Riba (Interest or usury)

In plain words

Two friends each give a third friend 10,000 to open a coffee shop. The first says: pay me back 10,800 next year, whether the shop does well or not. The second says: I am your partner, and we split whatever profit the shop makes. Both expect a return. Only the first is guaranteed one, without owning anything or sharing any risk. In Islamic law, that guaranteed extra 800 is riba.

Riba is usually translated as interest or usury. Precisely, it is any increase on a loan of money agreed in advance, and any increase on a debt in return for more time to pay. The rate does not matter. Money is treated as a measure of value, not something that earns just by being lent.

A financier may profit by buying and selling real goods, renting out assets it owns, or sharing a business’s actual results. That is why the Islamic contracts exist: murabaha, tawarruq, ijara and musharaka. This page also covers the two other core prohibitions, gharar and maysir.

How it works

How a financier earns without riba

The same customer need, financed so the return is tied to an asset or a real risk.

1. 1

   Start from the real need

   A car, a home, stock for a shop. The question is what is being bought, not only how much cash is needed.

2. 2

   Pick a contract that fits

   A sale, a lease, a partnership or a fee for a service. Each creates a different kind of return.

3. 3

   The financier owns or shares the risk

   It buys the asset before selling it, keeps owning what it rents, or puts capital at risk. This step separates profit from riba.

4. 4

   The debt never grows

   An agreed sale price stays fixed even if the customer pays late. Any late charge typically goes to charity.

Animated diagram

The same 10,000 three ways: lent, used in a sale, or invested as a partner

Swipe sideways to see the whole diagram.

1. The lender hands over cash. The bank in a sale buys a real car. The partner puts money into a shop.
2. Ownership decides who carries risk. The borrower owns what the cash buys; the bank owns the car until it sells it; the partners own the shop together.
3. Lender and seller both receive 10,800, but only the lender’s claim can grow. The partner shares real profit, or loss.
4. The numbers can match a loan. The ownership step and the fixed debt make the difference.

The word and where it comes from

In Arabic the word is ربا, pronounced RI-ba, from the root r-b-w, ر ب و, meaning to increase or grow. In finance it is the increase a lender takes on top of the amount lent.

In pre-Islamic Arabia a creditor would offer a debtor a choice at maturity: pay now or owe more later. Scholars call this riba al-jahiliyya, the clearest case of the prohibition.

Where the prohibition comes from

Riba is prohibited in the Quran, in the Sunna (the reported sayings and practice of the Prophet Muhammad) and by the agreement of classical scholars. The passage most often cited is verses 2:275 to 2:279. In summary: God has permitted trade and forbidden riba; believers should give up riba still owed and keep only their capital, neither wronging nor being wronged. Verses 3:130, 4:161 and 30:39 are also cited.

“Trade is permitted and riba is forbidden” is the key: a credit sale at a higher price and a loan are different in kind, even when the cash flows look alike.

A widely reported hadith in Sahih Muslim names six items: gold, silver, wheat, barley, dates and salt. In paraphrase, each must be exchanged like for like and hand to hand; when the kinds differ, the amounts may differ, but delivery must still be immediate.

The two kinds of riba

Riba al-nasi’ah is what most people mean. In the mainstream view, interest on a personal loan, a mortgage, a savings account or an overdue card balance are all forms of it.

Riba al-fadl sounds archaic but matters for modern products. The classical schools disagree on why the six items were chosen and how far the rule extends. Most contemporary scholars and standard setters, including AAOIFI, apply the gold and silver rule to today’s currencies. ¹

• Currency exchange must be spot. Dirhams for pounds at any agreed rate is fine if both sides are delivered at the time of the deal. AAOIFI’s standard on trading in currencies sets out the rule. ¹
• Forwards are not accepted by most scholars, because the rate is fixed today and both currencies move later. Islamic treasuries hedge with a one-sided promise (wa’d) instead.
• Remittance and FX apps should not lock a rate while the customer’s money arrives days later without a reviewed structure.
• Gold products need real, allocated gold and immediate possession, physical or constructive.

Why profit from trade and rent is allowed

Time value: allowed in a price, not in a loan

Most scholars accept that a seller may charge more for a credit sale than for cash. A car priced at 10,000 cash may be sold for 10,800 over a year,. What cannot happen is the debt growing afterwards: no extra for late payment, no compounding. This is why a profit rate can track EIBOR, SAIBOR or SOFR. The contract, not the number, decides whether it is riba.

Illustration

The three core prohibitions and what each rules out

Swipe sideways to see the whole diagram.

Gharar: excessive uncertainty

Gharar, غرر, means hazard. A contract has prohibited gharar when something essential is unknown: what is sold, its quantity or quality, the price, or whether and when it will be delivered. Minor, unavoidable uncertainty is tolerated.

