In the Arabic language, 'riba' literally means 'excess, increase, addition, expansion', and translates into English as 'usury' or 'interest.' In Sharia, it technically denotes the 'premium' that a borrower pays to a lender alongside the principal amount, either as a loan condition or for an extension of its maturity. Under Sharia, 'riba' is defined as 'the unjustified increment in capital derived from a loan or debt agreement,' aligning with the conventional concept of 'interest,' as unanimously agreed upon by Islamic jurists. In essence, 'riba' is the excess amount a lender receives over the loaned principal apparent in financial transactions like loans, credit cards, and mortgages.

Prohibition of Interest (riba) in the Quran and Hadith:

Riba is regarded as a major sin in Islam and is strictly prohibited. The Quran and the Hadith clearly instruct to abstain from it. 

Quran. In the Quran Allah says:

“Those who eat Riba (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan (Satan) leading him to insanity. That is because they say: “Trading is only like Riba (usury),” whereas Allah has permitted trading and forbidden Riba (usury). So whosoever receives an admonition from his Lord and stops eating Riba (usury) shall not be punished for the past; his case is for Allah (to judge); but whoever returns [to Riba (usury)], such are the dwellers of the Fire - they will abide therein. Allah will destroy Riba (usury) and will give increase for Sadaqat (deeds of charity, alms, etc.) And Allah likes not the disbelievers, sinners. Truly those who believe, and do deeds of righteousness, and perform As-Salat (Iqamat-as-Salat), and give Zakat they will have their reward with their Lord. On them shall be no fear, nor shall they grieve. O you who believe! Be afraid of Allah and give up what remains (due to you) from Riba (usury) (from now onward), if you are (really) believers. And if you do not do it, then take a notice of war from Allah and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums)...”-(Quran 2:275 to 279).

“And whatever you give for interest to increase within the wealth of people will not increase with Allah. But what you give in Zakath, desiring the countenance of Allah – those are the multipliers” - (Quran 3:39).

“And [for] their taking of usury while they had been forbidden from it, and their consuming of the people’s wealth unjustly. And we have prepared for the disbelievers among them a painful punishment”- (Quran 4:161).

“O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful”. (Quran 3:130).

Hadith. Taking riba is strictly prohibited not only in the Quran but also in the Hadith, a few of which say:

From Jabir: The Prophet, may peace be on him, cursed the receiver and the payer of interest, the one who records it and the two witnesses to the transaction and said: "They are all alike [in guilt]." (Muslim, vol. 3, p. 1219:106)

Jabir ibn 'Abd Allah, giving a report on the Prophet's Farewell Pilgrimage, said: The Prophet, peace be on him, addressed the people and said: All of the riba of Jahilliyya is annulled. The first riba that I annul is our riba, that accruing to 'Abbas ibn 'Abd al-Muttalib (the Prophet's uncle); it is being cancelled completely. (Muslim, vol. 2, p. 889:147).

From 'Abd Allah ibn Hanzala: The Prophet, peace be on him, said: "A dirham of riba which a man receives knowingly is worse than committing adultery thirty-six times". (Mishkat, vol. 2, p. 90:2825, on the authority of Ahmad and Daraqutni) Bayhaqi also reports the above Hadith in Shu'ab al-Iman with the addition that "Hell befits him whose flesh has been nourished by the unlawful", (ibid.).

From Abu Hurayra: The Prophet, peace be on him, said: "On the night of Ascension I came upon people whose stomachs were like houses with snakes visible from the outside. I asked Gabriel who they were. He replied that they were people who had received interest." (Ibn Majah, vol. 2, p. 763:2273).

From Abu Hurayra: The Prophet, peace be on him, 'said: "Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother." (Ibn Majah, vol. 2, p. 764:2274).

From Abu Sa'id al-Khudri: The Prophet, peace be on him, said: "Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt - like for like, and hand-to-hand. Whoever pays more or takes more has indulged in riba. The taker and the giver are alike [in guilt]". (Muslim, vol. 3, p. 1211:82).

