Shariah (Islamic law) is a body of divine regulations from the Most High, designed to safeguard human interests. Islam places high value on the well-being of society, even when it comes at the temporary expense of individual interests. Among the core objectives (maqāṣid al-sharīʿah) is the protection of property and wealth from unlawful possession or consumption. In line with this objective, Shariah prescribes specific rules, one of which is the prohibition of ribā (interest) in commercial transactions.
Ribā is an Arabic word that literally connotes “increase,” “addition,” or “growth.” In shariah realm, it refers to interest or usury in commercial transactions. Technically, it refers to unequal exchange of commodities or a ‘premium’ that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity. Scholars define riba as an increase or excess which, in an exchange or sale of a commodity, accrues to the owner (lender) without giving in return any equivalent counter-value or recompense to the other party. Notably, conventional banks’ loan is an illustrative form of ribā in today world economy.
Historically, ribā can be traced back to pre-Islamic Arabia era, where the rich exploited the poor by charging unfair interest rates. Transactions during this era often involved fixed repayment periods with high interest and rampant speculation which formed essential elements of their trades. A debtor who could not repay the debt i.e., money or goods, with the accumulated interest at the time it fell due was given an extension of time during which to pay, but at the same time the sum due was doubled. This exploitative practice was explicitly prohibited in Islam by Allah through various Qur’anic revelations.
Numerous Qur’anic and Prophetic texts forbid all forms of ribā, describing it as injustice and exploitation, and ranking it among the gravest sins. In Qur’an 2:275, Allah states:
“Those who devour ribā will not stand except as one whom Satan has driven to madness by his touch. That is because they say: ‘Trade is like ribā,’ but Allah has permitted trade and forbidden ribā…”
It was reported that the Prophet said in his farewell speech regarding interest:
“Allah has forbidden you to take usury (interest); therefore all interest obligations shall henceforth be waived. Your capital is yours to keep. You will neither inflict nor suffer any inequity. Allah has judged that there shall be no interest” (Al-Sirah al-Nabawiyyah, vol. 2, Beirut, 1996, p.603).
Furthermore, Riba is not limited only to an increase in loan contract, which is imposed due to delay in payment of such loan. However, Riba can occur in exchange or sale of commodities. Muslim scholars of fiqh(jurisprudence) has classified Riba into two types based on general provisions for prohibition of Riba in the Quran and Hadith. They are:
This form of riba is declared haram (illegal) which should not be engaged in based on different grounds. Importantly, Islamic finance considers money purely as a medium of exchange, not a commodity that can generate profit by itself. In other words, money is used to facilitate a trade and not a tradeable commodity capable of yielding profit on its own. Ibn al-Qayyim (d.751 AH) states: ““Money is never sought for itself; rather, it is used as a means to gain other assets” [‘Iʿlām al-Muwaqqiʿīn]. Similarly, Imām al-Ghazālī (d. 505 AH) stated: “Currencies act as a gateway to all other assets; they hold value inherently yet are not sought for their own sake.” (Iḥyāʾ ʿUlūm al-Dīn). This principle underlies the prohibition of Ribā, as it emphasises that money should not generate additional value via fixed interest payments, simply by being put in a bank or lent to someone else. Essentially, money requires an external factor such as labour, a service, or an asset to yield profit.
In the conventional banking system, it is evident that money granted as a loan is not treated as a medium of exchange but an asset that is capable of yielding on its own without being paired with any external factor. Though, consent is an essential element of a contractual agreement. However, the fact that a borrower give a consent to the transaction by agreeing to pay the interest without any external factor from the financier does not validate a riba-based transaction. According to a tradition of the prophet which was narrated by Jābir bn Abdillah, he said the prophet cursed who accepts Riba, who pays it, who records it, as well as the witnesses as they are all equal in committing the sin.(Reported by Imam Muslim).
Essentially, the significance of prohibition of any form of interest as it affect economic development can be well seen in the word of President Obasanjo who said after the G8 summit in Okinawa in 2000: “All that we had borrowed up to 1985 or 1986 was around $5 billion and we have paid about $16 billion yet we are still being told that we owe about $28 billion. That $28 billion came about because of the injustice in the foreign creditors’ interest rates. If you ask me what is the worst thing in the world, I will say it is compound interest.” This statement illustrates the negative effect of interest in the Nigeria economy. It was reported by UN GCRG- technical team calculations, based on IMF World Economic Outlook (2024) and World Bank World Development Indicators that “3.3 billion people live in countries that spend more on interest than education or health”. This record indicates that the amount paid by loan debtors for accrued interest on loan is more than that which has been spent on education and health in Africa, Asia and Oceania, Latin America and Caribbean among others.
