Riba: usury and interest in Islam

What the Qur’an and the Sunnah say

The Qur’an returns to riba several times. Verse 275 of Surah al-Baqarah contrasts trade, which has been made lawful, with riba, which is forbidden; verses 278 and 279 order believers to give up whatever riba is still owed to them and leave the one who repents his capital, so that he neither wrongs anyone nor is wronged. Surah Al ʿImran (3:130) forbids practising usury by multiplying one’s profits many times over, and Surah ar-Rum (30:39) says that a usurious loan made to grow rich at the expense of others is not blessed by Allah.

In the Sunnah, the Prophet ﷺ cursed the one who consumes riba, the one who makes others consume it, the one who records it and its two witnesses, saying that they are equal in sin (Muslim 1598). He counted it among the seven destructive sins (al-Bukhari 2766, also narrated by Muslim).

The two kinds of riba

• Riba of debts (riba al-nasi’ah, also called the riba of the pre-Islamic era): any surplus required on a loan from the outset, or added to a debt that has fallen due in return for extra time. This is the riba that the Qur’an targets directly.
• Riba of sales: excess (riba al-fadl) or delay (riba al-nasa’) in exchanging certain “usurious” goods for one another.

The hadith of ʿUbada ibn as-Samit lists six goods: gold, silver, wheat, barley, dates and salt. When one of them is exchanged for goods of the same kind, the exchange must be like for like and hand to hand; if the kinds differ, they may be sold as one wishes, provided it is hand to hand (Muslim 1587). The schools of law looked for the underlying cause (ʿilla) of this rule in order to extend it: for the Hanafis and most Hanbalis, measurement by volume or weight together with sameness of kind; for the Shafiʿis, being a currency in the case of gold and silver and being a foodstuff in the case of the other four; for the Malikis, being a currency and being a staple food that can be stored.

Banknotes and bank interest

The International Islamic Fiqh Academy decided that banknotes are a currency in their own right, subject to the rules of riba, zakat and salam just like gold and silver (resolution 21 (9/3), Amman, 1986), and that debts are repaid in the same amount, without indexation to prices (resolution 42 (4/5), Kuwait, 1988).

On banking, it ruled that any surplus or interest on a debt that has fallen due in return for extra time, and any interest on a loan from the moment the contract is made, is forbidden riba (resolution 10 (10/2), Jeddah, 1985). It specified that interest-bearing deposits, whether current, fixed-term or savings, are usurious loans, whereas the investment deposits of genuinely Islamic banks fall under mudarabah (resolution 86 (3/9), Abu Dhabi, 1995). AAOIFI, Diyanet and the Saudi bodies share this position.

The Al-Azhar Islamic Research Academy ruled to the contrary in 2002 (decision 321, 31 October 2002) that placing one’s money in a bank with a return fixed in advance is permissible, and Dar al-Ifta of Egypt follows this view. It remains a minority view internationally.

What is not riba

• Selling for more on deferred terms than for cash, if the price is fixed once and for all in the contract: this is permitted (resolutions 51 (2/6) and 64 (2/7)). It is the basis of instalment sales and of murabaha.
• Sharing a real profit in a partnership or a mudarabah, with no guarantee of capital.
• Charging rent for the use of an asset that one continues to own and whose risk one bears (ijarah).
• Charging the actual costs of a loan, unrelated to its amount or its duration (resolution 108 (2/12)).
• Granting a discount to a debtor who pays early, if it was not agreed at the outset (resolution 64 (2/7)).

Late payment and penalties

No surplus may be imposed on a debtor who pays late, whether or not it was provided for in the contract, because that would be riba (resolution 51 (2/6)). A penalty clause is accepted in contracts where the obligation is not a monetary debt, for example a manufacturing order, but never for late payment (resolution 109 (3/12)).

What to do in practice

Anyone who has received interest keeps their capital and gets rid of the surplus, without seeking any reward: see what to do with interest received and the interest purification tool. To buy a home, buy equipment or save without interest, Islamic finance contracts offer alternatives: murabaha, ijarah, musharakah.