There are two types of riba (interest) prohibited in Islam: 1) Riba al-nasiyah (interest on loans) which refers to any predetermined increase on a loan based on time. 2) Riba al-fadl (interest in exchange) which occurs when exchanging amounts of the same commodity if the amounts are not equal or not simultaneous. The key differences between the two are that riba al-nasiyah involves lenders/borrowers while riba al-fadl involves sellers/buyers, and riba al-nasiyah considers time while riba al-fadl can occur in a spot transaction. Both ultimately aim to curb unfair

2. What is Riba (Interest) and its Types
Rana Muneer Ahmad

3. The word 'riba' means to increase, to grow, to
multiply and to climb. However, in economic
context, it is generally considered as a contractual
increase on loaned money or commodity. This
word as such or its variants have been used in
numerous versus of Quran. There is, however, a
complete consensus among Muslim jurists that
only in the following eight verses of Quran, this
word has been used in its economic sense: -
What is Riba?

4. And from the riba-based giving (investment), you think as if your wealth
is increasing at the cost of others (borrowers), but in the sight of Allah
(from overall perspective), it is not increasing. On the other hand, when
you give something in charity to please Allah, then your wealth is
increasing (in the sight of Allah). (al-Room 30:39)
And for their (Jews’) devouring of riba even though it was forbidden for
them, and for their (Jews’) wrongful appropriation of other peoples'
property, We (God) have prepared for those among them who reject faith
a grievous punishment. (al-Nisaa 4:160-1)
O Believers! Do not charge riba on top of riba and fear God so that you
may prosper. (Aale-Imran 3:130)

5. People who indulge in riba shall be raised like those who have
been driven to madness by the touch of Devil. That is because
they say that a riba-based transaction is just like trading, while
God has permitted trade and prohibited riba. Hence those who
have received the admonition from their Lord and have desisted
accordingly, may have what has already passed, their case being
entrusted to God; butthose who revert to riba-based dealings,
shall be the inhabitants of the hell-fire and abide therein for
ever. (You must know that) God deprives riba from all blessings
and blesses charity; He loves not any ungrateful sinners. (al-
Baqarah 2:275-6)

6. O you (who claim to be) believers! Fear God and
give up riba that remains outstanding if you are
true believers. Watch out! If you do not obey this
commandment, then God declares war against
you from Himself and from His Prophet. But, if
you give up your outstanding riba, then you can
claim your principals. Neither should you inflict
harm (due to riba) to others, nor others should
do harm to you. (al-Baqarah 2:278-79)

7. Riba in Hadith: On the topic of riba, there is a big number of ahadith.3 Here a selection of commonly quoted
ahadith is reproduced that is divided, for
pedagogical purposes, under the following four titles: -
1. Ahadith that reinforce the concept of Quranic riba
1.1 The Prophet said: "There is no riba except in loaning." (Nasaee 4504)
1.2 The Prophet said: "Verily riba is in loaning." (Muslim 2991)
1.3 The Prophet said: "There is no riba in hand to hand (spot)
transactions."(Muslim)
1.4 At the last Pilgrimage, the Prophet said: "All of the riba of Jahilliya is annulled.

8. In this respect, the first riba I annul is
the riba that the borrowers owe to my
uncle Abbas; it is cancelled completely.
(Muslim)
1.5 After the prohibition of riba, all Muslims were
clear not to indulge in it anymore. However, a
dispute arose between two Muslim tribes about
the settlement of outstanding interest on previously loaned capital. The dispute
was put up to the Prophet who forbade demand and payment of that interest
too. (See Shafi 1996 p.28-9)

9. There are two types of riba which are Riba on credit (riba al-nasiyyah) and riba on cash (riba al-
fadhl).
1. Riba on Credit (riba al-nassiyyah)
Literally: Riba denotes increase, addition or excess.
Usury on credit (riba al-nassiyyah) refers to a stipulated increase over the loan which a debtor
agrees to pay to his creditor in relation to a specific period of time. In other word It is a fixed
charge payable by the borrower to the lender irrespective of what the loan money produces.
Types of Riba

10. The additional amount
is determined in
relation to the amount
of debt and the period
of the loan.
Accordingly, the
scholars consider any
advantage that is
derived from the loan
as usurious.
This type of riba is
prohibited by the
Quran in 2: 275-281,
3: 130, 4: 160 and
30:39.
Determination of the additional
amount

11. 2:275 "Those who charge usury are in the same position
as those controlled by the devil's influence. This is
because they claim that usury is the same as commerce.
However, GOD permits commerce, and prohibits usury.
Thus, whoever heeds this commandment from his Lord,
and refrains from usury, he may keep his past earnings,
and his judgment rests with God. As for those who persist
in usury, they incur Hell, wherein they abide forever.

