What Is Riba? Islam Question & Answer

what is riba

Briefly, ribh (famously translated to mean profit) refers to a mark-up put above the cost price of a product or service. It is designed to compensate traders for their expenses, effort and time. Riba, by contrast, is an additional amount added to a credit facility and not to product costs. There are various essential differences between ribh (profit) and riba (usury). The above definitive (qati’) verse permits trade (as a mode of earning profit) but strictly prohibits interest.

There have been modern attempts to solve this problem by creating Bitcoin, a digital currency that has been described as ‘digital gold.’ Its proponents argue that it is the soundest form of money. However, it is a new invention and doesn’t have the longevity of gold, and its technology is not yet accessible to the everyday person who isn’t tech-savvy. The first thing we can do is shun riba-based products and use halal alternatives instead.

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Usury takes away wealth from the real economy and allows the lender to have money which ought to be used in the production of more goods and services. ‘Riba An Nasiyah’ is defined as excess, which results from predetermined interest (sood) which a lender receives over and above the principal (Ras ul Maal) in any loan transaction.This is the real and primary form of Riba. Housing and Urban Development (HUD) houses are announced at least twice a month by the federal government for auction. They are good houses, which you can buy at 50 to 60 percent below market price.

Concept of Islamic Banking and why Islamic Banking

Many have long argued for a return to the gold standard where money was backed by physical gold. However, this would be a direct challenge to the current economic status quo and a difficult feat to accomplish. What’s more, between 2000 and 2021, the US money supply went from $4.6 trillion to $19.5 trillion.

what is riba

The principle of the circulation of capital exists in both the Muslim world and the non-Muslim world. What it means is circulating capital so that it will increase. The same applies to lending; they give money as a loan provided that it will increase when they get it back. what is riba This being the case, no return for the use of money can be justified,[422] and explains (at least in part) why it is riba. In Islam, wealth can only be generated through active work. It is consideration for the entrepreneurial effort and risks incurred in an investment.

Islamic Finance As A Tool For Economic Recovery Post Covid-19

As with a rent-to-own arrangement, the purchaser does not become the true owner until the loan is fully paid. A credit sale becomes riba if there is a third party involved providing a loan with interest. For example, when you buy a car from a dealership and they offer you financing. The financing is a loan contract from a bank – not a credit sale with the dealership – and the loan contract has riba. Unfortunately most modern sales for high cost items are structured in this way with a third party providing a loan – and this is riba. This is due to the Cantillon Effect, which describes how those closest to the newly created money get to spend it first before it trickles down and causes prices to go up.

  • Big financial institutions such as banks and wealthy private investors buy these bonds.
  • I want to share my story, which may help someone to stay away from credit cards.
  • The moneylender becomes wealthier since his wealth grows by the mere fact of lending it.
  • Banks were giving cheap loans to everyone, which inflated the housing market.
  • Some non-Muslim products don’t necessarily involve riba, so assess each product on a case-by-case basis.
  • In reality, the majority of money in the economy is created by banks when they lend out money.

You can see how the initial interest multiplies in practice as per the following verse from the Quran warning against precisely this scenario. It was this type of reckless lending that contributed to the 2008 financial crisis causing financial ruin for so many. Banks were giving cheap loans to everyone, which inflated the housing market.

The Holy Quran has made forbidden riba/interest in many verses. Muslim scholars recommend to give the interest money to a charity organization to help the poor and needy. Although one will not receive a reward by donating the interest money for a charitable cause, it will help clean the wealth from riba. However, the donated interest money should not be used by anyone for projects such as the construction of mosques or the printing of the Holy Quran. The same logic applies here; if people do not feel oppressed by paying riba, their feelings will still not make riba halal. From these six items, the scholars of Islam differed as to whether the prohibition of riba can be extended to other items or not.

