Riba also known as "Usury". Riba is forbidden in Islam and considered as a major sin.

Simply, unjust
gains in trade or business. While the term "Riba" is often equalized as " Interest" by many who say:
'buying and selling is but a kind of usury' - while God has made buying and selling lawful and usury
unlawful. There are two types of Riba discussed by Islamic jurists: An increase in capital without
any services provided and second type is speculation which is prohibited in Islam. Commodity
exchanges in unequal quantities, also prohibited in the Islam.
When currencies of base metal were first introduced in the Islamic world, paying a debt in a higher
number of units of this fiat money was not considered Riba; jurists were concerned with the real
value of money (determined by weight only) rather than its numerical value. For example, it was
acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight
of gold (the value in terms of weight had to be same because all makes of coins did not carry exactly
similar weight), therefore having the same real value.
RIBA INTEREST
Riba is often considered as interest by many but actually only interest is not Riba. Riba is not only
limited in financial terms. In interest, the creditor receives a fixed rate of return, no matter how much
profit or loss the venture makes.
The creditor does not show any interest about the purpose of the loan. He does not want to
participate in socio-economic development. The knowledge skills and ability are avoided of debitor
by the creditor. The formula by which Interest is calculated is:
Interest = Principal amount x Rate x
100

time

Interest is an increased amount and considered as Riba because of following reasons:

1.
2.
3.
4.
5.

It is unearned income over the principle

Return of principle with additional amount is ensured
There is No risk of erosion of capital
It is actually transfer of asset from poor to rich
No effort is required.

RIBA PROFIT
Profit is not Riba because it is not the additional gain without profit but it participate in socio
economic development. There is the knowledge, abilities and skills of one person and other person
finance him. The finance gets complete knowledge and information for which the finance is
required. Both parties share profit according to ratio.
No doubt, profit is increased amount but this increased amount is earned through efforts and
participation which cause socio economic development that is why we can say that profit is not Riba.
We can summarize the word profit in following sentence:
Profit is positive gain from business operations or an investment after substracting all
expenses, use and loss.
The formula for calculating profit amount is:
Principal amount sales = Gross Profit Cost = Net Profit x Ratio of investment=Profit
This profit is distributed according to equity participation. Profit is not the earning through wrong
means because of following reasons:

1.
2.
3.
4.
5.

It is the positive end result of business operations.

It is earned by investing labour and capital.
There is not any surety.
There is a risk of erosion of capital
It ensures equal distribution of profit and loss.

Socio-Economic Life through Riba:

1. Riba makes a man selfish and miser.
2. It creates hostile relationship between rich and the poor.
3. Moral decay spread out.
4. It impacts on saving investment and production.
5. Riba creates Idleness among savers.
6. It increases price level and inflation.
7. Because of inflation unemployment increases
8. Riba induces to destroy wealth.
9. It exploits labours
10. It imposses unnecessary burden on a nation.
Any earning through wrong mean is Riba. Riba is not limited only financial transactions but it has a
huge area and interest is only a small part of it. The statement that interest is Riba is wrong. In
interest the creditor receives a fixed amount at return but in Profit the increased return is not Riba
because this increased amount is earned through efforts, skills, knowledge and participation and
through financing. Riba has a negative effect on human life and causes crime, inflation and other
negative traits.

