riba

(interest)

International, United Kingdom

Is the payment of interest. The prohibition on riba stems from the Sharia tenet that money, by itself, should not be recognised as a commodity and consequently, there should be no reward for its use. Under Sharia, money is perceived only as a medium of exchange and a unit of measurement. Islamic derivative products must therefore be based on underlying transactions in tangible commodities as opposed to merely superficial cash flows. In this context, it is important to note that while Sharia prohibits riba, it does not prohibit trade or the making of profits as part of such trade(s). In fact, the Quran expressly alludes to the distinction between trade and riba in the following passage:

"Those who eat riba do not stand except as stands one whom Shaytan has by the touch thrown into confusion. That is because they say: 'Sale is like riba'. God has permitted trade and forbidden riba."

See

Sharia

+ riba

International, USA

Often interpreted as a prohibition against interest, riba is more broadly defined as a prohibition against unjust enrichment or advantage obtained by a lender without regard to risk or additional consideration. For example, in a conventional financing, a borrower must pay interest to the lender on the loan even if the borrower's business is unsuccessful. This structure does not comply with Sharia because the lender did not do anything to earn the additional funds and is not sharing in the risks of the business. Riba does not prohibit parties from earning a return on their investments but this return must be based on the profitability of the business. Riba also prohibits transactions with guaranteed returns.

Because interest is a fundamental aspect of conventional loan transactions, Islamic finance transactions are generally structured to avoid the borrower having to pay interest while allowing the lender to make a profit.