Riba in Islam: Unpacking Riba in the Context of Investing

In Islamic banking, riba means “charging interest,” usury, or high-interest rates. Islam forbids riba because it is unjust, exploitative, and harmful to society. Riba is not allowed under Sharia law for several important reasons, which will be discussed in this article. 

What is Riba in Islam?

Riba is an Islamic word that means “excess” or “increase.” In Islamic finance, Riba refers to any interest or profit gained without providing additional benefits or services.

This includes interest charged on loans and profit made from speculation or gambling. Islam prohibits riba because it is a form of exploitation that can lead to social and economic inequality.

When one party charges interest to another party, they profit from the other party’s need for money. This can create a cycle of debt and poverty that is difficult to escape.

Riba encourages people to be greedy and selfish, and it can lead to a breakdown of the social fabric. Riba is also seen as a form of gambling.

When one party charges interest to another party, they are essentially betting that the other party will not be able to repay the loan. This can lead to financial ruin for the borrower and create a culture of risk-taking that is not in line with Islamic values.

How is Riba Prohibited in the Quran and Sunnah

The prohibition of Riba is mentioned in several verses of the Quran.

The concept of Riba being forbidden stems from the idea that money should not be utilized to take advantage of others and that all financial dealings should be just and impartial. It is also seen as a way to protect the poor and vulnerable from financial exploitation.

The Quran and Sunnah provide a clear and unambiguous prohibition of Riba. There is no room for interpretation or debate on this matter. Muslims are obliged to obey the prohibition of Riba and avoid all forms of financial transactions involving interest.

What are the two main types of Riba?

• Riba al-Fadl (Interest of Excess) is the exchange of unequal quantities of the same commodity. For example, it is forbidden to sell one kilogram of gold for 1.1 kilograms of gold.
• Riba al-Nasiah (Interest of Delay), is the lending of money with the stipulation of receiving an additional amount upon repayment. For example, it is forbidden to lend someone $100 and then demand $110 in return.

Implications of Riba for Halal Investment Practices

The prohibition of Riba has several implications for Halal investment practices.

First, it means that Muslims cannot invest in conventional financial products that involve interest, such as savings accounts, bonds, and certificates of deposit.

Second, it means that Muslims should only invest in Sharia-compliant products, meaning they do not involve any form of Riba.

Examples of Sharia-compliant investments

Mudaraba

Mudaraba is a type of partnership in Islamic finance where one party, the rab al-mal  (literally, “owner of the money”), provides the capital, and the other party, the mudarib ( “manager”), provides the expertise and management skills. The partnership’s profits are shared according to a pre-agreed ratio, and the rab al-mal manages the losses. The mudarabah contract is based on the principle of risk and reward sharing.

Musharaka

Musharaka is a partnership in Islamic finance where two or more parties contribute capital to a common enterprise and share in the profits and losses under their respective contributions. It is a profit-and-loss sharing arrangement, meaning the investors share the venture’s risks and rewards.

Ijara

Ijarah is a type of lease contract in Islamic finance where the owner of an asset, called the mu’ajjir, leases it to another party, called the musta’jir, for a specified time in return for a rental payment, called the Ujrah. The Umrah is typically paid in instalments over the lease period.

Sukuk

Sukuk are Islamic bonds that are backed by assets such as real estate or infrastructure projects. They are a Sharia-compliant alternative to conventional bonds, typically involving interest payments. Sukuk is structured as a profit-sharing arrangement between the issuer and the investor. 

>> Learn more about Sukuk investments

These products are designed to comply with the Islamic prohibition on interest. They allow investors to share in the risks and rewards of an investment, and they are considered more equitable than conventional financial products.

Islam teaches that all financial transactions should be based on fairness and mutual benefit. Riba is seen as a violation of this principle and, therefore, prohibited.

Start investing without Riba on Cowrywise

Halal mutual fund is an inclusive investment option on Cowrywise for Muslims who consider certain social welfare and moral standards when investing. It encourages Muslims to invest responsibly and ethically.

Watch this video on how to start investing the halal way on Cowrywise:

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