The Concept of Riba and 3 Main Consequences of Riba From Islamic Perspective

Islam forbids the adoption of interest (riba) due to the negative consequences that come with it. There is a strong bond between interest and conventional finance. Interest is the most important component of traditional finance. However, Islamic banking and finance must follow Shariah principles guided by Islamic law, which prohibit the use of interest (riba) in any financial transactions.


The Concept of Riba

Riba is an Arabic word, meaning usury or interest in English. In Islamic banking, riba refers to charged interest. It has also been referred to as usury, or the charging of unreasonably high-interest rates. Muslims are not allowed to earn income from lending money or borrowing money from someone. This means that earning interest (riba) is not allowed – whether you are an individual or a bank. There is also another form of riba, according to most Islamic jurists, which refers to the simultaneous exchange of goods of unequal quantities or qualities. It is an arrangement that exploits the poor by continuously tapping them into the growing debt while the rich increase their wealth without creating any value. It expands the gap between the rich and the poor.

There are several verses in the Holy Quran and a number of Hadiths that strongly convey the strict prohibition of it. In the Quran, Allah says: “Those who eat Riba (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaytan (Satan) leading him to insanity” (Baqarah: 275).

There are a few reasons for the prohibition of riba. Here we briefly explain the three consequences of riba for you:

1. Riba is Foundation of Injuctice

When a person borrows money, it indicates that the person is in the need of the fund. By charging interest, the lender places an additional burden on the borrower, which is unfair. Interest is a mechanism used by wealthy individuals to generate more money at the expense of the poor, and it promotes inequitable wealth redistribution.

2. Riba Damages Society

Islam emphasizes the significance of public interest, while riba is only beneficial to the lender. Riba exploits the poor and needy people. The wealthy creditors deferred their current earnings in order to profit from the interest on the loans given to needy debtors in the future. As a result, it raises the creditor’s future wealth while decreasing the debtor’s future profits. It is a complete act of exploitation that will increase poverty among the poor.

3. Riba Creates Negative Economic Growth

Riba does not indicate that the money is being used productively. The need to pay the additional charge, interest, causes the borrower to cut back on consumption, lowering demand for goods and services. As a result, there will be a negative outcome. Furthermore, riba destabilizes the economy to some extent. An increase or decrease in an interest rate corresponds to the ups and downs of the economy.

These are the three consequences of riba. Shariah prohibits riba to encourage Muslims to make financial decisions correctly and lawfully. Also, it aims to safeguard Muslims’ wealth from being taken unfairly and to eliminate hatred, evils, and promote justice.

How to Avoid Riba?

– Live within your means and do not take or give loans that have interest

– Make sure you open a Riba-free bank account

– Avoid signing contracts that have interest in certain clauses

– When you are in need of money, instead of taking loans from banks with interest, turn to your family and friends.

– Manage a “goodly loan” (al-qard al hasanah); a loan through which one can incur a kindness towards another human being (being interest-free)

We as Muslims should constantly strive against interest every day and make a conscious effort to avoid it. Those who abstain from such dealings are positioned to be graced with God’s mercy and blessings.

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