Understanding Riba: The Prohibition of Usury in Islamic Finance #
From Shariah’s perspective, there are different types of usury (riba). One of the most common and familiar examples of usury among the general public is the imposition of interest over the principal amount of loan. In other words, riba is a predetermined excess or surplus over and above the loan received by the creditor conditionally in relation to a specified period.
For illustration, Mr Zul borrows SGD 100 from Mr John with the agreement that Mr Zul (borrower) will pay SGD 120 to Mr John (money lender) next month. The repayment amount (SGD 120) with an extra SGD 20 above the principal amount (SGD 100) is the basis for associating this activity with usury. We can relate this with the literal meaning of “riba”: excess, increase, augmentation, expansion, or growth.
As Muslims, we must avoid being involved in such illicit transactions. In surah Al-Baqarah (verse 278-279), Allah سبحانه وتعالى says:“O you who believe, fear Allah and give up what still remains of ribā, if you are believers. But if you do not (give it up), then listen to the declaration of war from Allah and His Messenger. However, If you repent, yours is your principal. Neither wrong, nor be wronged.”
Islamic finance fraternities worldwide have continuously strived and exerted their utmost effort to introduce financial products that adhere to Shariah principles (Shariah-compliant). This effort includes formulating Islamic financing facilities as alternatives to conventional loan facilities that helps Muslims abstain from usury, which is sternly warned by Allah سبحانه وتعالى.
The basis of Islamic financing facilities is trading (as opposed to the interest imposed in the conventional loan facilities), which is in line with the spirit of verse 275 of surah al-Baqarah:“…But Allah has permitted trading and forbidden usury…”
