Concept of Riba in Islamic Banking

One of the principles of Islamic banking is the prohibition of Riba (usury). This is because Islamic banking operates on the basis of Sharia laws of banking that are against the payment and acceptance of interest. In Islam, transactions that involve exchange of money for money must obey Divine Instructions and riba is prohibited in the Quran.

Islamic Banking: Riba in the Holy Quran

The holy Quran defines riba as some kind of increase in the loan amount. As per traditional views, the term ‘riba’ is interest, which the lender charges from the borrower above the loan amount for advancing the loan. Centuries ago, the riba was prohibited in Christianity and Judaism as well. The prohibition of Riba was later abolished by the clerics of the Jews and by the Christian Church. However, Islam upheld the virtuous prohibition of riba. Note that Riba is not practiced at government level in any of the Islamic countries but Muslims are quite enthusiastic about Riba-Free financial system. A number of western economists have opined people’s conscience should be awakened towards this religious prohibition.

Islamic Banking: Arguments Against Riba

Some people have even argued that Islam only prohibits excessive interest. Some even say that interest is prohibited on consumptive loans and not on loans for commercial purposes. These tendentious opinions fail to justify verses 278 and 279 of Surah Al-Baqarah.

“O ye who believe! Be afraid of Allah and give up what remains (due to you) from Riba (usury) (from now onwards) if you are (really) believers! 2:278.

And if you do not do it, take notice of war from Allah and His Messenger! But if you repent, you shall have your capital sums 2:279.”

The heart of Islamic banking lies in promoting ethical and fair practices in commercial transactions. The mode of such transactions should be ‘Halal,’ that is free from anything which is objectionable and loathsome. Islamic economies aim towards ensuring equal distribution of rewards among the various factors of production.