What is Riba?

Although Islamic finance is playing a more and more important role in the world, I even didn't know what is different between conventional and Islamic banks. I thought it was not my business as I'd never seen any Islamic bank in Korea.

Things are always changing though. I happened to come to Malaysia and this country is closely connected with Islamic banks. It's time I needed to know at least what it is!

I asked my Thai friend if she knew anything about it and she said there's something different in their interest system. I found out later that it was about riba, which is one of the most crucial concepts in Islamic finance.

Then what is Riba?

Literally, riba means ‘excess’ or ‘increase’ in the Arabic language, which is also thought to be ‘effortless profit’ in the Islamic terminology and translated into ‘interest’ in English. However, riba is so much more than what I mentioned above in fact. There are a number of opinions about the definition of riba, depending on scholars, and the meaning seems to be too general and indefinable, so we are going to have a look at it from the different angle in order to get a better understanding of what riba is by explaining 1) why riba is prohibited in Quran and 2) why a profit in the Islamic banking is not riba.


1) why riba is prohibited in Quran

In the conventional economics, a loan is considered a means to make greater economic benefits. That is why the lender returns to the borrower more and better than the quantity borrowed in compensation for the time value of their money.

However, it is assumed that those who are in difficulties borrow a loan to get out of the situation in the Islamic economics. In other words, what Quran prohibits is not ‘riba’ itself but the worse result which can be happened to the borrower not being able to pay back. This is the reason why riba is not accepted in Quran.


2) why a profit in the Islamic banking is not riba

Nevertheless, a profit called interest in the western banking still exists in the Islamic banking and it is one of the vital sources which allow the Islamic bank to run the business smoothly. Then why is the profit in the Islamic banking not riba?

While the borrower has to take the risk of the lender by paying them the interest in the conventional economics, the borrower and lender share not only the profit but also the risk as a partner in the Islamic economics. Moreover, either a product or a service must be delivered in Islamic banking transactions so that the profit is not riba anymore, but just a profit from their investment in the partnership.


It is true that the definition of riba has similarities to interest in some ways but we can find the certain differences between them and when the reasons, why riba is prohibited in Quran and why a profit in the Islamic banking is not riba, are taken into account, we can get a better understanding of the definition of riba.