The Qur’an draws a distinction between riba and sales (al ‘bay). The difference between riba and selling, however, implies a distinction between riba and ribh (profit). Thus, the meaning of riba can be more clear by contrasting riba with ribh.
Riba
Literally, riba means “increase.” However, in English, we translate it as “interest.” Most observers believe that riba is a quantity of money that a lender demands from a borrower in addition to the loan’s principal as an incentive for extending the loan or giving longer time for repayment. It makes no difference how small or huge the additional sum is; even the smallest amount is still riba because it is an “addition.”
The amount of riba (interest) that borrower adds to a loan is usually specified ahead of time. The higher the amount or the interest rate or both, the interest will be higher.
Ribh (Profit)
Ribh – “profit” – is an amount of money added on top of the cost price of a good or service. This “extra” is “mark-up. The “extra” in the form of a mark-up compensates the trader for his expenses, as well as for putting out the effort and risk of bringing a product or service to market. Riba, on the other hand, is usually an addition to the cost of a loan rather than the cost of a product.
The Difference between Riba and Ribh (Profit)
Riba (interest) and ribh (profit) are different because they come from different ways. Trading and by extension investment take place in the real economy.
Buying and selling are important needs for people. Interest-bearing lending, on the other hand, does not immediately address people’s needs because money is useless in and of itself. While profits must be acquired by active engagement in economic activity, while interest is generated in a passive manner, with lenders not participating in the production or distribution process. Interest is earned on collateralized loans even when no risk is taken. It’s critical to understand the differences between profit and interest, as well as the types of activities that generate them — trading and lending, respectively.
It may become difficult to distinguish between ribh and riba if these distinctions are not clear. It also will be difficult to comply with Islamic finance and Shariah banking without a clear understanding of the difference between forbidden riba (interest) and authorized ribh (profit).
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