such, Murabaha is not an interest-bearing loan (qardh ribawi) but an acceptable form of credit sale under Islamic law.

As with a rent-to-own arrangement, the purchaser does not become the true owner until the loan is fully paid.

Interpretations of Riba

Riba is forbidden under Sharia law (Islamic religious law) because it is thought to be exploitative. Though Muslims agree that riba is prohibited, there is much debate over what constitutes riba, whether it is against Sharia law or only discouraged, and whether or not it should be punished.

Depending on the interpretation, riba may refer only to excessive interest. To some, the entire concept of interest is riba and thus unlawful.

Some modern Islamic scholars believe that interest should be permitted up to the value of inflation to compensate lenders for the time value of their money without creating excessive profit. Nevertheless, riba is largely taken as law and formed the basis of the Islamic banking industry.

The Muslim world has struggled with riba for quite some time, religiously, morally, and legally, and economic pressures eventually allowed for a loosening of religious and legal regulation, at least for a period. 

In his book, "Jihad: The Trail of Political Islam," Gilles Kepel, a French scholar of Islam, wrote that "since modern economies function on the basis of interest rates and insurance as preconditions for productive investment, many Islamic jurists racked their brains to find ways of resorting to them without appearing to bend the rules laid down by the Koran," adding that "the problem loomed ever larger as more and more Muslim states entered the world economy in the 1960s."

This loosening of economic policy lasted until the 1970s when a "total ban on lending with interest was reactivated."

How Islamic Lenders Make Money

Banks that are Shariah compliant evolved as profit-sharing institutions. A borrower might give back a share of the profits in return for a loan.

This avoidance of riba does not seem to have overly hampered their operations. There are some 560 banks worldwide that adhere to Islamic principles.

The Bottom Line

Riba is a core component of Islamic finance, a guide to managing money that is consistent with the moral principles of Islam.

The Koran makes it fairly clear that interest is an exploitative practice. This doctrine is largely respected by about a quarter of the global population as well as other non-Muslim people.