12. The hadith of the Prophet (pbuh) states: “Jabir said that Allah’s
Messenger (pbuh) cursed the accepter of interest and its payer, and one
who records it, and the two witnesses, and he said: They are all equal.”
Riba usually arises when the parties to a loan contract deal with
properties which are perishable and homogeneous such as gold, silver,
money, dates, salt, etc.
When lending these properties the creditor is not allowed to charge the
debtor for their use.
In contrast, a person may charge another for the use of his usable
property such as a house or a car.

13. •A question may arise that if a person can charge another
for the use of his house why shouldn’t he charge him for
the use of his money.
Question
•House and money belong to two different types of
properties. While a house is a usable property that can be
used many times, money can only be used once. For
example a person who uses his money to buy a computer
cannot use the same money to buy another thing. The
same applies to other homogeneous properties such as
rice, sugar, oil, etc.
Answer:

14. These properties can only be used once and
therefore, Islamic law prohibits renting money
which amounts to usury and allows renting a
house and other usable properties.
•It is allowed to lend or borrow money. While lending these
properties, any condition for additional return is
considered usury. Assigning time value to money is
equivalent to accepting that money can be rented out.
Usury therefore amounts to renting money. Furthermore,
when a house is rented it is certain that the tenant would
get benefit or usufruct from the house.

15. Money, on the other hand, had to become part of an
enterprise and combined with efforts in order to give
benefit/profit. The money would have to be invested and
there could be the possibilities of profit and loss. Charging
an extra amount for the time, irrespective of the outcome of
the enterprise is considered injustice. Instead of renting
money Islamic law recommends profit and loss sharing
contracts.

16. Some writers have differentiated
between usury and interest on the
ground that:
Usury involves loans for
consumption while the interest
involves loans for production.
They argue that
Interest, is an extra charge imposed
on a debtor who borrows money for
productive purposes such as
investment, industry and trade.
Usury and interest any difference?

17. Usury is an extra charge imposed
on a debtor who borrows money
for consumption such as his own
personal day-to-day needs.
Interest is a reasonable charge for
the use of money employed in
productive purposes while usury is
unjust and forbidden.
•This view however could not be maintained. A debtor
who borrows money for investment, trade, and
business may face one of the four possible situations:
Observation on this opinion
1) He may make enough profit to
pay the capital and interest and
keep the balance.

18. 2) It is also possible
that he may make
profit enough to pay
for the interest while
he may not get any
share of the profit.
3) There is the
possibility that he may
not earn any profit in
which case he has to
return the capital and
pay the interest. He
may suffer losses.
In these three out of
four possible
scenarios, the
transaction is not fair
to the borrower. Even
in the first example
the transaction is not
fair to the creditor as
it is possible that the
debtor may keep a
larger share of the
profit for himself and
return a smaller
percentage to him.

19. Thus: charging interest on loans granted for
productive purposes could also be exploitative
and unjust to either or both of the parties. It is
therefore argued that riba covers all types of
loans where interest is charged whether they
are made for consumption or production
purposes.
Exploitative nature of granting loan for
business
•If a loan (qardh) is granted for investment purposes:
•The lender is only guaranteed his capital and he cannot
claim any share in the profit.

