Riba is considered to be one of the transactions that man has known since ancient times and which all laws prohibit, because it is a means of illicit exploitation of people’s wealth and eating it falsely. In order to study Islamic banks and their transactions, it is necessary to first shed light on the issue of usury.

The riba, banned in Islamic finance, corresponds to usury, i.e. the interest of a loan. However, it is written in the Quran that :

“God has permitted trade, and forbidden usury (riba).” (verse 275 – Surah Baqara).

Interest is therefore defined as “Haram”, i.e. illicit. In Islamic finance, any interest rate is therefore considered abusive.

1. Definition of Riba

Riba literally means increase, addition, expansion or growth. It is understood here as an increase upon usurious items and upon debt, due to the deferred payment term.

In the capitalist economy, the term “interest” is the one used, and means what the lender obtains from the borrower for the use of the money. Or what the lender obtains from the borrower in exchange for the risk of lending money or for the effort in lending.

Among the justifications provided by economists for resorting to interest are :

• It is the result of the risk element of lending money, as the usurer lends his money to someone who may not return it. It risks this money and should therefore take advantage of this risk.
• Interest is to compensate for depriving the usurer of the use of the money he has lent, which is a reward for waiting for him for the duration of lending.
• Riba is a lender’s right to profit from the borrower’s use of the borrower’s money.
• Interest as an expression of the difference between the value of the commodity at present and its future value.
• Interest is some sort of a “fare”, which is the same as the fare earned by the landlord as a result of the tenant benefiting from the property.

2. Types Of Riba

Riba al-Fadl (ربا الفضل) :

It is referred to the exchange of ribawi items (i.e., the six items of gold, silver, wheat, barley, dates and salt), on spot basis but with a difference in value. For example, selling 10 grams of gold for 15 grams of gold on spot.

Riba al-Nasi’ah (ربا النسيئة):

It is referred to any increase on the principal due to deferments, e.g. exchanging 100 kg of salt now against 120 kg of salt in one year.

The Riba in a halal loan

As mentioned before, The Islamic loan, does not contain interest. It doesn’t mean it is a “free loan”! Islamic Finance promotes trade, unlike the “interest” that promotes money in itself. In fact a halal loan is not a loan in itself. In islamic banking, the bank does not lend you money so that you can buy a house, a car, etc… The islamic bank buys the property for you and sells it to you, a little more expensive. The bank does not pay with a bank interest, but with a commercial margin. And you, thereafter, give a monthly annuity to the islamic bank, over a period of time and defined in advance, until it is 100% owner of your property.

The Riba in an investment contract

In islamic savings contracts, there is no mention of interest (such as a savings contract, with a fixed and guaranteed interest). The fixed and guaranteed interest in an investment contract is considered to be Haram, since it is not based on actual and realized performance, but on a guarantee. The funds deposited on halal savings contracts are used to finance companies, projects, considered halal, thus suitable for Islamic finance (ex: The sector of arms, alcohol, pig breeding etc… are not eligible). This investment will generate profitability, which will be shared with customers of the islamic bank.