The term riba in Arabic means 'to grow, to exceed, to increase'. Technically, it denotes the amount that a lender receives from a borrower at a fixed rate of interest. At the time of the revelation of the Qur'an several forms of interest transactions were in vogue and were designated as riba by the Arabs. Of these one was that the vendor sold an article and fixed a time limit for the payment of the price, stipulating that if the buyer failed to pay within the specified period of time, he would extend the time limit but increase the price of the article. Another was that a man loaned a sum of money to another person and stipulated that the borrower should return a specified amount in excess of the amount loaned within a given time limit. A third form of interest transaction was that the borrower and vendor agreed that the former would repay the loan within a certain limit at a fixed rate of interest, and that if he failed to do so within the limit, the lender would extend the time limit, but at the same time would increase the rate of interest. It is to transactions such as these that the injunctions mentioned here apply.

Is Buying and Selling is Akin To Interest?

One justification put forward in favour of riba (interest) is that it is like an ordinary business transaction (buying and selling of goods and services). The unsoundness of this view lies in not differentiating between the profit one gains on investment in commercial enterprises on the one hand, and interest on the other. As a result of this confusion, the proponents of this view argue that if profit on money invested in a business enterprise is permissible, why should the profit accruing on loaned money be deemed unlawful? Similar arguments are advanced by those who thrive on interest in our own times. Their argument runs as follows: A person who could have profitably invested his money in a commercial enterprise loans it out to somebody who, in turn, makes a profit out of it. In such circumstances why should the borrower not pay the lender a part of the profit? Such people, however, disregard the fact that no enterprise in which a man participates, whether it is commercial, industrial or agricultural, and whether one participates in it with one's organizing skill or capital, or by both, is immune from risk. No enterprise carries absolutely guaranteed profit at a fixed rate. What is the justification, then, for the fact that out of all the people in the business world, the financier alone should be considered entitled to a profit at a fixed rate in all circumstances, and should be protected against all possibility of loss?

Let us set aside for a moment the questions of non-profitable loans and vacillations in the rate of profit. Let us consider only the question of loans for profitable enterprises, and confine our consideration to loans made at non-exorbitant rates of interest. The question, however, remains: Which rational principle, which logic, which canon of justice and which sound economic principle can justify that those who spend their time, energy, capacity and resources, and whose effort and skill make a business thrive, are not guaranteed profit at any fixed rate, whereas those who merely lend out their funds are fully secured against all risks of loss and are guaranteed profit at a fixed rate? And which principle can justify the fact that a man lends out his funds to an industrial concern and fixes, say for the next twenty years, that he will be entitled to receive each year a given per cent interest on his capital, while the proprietors of the industrial concern have no means of foretelling the price changes affecting their commodity, and hence their profit? Let us consider another case, namely that of war loans. How can it be appropriate that all classes of people endure all kinds of losses and are exposed to all kinds of risks and dangers connected with war, whereas the financiers, simply by having made loans, continue to receive Interest on them for long periods of time, sometimes even for a whole century?

Differences between Interest Based and Ordinary Business Transactions 

The essential difference between non-interest business transactions and interest-bearing transactions rests on the following grounds:

(1) In ordinary business transactions there occurs a mutually equitable exchange of benefits between the buyer and the seller. The buyer derives benefit from the article which he purchases from the seller; the seller receives compensation for the effort, ingenuity and time spent on making the article available to the buyer. In interest-bearing transactions, on the other hand, the exchange of benefits does not take place equitably. The interest receiving party, receives a fixed amount as a payment for using the loan he advances and thus his gain is secured. The other party to the transaction has only one thing at his disposal - a period of time during which he can make use of the funds loaned, and which may not always yield a profit. If such a person spends the borrowed funds on consumption, there is obviously no question of profit. Even if the funds are invested in trade, agriculture or industry, one stands the chance both of making a profit and of incurring a loss during the period of time in question. Hence an interest-bearing transaction entails either a loss on one side and a profit on the other, or an assured and fixed profit on one side and an uncertain and unspecified profit on the other.

(2) In business enterprises the profit that a person makes, however large it may be, is made only once. The person who lends out money on interest receives, on the contrary, an on-going profit which multiplies with the passage of time. Moreover, however large the extent of the profit made by the borrower from the loaned money it will still be within certain limits, while the claims of the lender in return for this profit are unlimited. It is even possible that the lender may seize the entire turnover of the borrower if he defaults on payment, thus depriving him of all the resources from which he makes his living. It is also possible that even after the lender has seized all the property of the borrower, his claims will still remain unsatisfied.

(3) In a business deal, the transaction ends with the exchange between a commodity and its price. After this exchange has taken place, no obligation remains on either party towards the other. If the transaction is that of rent, the thing rented (e.g. land or building) is not consumed but is rather used and remains intact, and is returned to the owner after a stipulated period of time. In a transaction involving interest, however, what actually happens is that the borrower first spends the loaned funds, then reclaims them with his efforts, returning them to the lender together with a surplus.

(4) In agriculture and industry, and in trade and commerce, one makes a profit after having expended one's effort, intelligence and time. In an interest-bearing transaction, on the contrary, one becomes entitled to a sizeable share in the earnings of others without any toil and effort, by merely allowing someone to make use of one's surplus money. The lender is neither a 'partner' in the technical sense of the term, for he does not share both the profit and the loss, nor is his share in proportion to the actual profit.

[Compiled from “Towards Understanding the Qur’an]