20. He is also protected from any loss
made by the borrower.
Islamic law prohibits the stipulation of
any condition in a loan contract that
would benefit the lender. Any loan
that generates conditional benefit to
the lender is prohibited.
•It is recommended that loan should not be granted for
investment purposes. The parties instead should enter
into musharakah or mudharabah contracts where they
have to share profit and loss on equitable terms.
Granting loan for investment
purposes

22. The shares of fund owner and fund user in a musharakah or mudharabah are tied
and connected to the underlying economic activities. They are entitled to receive
a certain pre-determined percentage of the actual profit made by the
investments.
A fund provider cannot claim a certain fixed rate of interest irrespective of the
amount of profit made.
In contrast, in usury the return to the usurer is fixed in advance. The usurer is
guaranteed a certain cost for his fund irrespective of the actual outcome from
the investment.

23. This pre-determination of
return to the usurer ignores
the economic realities on the
ground and therefore
introduces distortion into the
market. Particularly, when we
consider that the pre-
determined interest is added
to the cost of production and
the prices of goods.
Comparison between Islamic
economy and usury based
economy:
1) An Islamic economy is an
exchange-based economy,
economy where goods, assets
and services are exchanged
for money. In a usury-based
economy the principal
economic activity is the
exchange of money now for
more money later.

24. 2) Islam wants a society of investors and entrepreneurs
while a usury-based economic system creates a society
of lenders and borrowers.
3) Islamic transactions connect the fund to a real asset-based economy. When
there is inflation the loss in purchasing power of a currency is compensated
by the increases in the value of the assets. In contrast, usury-based
transactions create artificial money in the system without any corresponding
increase in the real goods and products which leads to inflation.

25. Fadhl literally means excess or surplus. Usury
in sale (riba al-fadhl) was not known to the
pre-Islamic Arabs and was prohibited at a later
stage by the hadith of the Prophet (pbuh).
Usury in sale takes place when a ribawi
commodity is exchanged for an unequal
amount of the same commodity or when the
amounts are equal but one of the counter
values is delivered later. The hadith states:
2. Riba in Cash (Riba al-fadhl)

26. "Abu Said al-Khudri (Allah be
pleased with him) reported
Allah’s Messenger (pbuh) as
saying: Gold is to be paid for
by gold, silver by sliver, wheat
by wheat, barley by barley,
dates by dates, salt by salt,
like for like, payment being
made hand to hand. He who
made an addition to it or
asked for an addition, in fact
dealt in usury. The receiver
and the giver are equally
guilty.”
In another hadith narrated
Abu Said Al-Khudri and Abu
Huraira (Allah be please with
them): Allah’s Apostle (pbuh)
appointed somebody as a
governor of Khaibar.

27. That governor brought to him an excellent kind of dates (from
Khaibar). The Prophet (pbuh) asked, “Are all the dates of khaibar
like this? He replied, “By Allah, no, O Allah’s Apostle! But we barter
one Sa’ of this (type of date) for two Sa’s of dates of ours and two
Sa’s of it for three of ours.” Allah’s Apostle (pbuh) said, “Do not do
so (as that is a kind of usury) but sell the mixed dates (of inferior
quality) for money and then buy good dates with this money”.
• Gold, silver, wheat, barley, dates, and salt are also called ribawi
properties.

28. The Zahiris have
maintained that riba
al-fadhl may only
happen with regard
to those six specific
commodities. They
do not extend the
hadith to other
commodities.
All other Fiqh Schools
are of the opinion
that the hadith is of
general application
and is not necessarily
confined to these six
items but could be
extended to other
commodities through
analogy (qiyas).
Juristic opinions on ribawi commodities

29. a) Riba al-nasiyah is
prohibited by both
the Quran and the
Sunnah while riba al-
fadl is prohibited by
the Sunnah only.
b) Riba al-nasiyah
may happen in cases
of loan where the
parties are the lender
and the borrower
while riba al-fadhl
may happen in a sale
contract where the
parties are the seller
and the purchaser.
The differences between riba al-nasiyah and riba al-
fadhl:

30. c) In cases of debt it is possible
that a debtor voluntary returns
an additional amount t the
creditor while in exchange of
ribawi commodities against
each other any addition by any
of the parties is prohibited.
d) Riba al-nasiyah arises
in relation to time while
riba al-fadhl may also
arise in a spot transaction.
e) Riba al-nasiyyah is
considered bad in itself
(haram li-dhatihi) while
riba al-fadhl is considered
bad for the sake of others
(haram lii ghairihi) as it
leads to riba alnasiyah.