There are 4 types of riba that happen in commercial transactions. Riba literally means excess, increase, augmentation, expansion, or growth. The excess could be coming from itself or an increase in an exchange or sale of ribawi items (gold, silver, dates, wheat, salt, and barley).
Every Muslim should understand the issue of riba in daily life. Some Muslims might know the definition of riba, but they do not apply it in their lives. Riba is absolutely impermissible in Islam. Qur’an and Hadith have clearly declared the prohibition of riba.
Riba can happen in two kinds of transaction: sale and debt. Any excess in sale contract is called Riba Al Buyu’, while riba that happens in debt is called Riba Ad Duyun.
Riba Al Buyu’
An excess in sale or trading transaction is called Riba Al-Buyu’. It also means any sale transaction in which one commodity is exchanged for another, but the amounts are unequal, and at least the delivery of one of the commodities is postponed. There are 2 types of riba al buyu’:
- Riba Al Fadhl: The exchange of ribawi items with different weights, measurements, or numbers at the same time. This is known as riba of excess. It refers to the buying and selling of similar goods in different amounts (e.g., number, weight, value, etc.) with the same price. For example: Exchanging 2kg of dates for 3 kg of dates on December 1, at the same time. The excess of 1kg dates is riba al Fadl.
- Riba An Nasiah: Riba An Nasiah happens because of the deferment at the time of the exchange. The exchange of ribawi material in this scenario is equal of weights, measurements, and numbers, but both the payment of the price and the delivery are not at the same time. In other words, it is a sale transaction of a homogeneous and equal commodity and postponement of the delivery.
Riba Ad Duyun
This riba is a type of debt interest that arises when people lend or borrow money. Riba ad duyun is any unreasonable increase in borrowing or lending money, paid in kind or in money over the loan amount, as a lender-imposed condition or willingly by the borrower. There are 2 types of riba ad duyun.
- Riba Al Qardh: Riba is imposed from the start and is dependent on the length of time the borrower takes to repay the loan. For example Ali borrowed $100 from Khalid on 10% interest for one year. Upon maturity, Ali will pay $110 (Principal amount: $100; Interest: $10) to Khalid
- Riba Al Jahiliyyah: Riba that happens because of the default of payment, and there is no riba at the beginning of the contract. This occurs when a creditor in a deferred exchange contract asks the debtor for additional money on the original debt. In exchange for an increase in debt, the creditor agrees to allow the debtor to postpone the debt payment. For example Amin owes Salim $1000 on January 1. Then, Amin cannot pay Selim on the agreed date, so Salim agrees not to collect his debt until February 1, in exchange for Amin agreeing to pay him $1200 instead of $ 1000. Shariah strictly prohibits this transaction.
Difference between Profit and Interest:
After understanding the types of riba, every Muslim must be careful in executing their commercial transactions. However, riba and profit in trade are not the same. In trade, one earns profit as a result of initiative, enterprise, efficiency, hard work, profit fluctuates, and there is a risk of loss as well. On the other hand, the interest is not earned through hard work or any value-creating process. It is not the reward of labor but is in fact an unearned income. The lender gets his fixed amount, irrespective of the fact, whether the debtor earns any profit or sustains a loss. Therefore, the prohibition of riba is a clear statement to promote justice among the parties in executing the transactions.
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