Article 1

Riba and Interest in Islamic Finance: Semantic and Terminological Issues

Abstract

• Purpose of the paper:

  • Analyze differences and similarities between riba and interest.

  • Argue that they are not interchangeable, even though commonly perceived as such.

• Methodology:

  • Comparative conceptual analysis of interests in finance vs riba in Islamic jurisprudence.

• Findings:

  • Suggests Islamic banking should be characterized as "riba-free" instead of "interest-free."

• Implications:

  • Aim to clear misconceptions between riba and interest in scholarly discourse.

Introduction

• Common misconceptions:

  • Terms 'interest' and 'riba' are often treated as synonymous in academia.

• Example from the Institute of Islamic Banking and Insurance:

  • Common titles assert "Islamic Interest-Free Banking," showing the confusion.

• Aim:

  • Caution against this interchangeable use and clarify the distinction.

Key Differences Between Riba and Interest

• Linguistic Origin:

  • Interest (English) | Riba (Arabic)

• Disciplinary Background:

  • Interest relates to economics and finance

  • Riba is based on Islamic legal principles (fiqh al-Islami)

• Legal Perspectives:

  • English Law distinguishes between interest and usury;

  • Islamic Law classifies riba universally as unlawful.

Potential Confusions

• Subjectivity in Definitions:

  • English legal definitions affect Islamic banking terminologies.

  • Tendency to conflate riba and interest due to these subjective definitions.

• Perspectives from scholars:

  • al-Masri (2004) argues not all forms of interest are unlawful.

  • El-Gamal (2006) states that claiming "Islam forbids interest" oversimplifies the issue.

Conceptual Analysis

Definitions of Interest and Riba

• Interest:

  • Typically described as compensation for time value of money.

  • A well-known definition: Difference between present and future value.

• Riba:

  • Specific to loans (riba al-qurudh) and sales (riba al-buyu’).

  • Divided into riba al-nasi’ah (concerning loans) and riba al-fadhl (regarding sales).

Financial Transactions

• Importance of contractual stipulations (shart) in identifying riba.

• Example Analysis:

  • $1,000 loan returned with $1,100 falls into riba due to extra charge and agreement.

  • A thank-you additional payment ($1,100) without stipulation does not constitute riba.

Murabahah and Riba vs. Interest

• Murabahah in Islamic Banking:

  • Credit sale contract examples show interest as permissible (halal).

• Distinction of Profit in Murabahah:

  • Cash Sale: Likely includes only profit (e.g., $100 to $110).

  • Credit Sale: Involves additional charge for time value, e.g., $120 for extended repayment period.

• Acknowledgment by scholars (Vogel & Hayes) of possible dual components in transactions.

Riba without Interest

• Exploration of riba al-buyu’ and rules on currency exchanges:

  • Example:

    • Exchange of currencies must occur on-the-spot; delay constitutes riba.

• A theoretical exploration:

  • Foreseeable instances of riba without financial interest, e.g. in currency forward contracts.

Venn Diagram Representation

• Visual Representation of Concepts:

• Riba can exist without interest and vice versa.

• Intersection occurs where both terms overlap, but significant differences exist in isolated contexts.

Conclusion

• Summary of the paper’s arguments:

  • Riba and interest are not equivalent; both can independently exist.

• Important to use terminology accurately:

  • Islamic finance should be defined as riba-free rather than interest-free.

• Aims to clarify semantically and conceptually, reducing confusion among scholars and students.