Concept of Riba in Islam (Islamic Banking)

Riba can be roughly translated as "Usury", or unjust, exploitative gains made in trade or business. Riba is mentioned and condemned in several different verses in the Qur'an (3:130,4:161, 30:39 and perhaps most commonly in 2:275-280). It is also mentioned in many Hadith. Though it is believed that only the religion Islam has prohibited or discouraged it, but it is also prohibited or hardly discouraged through the Old Testament [1] (i.e., set of holy books granted to follow in Judaism and Christianity) which is cited here, “And in case your brother grows poor so he is financially weak alongside you, you must also sustain him. As an alien resident and a settler, he must keep alive with you. Do not take interest and usury from him, but you must be in fear of your God; and your brother must keep alive with you. You must not give your money on interest, and you must not give your food out on usury.”(Leviticus 25:35-37) While Muslims agree that Riba is prohibited, there is disagreement over what it is, with many but not all scholars equated it with any interest charged on loans. There is also disagreement over whether it is a major sin and against sharia (Islamic law), or simply discouraged (makruh).  Riba is also applied to a variety of commercial transactions. Most Islamic jurists describe two kinds of Riba.

• Riba an-nasiya: an excess (riba) charged for a loan in cash or kind.
• Riba al-Fadl: the simultaneous exchange of unequal quantities or qualities of a given commodity.

For example the following Hadith, agreed upon by Bukhari and Muslim, clearly states that riba cannot exist in on-the-spot transactions:

“It is reported from Usamah bin Zayd that the Messenger of God said: "There is no riba in what is hand to hand (on the spot)".

Quran and prohibition

The Qur'an deals with riba in 12 verses, the word appearing eight times in total, three times in 2:275, and once in 2:276, 2:278, 3:130, 4:161 and 30:39.

The Mekkan verse in Surah Ar-Rum was the first to be revealed on the topic:

And whatever Riba you give so that it may increase in the wealth of the people, it does not increase with God (Quran 30:39)

The other Medinan verses:

And because of their charging Riba while they were prohibited from it (Quran 4:161)

Those who believe do not eat up Riba doubled and redoubled (Quran 3:129-130)

Culminating with the verses in Surah Baqarah:

Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the Devil; this is because they say: "Trade is like interest" while God has permitted trade and forbidden interest…God deprives interest of all blessings but blesses charity.... O believers, fear God, and give up the interest that remains outstanding if you are believers. If you do not do so, then be sure of being at war with God and His messenger. But, if you repent, you can have your principal.... (Quran 2:275-280)

According to Youssouf Fofana, jurists do not consider the first two verses as clear prohibitive verses on the matter, whereas the latter two have been understood to prohibit Muslims from riba. Tabari quotes a number of Tabi'een, who state the verse from Surah al-Rum refers to a gift, whereas al-Jawzi quotes Hasan al-Basri as stating it refers to riba. Thus, there is insufficient indication from this verse that riba is prohibited.

• The second verse (4:161) refers to the Jews and their taking of riba, which leaves it unclear if such a prohibition applies to the Muslims.
• The next verse (3:129-130) is seen by many as prohibiting riba, including Ibn Hajar al-Asqalani (a medieval Shafiite Sunni scholar of Islam).[31] However it appears that recourse to some traditions relating to Amr ibn Aqyash are required for the prohibition as the verse itself could be interpreted as expressing a preference against interest.
• The verses from Surah Baqarah (2:275-280) are seen by Fofana and others as categorically forbidding riba. The backdrop to these verses was the dispute between two clans, Banu Thaqif and Banu Amr ibn al-Mughirah, over riba due on loans between them. As such, the jurists historically agreed on the prohibition of riba from these verses and termed it riba al-nasia, distinguishing it from the interest in exchanging like goods in different quantities at the same time, mentioned in a number of narrations, riba al-fadl.

Conservative scholar Mohammad Nejatullah Siddiqi, interprets Quranic verses (2:275-280) to mean that riba is not only "categorically prohibited" and "unjust" (zulm), but is defined as any payment "over and above the principal" of a loan. Modernist Mohammad Omar Farooq argues that the Quran condemns riba but does not define it. Raquib Zaman notes that the only figures or only definition for riba given in the Quran are "doubling and quadrupling (the sum lent)" in Quran 3:129-130.

Hadith and prohibition

Riba is mentioned in a number of Hadith (the body of reports of the teachings, deeds and sayings of the Islamic prophet Muhammad).  According to Mohammad Omar Farooq, "it is commonly argued that riba is defined by Hadith.

In Muhammad's (P.B.U.H) farewell sermon he is reported to have said:

"God has forbidden you to take Riba, therefore all riba obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer inequity. God has judged that there shall be no riba and that all the riba due to `Abbas ibn `Abd al Muttalib shall henceforth be waived.” 

Several narrators including Jabir Abdul Rahman ibn Abdullah ibn Masoud Abdullah say that

Muhammad (P.B.U.H) cursed the accept-er of usury and its payer, and one who records it, and the two witnesses, saying: They are all equal. (Abdullah, however, could not swear to the cursing of the 'and the writer and the two witnesses)

Examples of Hadith denouncing what jurists call Riba al-Fadl include:

• Narrated Abu: We used to be given mixed dates (from the booty) and used to sell (barter) two Sas (of those dates) for one SA (of good dates). The Prophet said (to us), "No (bartering of) two Sas for one SA nor two Dirhams for one Dirham is permissible", (as that is a kind of usury). (See Hadith No. 405).
• Narrated 'Umar bin Al-Khattab: God's Apostle said, "The bartering of gold for silver is Riba, (usury), except if it is from hand to hand and equal in amount, and wheat grain for wheat grain is usury except if it is from hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount, and barley for barley is usury except if it is from hand to hand and equal in amount.". 
• Narrated Ibn 'Umar: Muhammad said, "The selling of wheat for wheat is Riba (usury) except if it is handed from hand to hand and equal in amount. Similarly the selling of barley for barley, is Riba except if it is from hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount.
• Narrated Abu Hurayrah: Muhammad said: If anyone makes two transactions combined in one bargain, he should have the lesser of the two or it will involve usury. 

The gravity of committing riba is reported to have been described by Abu Huraira:

Narrated Abu Huraira: The Prophet said, "Avoid the seven great destructive sins." The people inquire, "O God's Apostle! What are they? "He said, " To associate others in worship along with God, to practice sorcery, to kill the life which God has forbidden except for a just cause, (according to Islamic law), to eat up Riba (usury), to eat up an orphan's wealth, to give back to the enemy to flee from the battlefield at the time of fighting, and to accuse chaste women who never even think of anything touching chastity and are good believers." 

According to Sunan Ibn Majah, the Islamic prophet Muhammad (P.B.U.H),

declared the practice of riba worse than "a man committing zina (fornication) with his own mother”.

Raqiub Zaman notes that when riba is described in hadith literature, it is "in the context of sales", with "no mention of loan (qard) or debt (dayan) (i.e. the bartering of dates, wheat, gold, etc. is riba al-fadl not riba an-nasiya). According to the mufti of Egypt, Dr. Muhammad Sayyid Tantawy, there is nothing in the Quran or Hadith that prohibits the pre-fixing of the rate of return, as long as it occurs with the mutual consent of the parties.