Islamic Principles for Achieving Financial Wellbeing

Rafiq Yunus al Misri argues that riba may bring some benefits,  even to the orphans and the weak etc. However, the overall negative impact it has, outweighs the positive. In short, riba is an exploitative arrangement that keeps the poor in precarious financial circumstances as the poor are stuck with ever-growing debts whilst the rich increase their wealth without creating any extra value. Those who devour usury (riba) shall not rise again except as he rises, whom Satan of the touch prostrates; that is because they say, ‘Trade is like usury (riba).’ God has permitted trade, and forbidden usury (riba). Whosoever receives an admonition from his Lord and gives over, he shall have his past gains, and his affair is committed to God; but whosoever reverts — those are the inhabitants of the Fire, therein dwelling forever.

  • It is an opportunity to please Allah more and establish a halal way of life.
  • Interest is deemed riba, or an unjust, exploitative gain, and such practice is forbidden under Islamic law.
  • Moneylenders do not take any risks in the monetary economy.
  • This shows how influential the benchmark interest rates are and how they will have consequences for all, even if you don’t individually consume riba.
  • This loan is meant to help the one in need and never to earn the lender wealth.

But regardless of time and place, charging interest – particularly excessive amounts – has been seen as something immoral. As riba is quite a technical concept, it is easily confused with other related but very different financial concepts. Now, IslamicFinanceGuru is looking to bring Muslims back to a level playing-field by enabling Muslims to make effective and halal financial decisions without having to fall into riba.

How to get rid of interest money?

The caveat here is that some or all of these concepts also can involve riba – but they can often be used in situations where there is no riba as well. Riba Al Fadl refers to the exchange of two different amounts of the same commodity. For example, exchanging 1 kilo of dates for 2 kilos of dates. We have previously written a two-part series on the more academic, esoteric reasons why riba is haram here and here. An example of this would be taking a loan from someone who expects it to be repaid in addition to 5% per month on anything that has not been paid at the end of each month.

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This is called mudaarabah (profit sharing), and there is nothing wrong with it if the capital is kept distinct from the profit. If this money is deposited in a riba-based bank , then taking the interest is haram and it is not permissible to consume it. Islam also forbade another kind of riba, namely riba al-fadl, which means adding to the amount when exchanging one item for another of the same type. So if gold is sold for gold, that is not permissible except like for like, hand to hand. Islam stipulated that the exchange should be done hand to hand and that the items or goods should be of the same quality. If he sells a saa‘ of wheat for two saas (of the same commodity), even if it is hand to hand, he has engaged in riba.

There have been huge improvements in the last decade in the aspect of Islamic Finance where we see more Islamic banks, Takaful, and even Islamic capital markets coming up. We do agree, these institutions need improvement in their dealings and structure to ensure there is complete shari’ah compliance especially since the world’s entire financial system is based on usury. However, we do appreciate the effort and there is a need for Muslims to increase experts in this field and look for innovative solutions that will be fully Shari’ah-compliant In Sha Allah. This is a basic example that doesn’t factor in the interest charged on the loans, but it should demonstrate how money creation is usurious.

what is riba

It is not only Haram to buy anything through interest-based financing, it is, in many cases, non-economical and bound to lead to headaches. Hundreds and thousands of people lose their houses every year since they spend before they earn through the financing system. And when you lose in attempting the American dream, you lose big. So why not think of not losing on the Day of Judgment by opting for a simple life here. I know a Muslim sister who, before accepting Islam, used to be a real estate agent and was married to another real estate agent.

Islamic finance and beyond

This has changed with the introduction of paper money (a.k.a fiat money), which has no natural limits to its creation. It’s easy to print money, and in the digital age, where money is just digits in your bank balances, it can simply be entered on a computer. To reclaim our economic sovereignty, Muslims must again lead the fight against riba. This article will look deeper into the problems with interest and make recommendations on what you can do to avoid and combat it. Fourthly, as Imam Qarafi  explains, a ruling made to protect people, will always remain valid even if people do not feel the need to be protected anymore.

what is riba

The Shari’ah does not recognize such thing as acceptable and exorbitant riba. It distorts the distribution of wealth, where the moneylender earns more money without capital contribution to society. The moneylender becomes wealthier since his wealth grows by the mere fact of lending it.

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