What is Riba?
The word “Riba” means excess, increase or addition. According to shariah, it is any excess compensation without due consideration.
Example of Riba: If a man takes a loan from a bank and he pays back the loan to with a percentage increase over the principal amount.
The Quran does not indicate any particular type of riba, but the Muslim scholars have explained two types of riba. It is based on the Quran and an of Ahadith of the Prophet Muhammad (saw).
The first type of Riba is:
Riba in loan contract (Riba al-Nasiyah)
It is also known as Riba al Jahiliya. This was specified in the Quran before the sayings of the Prophet Muhammad (saw). Therefore; it was termed as Riba al Quran. It is defined as excess resulting from pre-fixed interest which a lender gets over and above the borrowed money.
The second type of Riba is:
Riba in sale or exchange contract (Riba al-Fadl)
It is also known as Riba An Naqd or Riba Al Bai. It is not directly mentioned in the Quran, but can be understood through ahadith. Therefore, it is also called Riba al Hadith. It is defined as excess compensation without any consideration which results from a sale of goods. It occurs in a sale or exchange of a commodity. The Prophet (saw) has classified it as riba in this hadith:
“Gold for gold, silver for silver, wheat for wheat, barley for barley, date for date, salt for salt, must be equal on both sides and hand to hand, whoever pays more or demands more (on either side) indulges in Riba” [Sahih Muslim].
According to this hadith,
- The commodities must be exchanged on the spot. It means that commodities should be exchanged at the same time and none of the commodity should be delayed.
- Similar commodities must be equal in quantity. The commodities must be equal in quantity during the exchange transaction.
For example, If A gets 1000 kg wheat from B but he has to pay 1200 kg of dates at a later date then this will be Riba Nasi’ah al-fadl.
Riba al-Fadl comes into existence in a sale transaction which involves the exchange of one ribawi commodity (mentioned in above Hadith) for the same type of commodity but the different amount of weight.