Riba is an Arabic term commonly translated as interest or usury. In Islamic finance, riba refers to certain forms of unjustified increase or gain in financial transactions and is prohibited under Islamic law.
The prohibition of riba is one of the foundational principles of Islamic finance.
How Riba Relates to Financial Transactions
Islamic finance seeks to avoid arrangements that generate returns solely through lending money at interest. Instead, Sharia-compliant transactions are structured around trade, leasing, partnership, investment, or asset ownership.
The interpretation and application of riba are based on Islamic legal principles and scholarly guidance.
Riba and Islamic Finance
The prohibition of riba serves as a key distinction between conventional interest-based finance and Islamic finance. As a result, Islamic financial institutions utilize alternative contractual structures designed to facilitate economic activity while adhering to Sharia principles.
Why Is Riba Prohibited?
Islamic scholars generally cite principles such as:
- Fairness in financial transactions
- Risk sharing
- Ethical economic activity
- Avoidance of exploitation
Frequently Asked Questions
Is riba the same as interest?
Many scholars and Islamic financial institutions use the term riba to refer to interest-based lending. Specific interpretations may vary among scholars.
Why is riba prohibited in Islam?
The prohibition is based on teachings found in Islamic sources and centuries of scholarly interpretation.
How does Islamic finance avoid riba?
Islamic finance utilizes alternative structures based on trade, leasing, partnership, and asset ownership.