Significantly, Islam allows only one kind of loan which is called Qard hasan (literally known as benevolent loan), whereby the lender does not charge any interest or additional amount over the money lent. However, optional gift from a borrower to the lender is permissible in Islamic finance, provided that it is not predetermined and not stipulated by the lender. Something coming out of the goodwill of the borrower as a form of showing gratitude to the lender is allowed and even encouraged. This is regarded as Husnu qodō in shariah and it was even practiced by the noble prophet on different occasions. Jābir bn Abdillah narrated that “ I went to the prophet while he was in the mosque. After the prophet told me to pray two Rakat, he repaid me the debt he owed me and gave me an extra amount (Sahih Bukhari)
2-Riba Al fadl: This form of riba occurs in sale or exchange transactions and was prohibited by the prophet in several traditions. It involves an immediate exchange of unequal quantities of the same commodity (e.g., gold, silver, wheat, barley, etc.). It is described as the riba of surplus in exchange of commodities of the same class. While explaining this type of riba, Ibn al-Qayyim said: “any extra given in a deal that exchanges quantities of the same kind that is determined by measure or weight is usurious and forbidden, even though the exchanged quantities of the same kind may differ in quality.[‘Iʿlām al-Muwaqqiʿīn].
Therefore, in simple terms, when two commodities which are of the same category(sinf) and class(jins) are exchanged for each other, two conditions must be met which are; they must be of same quantities and must be exchanged on the same spot regardless of varieties in their qualities. For example, if Mr A has 2kg of a foreign rice and wishes to exchange with Mr B to get a local rice, Mr B must also give a local rice of 2kg without any surplus and the exchange must take place on the same spot, meaning at the same time without any deferred delivery .
This form of riba has been prohibited in different traditions of the prophet. Ubadah bn As sāmit narrated that the messenger of Allah said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, the like for the like, hand to hand (i.e., immediate sale), (but) if the kinds differ, then sell as you may like it from hand to hand”. Deductively, while relying on this hadith, the Zāhiri school of though among others opined that commodity riba is limited only to the items mentioned by the prophet. Conversely, the Majority of scholars (Jumhur) are of the view that other items with similar characteristics shall be regarded as secondary items.(i.e Other medium of exchange currencies can replace Gold and Silver while other varieties of food such as Rice, beans, grains can stand on behalf of the four varieties of food mentioned in the hadith.
From the aforementioned hadith of Ubadah, the following illustration demonstrates the principles in exchange of commodities:
i. Exchange of same commodities: In this form of exchange, the two conditions must met unless the transaction will be regarded as a Riba. For instance, if a wheat is exchanged for another wheat, they must be of the same quantities and must be exchanged at the same time without any delay from any of the party.
ii. Exchange of different commodities: In this form of exchange, only the condition of spot transaction is applicable. For instance, if rice is exchanged for beans, the quantity of the rice and beans can be different since they are different commodities. However, they must be exchanged at the same time.
Furthermore, in an exchange transaction, the conditions must be met in order to avoid it being a riba-based transaction. However, in the alternative, to make the transaction Halal, cash can be obtained from the sale of the possessed commodity in order to get the other one at any quantity or quality. Also, in a loan transaction, Allah in Qur’an 2:280 urged creditors to deal justly and fairly with debtors. And, in the event of debtors unable to pay their debt, the creditors are asked to either give up even for claims arising out of the past on account of riba, give time for payment of principal if a
debtor is in financial difficulties or, to write off the debt altogether as an act of charity.
In conclusion, prohibition of Riba in its two forms is an underlying principle of Islamic finance. It is imperative to add that Islamic financial institutions (Banks) do not in any way engage in riba-based transactions even if there are misconceptions about their operations. Instead, they develop different products and services which are designed to gain profit and as well promote socio-economic justice and ethical values in business transactions. These products include Mushārakah(Partnership), Mudārabah(Profit Sharing contract), Murābaha(Cost-plus sale), Ijārah(Lease-based contract ), Salam(advance payment), Sukuk(Islamic Bond) etc (all of which shall be explained subsequently). Islamic Law prohibits paying or earning interest, irrespective of whether it is a soft development loan or a monthly consumption loan. A single interest-based loan may seem inconsequential, but a system built on ribā can result in widespread economic hardship and systemic injustice.
Imam-Fulani Jamiu Olarewaju is a 300 Level student of Common and Islamic Law in the prestigious Faculty of Law, Bayero University, Kano, Nigeria. He is a Researcher, Writer, Tutor, Educator and Islamic Banking and Finance Enthusiast. He could be reached via 0901 881 9182 or imamfulanijamiu@gmail.com