Rationale
As an exchangeable term with Riba, interest is defined by Ismail Ozsoy, professor of economics in
Fatih University, Istanbul, as "an unearned or unequally distributed income." Riba or interest is
unearned when the realized income that is earned out of the loan is less than the interest rate, and it
is unequally distributed income when the realized income is higher than planned.
Ozsoy argues that the main characteristic of interest is that either the borrower or the lender would
absolutely and inevitably be subjected to a loss and an injustice in any case, for its rate is fixed at
the very beginning, but it is impossible to predict the outcome of the business at which the loan is
used, profit or loss, or how much either would be. Thus, it can be identified with an absolute injustice
for either side of the transaction. It does not matter whether the interest rate is high or low and
whether it is called interest or usury because the different kinds of interest or different rates change
only the address, or the direction, of the injustice; it is sometimes the payer and sometimes the
receiver of interest who is exposed to this injustice and/or financial loss.
Ozsoy argues that injustice and unequal distribution of income is an indispensable nature of interest
as well as usury, which is considered to be an excessive rate of interest. As a matter of fact, while
any high rate of interest may expose the borrower to a financial loss in hard economic conditions,
any low rate may expose the lender to a loss in favourable economic conditions where return on
capital is high. This case reveals that there is not any acceptable rate of interest, low or high, from
the standpoint of the equitable distribution of income. That characteristic of interest arises from the
fact that its rate is predetermined despite the impossibility for mankind of predicting whether or not a
profit will be made, and even if, how much it will be.
Ozsoy compares the interest mechanism to a two-bladed saw, or a knife, that cuts on both sides,
such that either the borrower or the lender must pay more than they receivedone or the other side
is unavoidably injured by the interest mechanism.
Interest is the income earned by the borrowed financial capital regardless it is in the production
process or not. Interest is the allocation, to the capital owner, of an unearned, undeserved, unborn,
unavailable and imaginary income that might be attained without producing anything and without

contributing any value to the revenue of the society. It imposes all the risks on the debtor directly and
on the society indirectly but not on the lender although it is directly related to him/her.[18]
Interest mechanism prevents the fair distribution of positive or negative outcomes of economic
activities among the lender and borrower and worsens the income distribution. This occurs either by
providing the capital owner a certain and fixed percentage of earning in any case regardless of the
negative outcome of the business, or by limiting his earning with only a predetermined amount of
return in case the borrower entrepreneur earns considerably high income out of his/her financial
capital.[19]
The main reason advocated by Siddiqi and Ganameh as to the rationale of prohibition is that it is
oppression involving exploitation. In matters of consumption loans, it is necessary that those who
have wealth should assist those without, and in productive loans, a guaranteed return on capital is
unjust given the uncertainty surrounding entrepreneurial profits, whereas a return to both parties as
a rate of profit would be more equitable.[20]
Taji al-Din argues the reason appears to be the restriction in circulation of wealth among those who
already have it. Lenders would not provide loans to those they believe are unable to repay so such
wealth would be restricted to those able to service the debt. This is something forbidden
categorically by the Quran and the effects on society result in the accumulation of wealth amongst
those who have it and increase the divide between the rich and poor.
Mawdudi believes the cause relates to the undesirable resulting effect of an imbalance between
production and consumption. This is caused by the transfer of purchasing power from those with a
high propensity to consume to those with a low propensity to consume. The latter group reinvests its
income in production, increasing production and decreasing consumption demand. The cost of
capital results in increased prices of consumption goods, accentuating this process. Mawdudi
believes that this is the source of evils in the economy such as stagnation,depression, monopoly and
ultimately imperialism. Interest-free loans and the prohibition of return on capital along
with zakat, wages, profit and profit-share recreates this balance. The focus shifts to the entrepreneur
whose activity becomes the only source of income along with wages, giving him the upper hand in
society. Siddiqi and Ganameh cite the hadith of "income devolved on liability" in this context. [21]
Some argue[who?] that interest allows the creation of a group of people who contribute nothing to
society, simply generating income from capital. This starves society of their contribution and the
rationale of prohibition is to reverse this.
Ibn Rushd argued the rationale relates to the possibilities of cheating that exists in Riba, which is
clearly visible in Riba fadl. [22] Other arguments that some writers [who?] try to extract from indications on
the divine texts include the rationale being corruption, unjust acquisition of property rights,
destruction, and a detrimental personality.
Hameedullah believes the reason is the unilateral nature of the risk born in these agreements. [23] The
Islamic principle is for a reward, there must be some liability incurred; otherwise, a return is
prohibited.