From Abu Sa'id and Abu Hurayra: A man employed by the Prophet, peace be on him, in Khaybar brought for him jambs [dates of very fine quality]. Upon the Prophet's asking him whether all the dates of Khaybar were such, the man replied that this was not the case and added that they exchanged a sa' [a measure] of this kind for two or three [of the other kind]". The Prophet, peace be on him, replied, "Do not do so. Sell [the lower quality dates] for dirhams and then use the dirhams to buy janibs". [When dates are exchanged against dates] they should be equal in weight". (Bukhari, vol. 3, pp. 96-7, and Muslim, vol. 3, p. 1215:94).

Distinction between Trade and Interest

In Quran 2:275, Allah clearly distinguishes between trade and interest. The distinction arises from the way income is earned: 

• In trade, profit is earned through initiative, enterprise, efficiency, and hard work, with profit fluctuating and a risk of loss present. 
• In contrast, interest is not a reward for labor but an unearned income, as the lender receives a fixed amount regardless of whether the debtor profits or sustains a loss. 

Given the strict prohibition of interest, Islamic scholars regard riba not only as unjust enrichment but also believe that it has a wider impact on society beyond just the borrower. They argue that riba fosters negative traits such as miserliness, selfishness, callousness, indifference, inhumanity, greed, and the worship of wealth. It destroys the spirit of sympathy, mutual help, and cooperation, affecting the feelings of brotherhood and unity among the community. From a broader economic perspective, the negative impact of interest on the economy is undeniable. It not only impedes the circulation of money among the masses but also promotes wealth concentration, thereby widening the gap between the affluent and the underprivileged.

Types of Interest (Riba) 

There are two types of Riba in Islam: Riba An-Nasiyah and Riba Al-Fadl.

1. Riba An-Nasiyah

Riba An-Nasiyah, also known as Riba Al-Jahiliya, originates from 'nasi'a,' a term meaning to postpone or defer, highlighting the practice of extending the loan repayment time for an additional 'premium.' This form of riba encompasses interest on loans and any increase due to delayed exchanges of goods or payments. Sharia strictly forbids any predetermined positive return on a loan as a reward for waiting, a prohibition that applies regardless of the return's nature, whether it's a fixed or variable percentage of the principal, a pre-agreed amount for advance payment or upon maturity, or even gifts or services tied to the loan. The prohibition's essence lies in the stance that Sharia does not justify any assured reward merely for the passage of time until loan repayment. Under Sharia, a return on the principal amount is permissible if it could vary as profit or loss, contingent upon the uncertain outcome of the business venture. Such a return is acceptable as long as it is distributed justly among all parties, in line with the equitable principles established by Sharia.

Example of Riba An-Nasiyah

When an individual lends money with the stipulation that it will be returned with an extra sum after a certain time, this arrangement is recognized as Riba al-Nasiyah. The surplus charged for the delay is deemed an unfair profit.

2. Riba Al Fadl:

It is also known as Riba Al Bai, referring to the surplus value in trade or barter without a simultaneous equivalent exchange, typically involving tangible goods and commodities in spot transactions with immediate cash payment and commodity delivery. Riba Al-Fadl represents another aspect of riba, prevalent in direct transactions. It arises from the Hadiths, which stipulate that when gold, silver, wheat, barley, dates, and salt are exchanged for similar items, the exchange should be immediate, and the quantities should be equal and of similar quality.

Example of Riba Al Fadl

An example of Riba al-Fadl occurs when someone exchanges 1 kilogram of premium dates for 2 kilograms of lesser-quality dates. In this case, the additional kilogram received is viewed as Riba al-Fadl, despite involving the same type of product.

Rules regarding Riba Al-Fadl 

Any difference in value or quality should be ignored and the commodities should be exchanged in equal weight and volume. Instead of a direct exchange of commodities of the same kind, a person should sell his commodity against cash at the market value, and buy someone else’s commodity in exchange for cash at the market value.