• Insurance became takaful. Most scholars see a conventional policy, a premium for a payout that may never come, as gharar, with elements of maysir and riba in its investments. In takaful (تكافل, mutual guarantee) participants donate to a shared fund that pays claims, run by an operator for a fee or profit share.
• Options and many derivatives. Most standard setters do not accept trading conventional options and futures. Islamic hedging uses promises and real exchanges, documented under the ISDA and IIFM Tahawwut master agreement.
• Permitted exceptions. Salam (paying now for goods delivered later) and istisna (ordering something to be made) are allowed because goods, price and date are precisely specified.

In fintech, gharar looks like vague fees, prices changeable at will, or tokens with unclear rights.

Maysir: gambling and speculation

Maysir, ميسر, is gain from pure chance, where one side’s win is the other’s loss and nothing productive happens in between. The Quran prohibits it, for example in verse 5:90. It excludes betting and lotteries. What matters is whether a return comes from real activity or a bet.

• Prize-linked savings. Products like the UK’s Premium Bonds pay prizes instead of interest, which many scholars see as raising both riba and maysir. Some Islamic banks give unpromised prizes on current accounts as a gift (hiba); some scholars accept this, others do not.
• Crypto trading. Scholars differ on whether spot trading of major cryptoassets is permissible. There is wider agreement that interest-funded margin, perpetual futures and options-style products raise concerns.
• BNPL late fees. Interest-free instalments are not maysir. The risk is riba: a fee that grows with delay increases a debt. Some Sharia-reviewed plans charge no late fee; others charge a fixed fee covering actual costs or given to charity.

How it differs from conventional finance

How each bank earns money

A conventional bank owes depositors their money plus interest, whatever happens to its loans, and earns the spread.

An Islamic bank usually treats current accounts as a qard, a loan from the customer: repayable in full, with no return. Savings and investment accounts use mudaraba or wakala: the bank invests a pool and shares actual profit at an agreed ratio, or takes an agency fee, showing an expected rate, not a promised one. On financing, it earns sale profit, rent and partnership shares. The economics can look similar; the legal relationships and risks differ.

A map of Islamic alternatives

Tawarruq is the most debated item: AAOIFI accepts it under strict conditions, while the OIC International Islamic Fiqh Academy has rejected organised tawarruq. Each structure still goes to a Sharia board.

Is modern bank interest riba?

The mainstream answer is yes. In 1985 the OIC’s International Islamic Fiqh Academy ruled that any increase on a loan, or on a debt for more time, is riba, and urged trade-based financing instead. AAOIFI, most national Sharia authorities and the Islamic banking industry rest on this view.

A minority view exists. Some modernist scholars argued the Quran targets exploitative, multiplying debt rather than moderate interest. The best-known example is a December 2002 opinion of Al-Azhar’s Islamic Research Academy, endorsed by Sheikh Muhammad Sayyid Tantawi, accepting a pre-set return on money a bank invests for the depositor. Many scholars rejected it. This page describes both views without taking a side.

Across the Islamic world and beyond

Saudi Arabia

All banks are licensed by SAMA under one banking law, with no separate Islamic licence. In practice Islamic finance dominates retail banking, and banks have Sharia committees under SAMA’s governance rules. A Riyadh wallet adding a salary advance would need a Sharia-reviewed structure.

United Arab Emirates

A dual system of conventional banks, Islamic banks and Islamic windows. The Higher Sharia Authority at the Central Bank of the UAE, approved in 2016 and set up in 2017, issues standards binding on licensed Islamic institutions. ² A Dubai remittance app offering an Islamic account must follow them in its own structure.

Bahrain and Malaysia

Bahrain hosts AAOIFI, and its central bank requires Islamic banks to follow AAOIFI’s Sharia standards. Malaysia runs a dual system under the Islamic Financial Services Act 2013, with a Shariah Advisory Council at Bank Negara Malaysia whose rulings bind institutions and courts. ³

Pakistan, Iran and Sudan

In April 2022 Pakistan’s Federal Shariat Court declared interest-based banking un-Islamic and set the end of 2027 to eliminate riba. ⁴ A 2024 constitutional amendment set the target of 1 January 2028, as far as practicable; some bank appeals remain pending. Iran moved its whole system to usury-free banking under a 1983 law. Sudan ran a fully Islamic system for decades and announced a return to dual banking in 2021.

United Kingdom and the EU

Interest is legal; riba is a religious rule. UK Islamic banks are authorised like any other bank, and alternative finance tax rules remove double stamp duty on home purchase plans. Continental Europe has no specific framework. A Lithuanian EMI wanting an Islamic account must consider that customer money is safeguarded at banks, where it may earn interest.

Where riba hides in a fintech product

Example: a Gulf wallet adds an Islamic savings pot

Common misconceptions

FAQ