What Is the Islamic View on Money and Interest (Riba)?
Islam places great emphasis on economic justice, fairness, and ethical financial dealings. One of the most critical aspects of Islamic finance is the prohibition of riba (commonly translated as usury or interest). The concept of riba has deep roots in Islamic teachings, as it is mentioned multiple times in the Qur’an and Sunnah, reflecting its seriousness in the eyes of Allah (God, the Almighty, the One who is perfect and exalted above all). To fully understand the Islamic view on money and interest, we need to explore the foundations of wealth in Islam, the meaning of riba, and the modern applications of these principles in today’s financial systems.
The Islamic View on Money
Money as a Medium of Exchange
In Islam, money is not viewed as a commodity to be bought, sold, or traded for profit in itself. Instead, it is considered a medium of exchange, a measure of value, and a store of wealth. Its primary function is to facilitate trade and economic activity. Unlike assets such as land, goods, or labor, money does not inherently create value on its own it is only a representation of value.
This is why Islam does not permit money to generate more money through interest, as it contradicts the principle that wealth must be derived from productive and real economic activity.
Wealth as a Trust (Amanah)
In Islamic teaching, wealth belongs to Allah (God, the Almighty, the One who is perfect and exalted above all), and humans are merely trustees (khalifah) of it. This means individuals are accountable for how they earn, spend, and invest their wealth. The Qur’an emphasizes moderation, fairness, and the avoidance of greed. Wealth should circulate within society rather than being hoarded or accumulated unjustly.
“And spend from what We have provided for you before death approaches one of you, and he says, ‘My Lord, if only You would delay me for a brief term so I would give charity and be among the righteous.’”
(Qur’an 63:10)
Thus, wealth is seen not only as a personal blessing but also as a responsibility to benefit others through charity (zakat), fair trade, and community support.
The Meaning of Riba in Islam
Definition of Riba
Riba literally means “increase” or “excess.” In Islamic finance, it refers to any guaranteed or predetermined profit on loans or debts without an underlying productive activity. Simply put, riba occurs when one party gains money without bearing any risk or effort, exploiting another party in the process.
There are two main types of riba:
- Riba al-Nasiah (interest on loans): This is the most common form and refers to charging extra money for the extension of loan repayment or simply lending money with interest.
- Riba al-Fadl (excess in trade): This occurs when there is an unequal exchange of goods of the same type, such as trading 1 kilogram of wheat for 1.5 kilograms of wheat. It is prohibited to prevent exploitation and ensure fairness in transactions.
Qur’anic Prohibition of Riba
The Qur’an strictly prohibits riba and equates it with injustice and oppression.
- “Those who devour riba will not stand on the Day of Resurrection except like the standing of a person beaten by Shaytan leading him to madness… Allah has permitted trade and has forbidden riba.”
(Qur’an 2:275) - “O you who have believed, fear Allah and give up what remains [due to you] of riba, if you should be believers. And if you do not, then be informed of a war from Allah and His Messenger…”
(Qur’an 2:278–279)
These verses highlight that riba is not just a minor sin but a major transgression that leads to severe consequences.
Hadith on Riba
The Prophet Muhammad (peace be upon him) also strongly condemned riba.
He said:
“Allah has cursed the one who consumes riba, the one who pays it, the one who records it, and the two witnesses to it.”
(Sahih Muslim)
This hadith shows that all parties involved in an interest-based transaction are held accountable.
Why Is Riba Forbidden in Islam?
The prohibition of riba is rooted in the principles of justice, equity, and social welfare. Here are some key reasons why Islam forbids riba:
- Prevents Exploitation of the Poor
Interest-based lending often exploits the needy, who are forced to borrow in times of hardship and end up repaying much more than they borrowed. This creates cycles of poverty and widens the gap between the rich and poor.
- Promotes Risk-Sharing
In Islam, profit should only be earned when risk is shared. For example, in a business partnership (mudarabah), one party provides capital while the other provides labor or expertise, and both share profits and risks fairly. Riba, however, transfers all risk to the borrower while guaranteeing profit to the lender, which is unjust.
- Encourages Real Economic Activity
Islam promotes trade, investment, and entrepreneurship that create value and benefit society. Riba-based transactions, on the other hand, generate wealth without productive activity, leading to financial imbalance and instability.
- Ensures Social Justice
The prohibition of riba ensures that wealth is not concentrated in the hands of a few but circulates within society. This aligns with the Islamic vision of fairness, compassion, and mutual support.
The Islamic Alternative to Riba
Since Islam forbids interest, it provides alternative mechanisms for financial transactions based on fairness and risk-sharing. Some of the most common Islamic financial instruments include:
- Mudarabah (Profit-Sharing Partnership)
One party provides the capital, and the other manages the business. Profits are shared according to a pre-agreed ratio, but losses are borne by the investor unless caused by negligence.
- Musharakah (Joint Partnership)
Two or more parties contribute capital and share profits and losses proportionately. This ensures equity and shared responsibility.
- Murabaha (Cost-Plus Financing)
Instead of giving a loan with interest, the bank purchases an asset and sells it to the client at a marked-up price, with payments made in installments. The markup is agreed upon in advance, making the transaction transparent.
- Ijarah (Leasing)
Similar to conventional leasing, but structured in a Shariah-compliant way. The lessor retains ownership while the lessee benefits from using the asset in return for rent.
- Sukuk (Islamic Bonds)
Unlike conventional bonds that pay interest, sukuk represent ownership in real assets, projects, or investments, and returns are generated from profits rather than interest.
Riba in Modern Context
Conventional Banking vs. Islamic Banking
Conventional banks operate primarily on interest-based loans and credit, which are not permissible in Islam. In response, Islamic banking has emerged as a Shariah-compliant alternative, operating in many Muslim and non-Muslim countries.
Islamic banks avoid interest-based transactions and instead use profit-sharing, leasing, and asset-backed financing. This ensures that banking activities contribute to real economic growth and ethical investment.
The Challenge of Global Financial Systems
Since most global financial systems are interest-based, Muslims face challenges in avoiding riba in everyday life, such as mortgages, student loans, or credit cards. Islamic finance institutions and scholars are working to create alternatives, but accessibility and awareness remain ongoing challenges.