Relevance to modern times

Siddiqi suggests the key to whether the idea of prohibition of Riba is effective is whether it can
produce stability and efficiency in the economy and if it is conducive to growth and development and
increase justice and fairness.
The model of profit-sharing on the liability side of the banking system would make the financial
system more stable than using Riba. The sharing arrangements between suppliers and users of
resources for producing wealth improves business cycles and stability in the economy.

Entrepreneurship
With the abolition of interest, Siddiqi argues that the economic focus becomes attached to
entrepreneurial activities, using the vehicle of mudarabah, resulting increasing economic activity.
Although it may be thought that without interest, incentive to save drops, Keynesian analysis

indicates that savings are a function of income and interest is minor. As such, if income can be
increased, savings should increase, even in the absence of interest.
Mannan argues that interest holds back investment in production, whereas Mawdudi points out that
projects that could be socially useful, generating a small return and prevented as interest rates
prevent capital being utilized on such projects.
Without interest, capital can be more efficiently allocated to productive projects based on the rates of
profit rather than more credit-worthy individuals. A system based on profit-sharing also harmonizes
the interests between investors and entrepreneurs increasing efficiency.

Trade cycles
Many writers see the destabilizing effects that interest has on trade cycles. The basic idea is that
different interest rates and their variations allow for speculative institutions. Speculators hoard capital
for the purpose of chasing higher rates, which in turn deprives the deployment of capital for
productive purposes. It is argued that these vast movements of funds contribute to the fluctuations in
the trade cycles and make economic planning and organization problematic.
With the absence of interest, writers argued there will be less speculation due to the absence of the
interest rate and the reduced levels of debt that will result. That is not to say there will be no debt:
non-interest modes of finance allows debt but less. Decreased levels of speculation would thus
result in a more stable environment.

The word Riba as appearing in Holy Quran is translated in English as usury by some translators
and as interest by few. In Arabic language, it literally means an "increment or excess" but in
essence it means unfair advantage or profiteering, which is prohibited by Allah (swt). For instance
giving RS. 4800 for change of a RS. 5000 currency note would be Riba, even though there is
neither interest nor increase. Usury is not only unfair advantage but also excessive and wicked
charge of interest and is condemned by Bible and Quran as also other faiths.
The Muslim economists, bankers and insurers who have intensely studied Quranic verses and
hadiths find that among most of the ulema (clerics of Islam) and jurists of Islam considerable
misunderstanding and misconceptions are found about banking interest and insurance. Quran like
Bible prohibits usury and refers it as a kind of Riba.
Conventional Bank Interest and Profits
Banks provide a variety of financial services much different than the greedy and professional
moneylenders and pawnbrokers of ancient times. Governments and laws lay down stringent
requirements for their solvency and paid up capital and monitor and regulate their operations.
When the bank pays you interest on your deposit they pay you out of their overall profits. When the
bank charges you interest on the loan they charge it as the substitute for profit that they would
otherwise make by investing in share market, real estate etc. Al Azhar's verdict for PAYING predetermined profit (interest) is apparently based on the principle of pooling the overall profits of the
bank on all types of investments plus their own flat fees for account handling, lockers, guarantees,
monetary transfers etc. instead of the cumbersome and expensive procedure of sharing profits and
losses under each transaction of debt separately. But Al Azhar's plea for Qarze Hasana (loan
without interest or obligation to repay) to the poor and needy, is not commercially viable and only
philanthropic and charitable institutions could do that or the government can do that on the lines of

social security benefits for poor in US and Canada.

