Riba

There is no single English term corresponding to riba so (exceptionally) the Arabic word is retained.

Riba is unjust enrichment. It is any unearned compensation or payment. At Islamic law reward is only earned when risk is taken or shared. In the absence of exposure to risk reward is in effect wrongful appropriation. Riba may only arise in any exchange (including loans and trade) between parties – in any commutative transaction. Non-commutative transfers of value (such as gifts) cannot give rise to riba.

Types of Riba

There are two types of riba.

1) Simultaneous exchanges of:

a) unequal quantities of a commodity of equal quality, or

b) equal quantities of a commodity of unequal quality

2) Non-simultaneous exchanges of:

a) unequal quantities of a commodity of equal quality, or

b) equal quantities of a commodity of the same kind, or

c) unequal quantities of money

 Although either type may involve a disparity of commodities due, in Islamic legal literature (1) is called surplus riba and (2) is called credit riba — due to deferment, the  delay in time. This does not imply that Islamic law prohibits according a time value to money.

Usury

It is apparent that riba does not reduce to the charging or taking of interest or to usury – whether ‘usury’ is known in the traditional sense of charging or taking interest (in any amount) or in the later sense of an excessive rate of interest. At Islamic law, money is not deemed a commodity so only 2(c) applies to the exchange of money for money; as a result of 2(c) loans must be interest free and currency exchange must be a spot transaction.

Debts (literally, obligations) may not be traded, unless the trade takes the form of the assignment of debt therefore implying that only the parties’ identity changes (and there is no additional cost incurred.)

Qur’an on riba: 30:39; 4:161; 3:130-132; 2: 275-81

 

Further Reading

Wahbah al-Zuhayli, ‘The juridical meaning of riba’ 26-54 and Abdulkader Thomas, ‘What is riba?’ 125-134 in Abdulkader Thomas ed, Interest in Islamic Economics: Understanding riba (Routledge 2006)