This is a definition of ribâ by scholars Mohammad Fadel, Associate Professor and Canada Research Chair for the Law and Economics of Islamic Law, University of Toronto Faculty of Law and Ibrahim Warde, Carnegie Scholar and Adjunct Professor of International Business, The Fletcher School, Tufts University.
Short definition: ribâ: “unjust enrichment” (p. 655)
Long definition: There are significant differences of interpretation and application of the term ribâ and its commonly translated understanding in English as interest or usury. Below are a list of sub-terms useful to getting a better idea of the complexity and context-specific nature of ribâ in Islamic legal understanding.
The prohibition against ribâ is called ribâ al-fadl, which is the ribâ of excess.
“The basic prohibition . . . derives from a statement attributed to the Prophet Muhammad in which he:
prohibit[ed] the sale of gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, unless it is the same [quantity] for the same [quantity] or the thing [itself] for the thing [itself], and that whosoever gives an increase or receives an increase, has committed ribâ [of excess].” (p. 661)
There is another aspect to the definition, the basic prohibition of the ribâ of delay.
“Just as Islamic law established commodity-specific restrictions on spot transactions, it also placed limitations on the terms on which certain commodities could be traded on a deferred basis. This set of prohibitions is also based on a statement attributed to the Prophet Muhammad in which he is reported to have said:
“[Trading] gold for gold is ribâ unless [delivery is] hand-to-hand; [trading] wheat for wheat is ribâ unless [delivery is] hand-to-hand; [trading] dates for dates is ribâ unless [delivery is] hand-to-hand; [trading] barley for barley is ribâ unless [delivery is] hand-to-hand.” (p. 663)
There are aspects of ribâ that are acceptable in many schools of Islamic jurisprudence. Among them are:
qard, a loan. This understanding has a charitable component (tabarru‘). In this framework, the originator of the loan needed to be able legally to engage in charity. There was no loan due date, or one that was enforceable, which seemed to make it acceptable to the Maliki, Hanafi, and Shafi‘i schools of Sunni jurisprudence. “A qard is a morally meritorious (mandub) act because it is a form of ‘cooperation in piety and kindness.’” (p. 666, 666 n.54)
Ibrahim Warde. 2012. Ribâ, Gharar, and the Moral Economy of Islam in Historical and Comparative Perspective. In Islamic Finance in the Global Economy (52–64). Edinburgh Scholarship Online.
Short definition: ribâ: “any unlawful or undeserved gain derived from the quantitative inequality of the counter-values” (p. 52)
Long definition: There are significant differences of interpretation and application of the term ribâ and its commonly translated understanding in English as interest or usury. However, strictly speaking, it means “increase.” Therefore, ribâ does not encompass all interest, and it can include other things besides interest. In reality, ribâ refers to any ill-gotten gain procured through the exchange of money. Below are a list of sub-terms useful to getting a better idea of the complexity and context-specific nature of ribâ in Islamic legal understanding.
One type of ribâ is called ribâ al-fadl, the ribâ of excess, “which is produced by the unlawful excess of one of the counter-values.” (p. 52)
Another variety of ribâ is ribâ al-nasia, the ribâ of delay. It “is produced by delaying completion of the transaction in exchange for an increase of the counter-value.” (p. 53)
The third type of ribâ identified by early Islamic scholars ribâ al-jahiliyya, of pre-Islamic ribâ. This referred to a practice, which pre-dated Islam, in which a creditor would agree to extend the due date for a loan in exchange for doubling the amount owed. This process would happen repeatedly until it eventually led to the debtor’s enslavement.
In order to understand why ribâ is forbidden, it is important to examine it within the context of the moral economy of Islam:
“The broad ethical-economic system emphasizes fairness and productivity, honesty in trade and fair competition (Koran 17:35; 26:181–3), the prohibition of hoarding wealth and worshipping it (Koran 104:2–4), and the protection of human beings from their own folly and extravagance…”
As for the ethical-economic justification for the prohibition of ribâ, it is three-pronged: ribâ is unfair, it is exploitative, and it is unproductive. Under a traditional interest-based relation between borrower and lender, the borrower alone either incurs the losses or reaps disproportionately high benefits. Conversely, the lender makes money irrespective of the outcome of the business venture. Islam prefers that the risk of loss be shared equitably between the two.” (p. 60)