Bank interest rate about equal to or less than likely profit on
investment of the same amount as loaned cannot technically or logically be regarded as taking
unfair or unethical benefit and thus it cannot be treated as usury/Riba.
It may be noted that under the sharia compliant modes of financing one often ends up paying
higher profits to the lender than the regulated bank interest and the reason is said to be that risk of
loss is there for the lenders. In view of the modern risk appraisal methods for granting loans and
the laws that protect the interests of the borrowers and lenders it can safely be said that modern
banking as regulated by the laws is serving the needs of the business and consumers in
much better way and more economically than any other method in history.
The Islamic theological research committee of Egypt's Al-Azhar institute - seen by many as
the philosophical center of the dominant Sunni strand of the faith - has in the recent past voted 211 to approve fixed interest rates or pre-determined rate of profit..
But orthodox ulema do not agree and forcefully rejected the Al Azhar verdict. It would be recalled
that the judgment of Shariat Bench of Pakistan to abolish the interest dealings in Pakistan was
not allowed to be implemented by the Supreme Court of Pakistan and it was directed that first the
problem of inflation and reduction in purchasing power money be found. Despite lapse over 5
years there is no solution and the principal value of money as compared with gold, wheat and
various other commodities continues to regress.
The Nature of Usury at the dawn of Islam
In the following extract from Imam Maliks Mutawat the practice of usury as prevalent at the dawn
of Islam is described.
Malik related to me that Zayd ibn Aslam said, "Usury in the Jahiliyya was that a man would give a
loan to a man for a set term. When the term was due, he would say, 'Will you pay it off or increase
me?' If the man paid, he took it. If not, he increased him in his debt and lengthened the term for
him
Malik said, "The disapproved of way of doing things about which there is no dispute among us, is
that a man should give a loan to a man for a term, and then the demander reduce it and the one
from whom it is demanded pay it in advance. To us that is like someone who delays repaying his
debt after it is due to his creditor and his creditor increases his debt." Malik said, "This is nothing
else but usury. No doubt about it."
Please note that the above hadith does not distinguish between loan of cash or goods.
Malik spoke about a man who loaned one hundred dinars to a man for two terms. When it was
due, the person who owed the debt said to him, "Sell me some goods, whose price is one hundred
dinars in cash for one hundred and fifty on credit." Malik said, "This transaction is not good, and

the people of knowledge still forbid it."

Malik said, "This is disapproved of because the creditor himself gives the debtor the price of what
the man sells him, and he defers repayment of the hundred of the first transaction for the debtor for
the term which is mentioned to him in the second transaction, and the debtor increases him with
fifty dinars for his deferring him. That is disapproved of and it is not good. It also resembles the
hadith of Zayd ibn Aslam about the transactions of the people of the Jahiliyya. When their debts
were due, they said to the person with the debt, 'Either you pay in full or you increase it.' If they
paid, they took it, and if not they increased debtors in their debts, and extended the term
for them."
Please note that the length of terms is not indicated but in those days the period did not usually
exceed one year or so for which almost 50% excess is excessive. Further it appears that
repayment of loan in installments was rarely practiced.
Banking is a Trade
Islam does not prohibit profits in trade but prohibits exploitation or unethical means in trading. Banking is a
trade and financial service, much different than the concept of Baitul Maal, money lenders and pawn brokers
of ancient times. At the dawn of Islam there were no banks and goldsmiths and merchants accepted deposits
for safekeeping or gave loans on harsh terms. Now bank has become a financial intermediary that performs
one or more of the following functions: safeguards and transfers funds, lends or facilitates lending,
guarantees creditworthiness, and exchanges and transfers money. A narrower and more common definition of
a bank is a financial intermediary that accepts, transfers, and creates deposits.
Role of Central Banking
The foremost monetary institution in a market economy is the central bank or State Bank as in Pakistan.
These are usually government-owned institutions that perform the following functions: They serve as the
government's banker, act as the banker of the banking system, regulate the monetary system as
well as activities of commercial banks licensed to
work in the country and they look after both domestic and international policy goals, and issue the nation's
currency. As banker to the government, the central bank collects and disburses government INCOME and
receipts, manages the issue and redemption of
government debt, advises the government on all matters pertaining to financial activities, and makes loans to
the government. As banker to the nation's banks, the central bank holds and transfers banks' deposits,
supervises their operations, acts as a lender of last resort, and provides technical and advisory services.
Monetary policy for both domestic and
foreign purposes is implemented and, in many countries, decided by the national banking authorities, using a
variety of direct and indirect controls over the financial institutions. Coins and notes that circulate as the
national currency are usually the liability of the central bank