Question

What does “riba” refer to? How do lenders in the Islamic economies work around it?

Answer 1

Riba is a concept in Islam that refers to the notion of, growth, increasing or exceeding. It has also been roughly translated as illegitimate, unequal or unfair gains made in business or trade, under Islamic law.It is also referred to as charging of unfairly high interest rates. It is prohibited under Sharia Law (Islamic religious law) because it is considered to be unfair. Though Muslims agree that riba is prohibited, there is much debate over what actually constitutes riba.

Islamic finance is a way of doing business while keeping in mind Islamic law or sharia. The most important rule in transaction is the ban on interest rates. In economic terms, this means that the lender and borrowers are prohibited from charging or paying interest (riba). Sharia-compliant banks are not allowed to issue interest-based loans. As an alternative of lending money to their clients at a yield, they purchase the original product—the car, house etc and then rent it or re-sell it on instalments to the client for a permanent price which is generally higher than the initial market value. The key idea here is risk sharing—the banks make a profit on the deal as a return for the risk they took with the customer. Instead of successful off of interest rates, Islamic banks use their customers’ money to acquire assets and profit when the loan is successfully repaid.