Usury (ribaa): is the practice of assigning a fee on credit and other borrowed assets on top of the principal borrowed amount, thus making a profit on the loan, which is strictly prohibited in Islam due to the harm and injustice involved in it.
Ribaa is of different types, but the most serious type of ribaa, and thus the one that is all the more unlawful, is one relating to loans and debts. It covers any stipulated additional amount over the principal in a transaction of loan or debt and is of two types.
Every loan or debt from which the lender makes a profit is a form of ribaa.
- Ribaa on Debts
This type of ribaa exists in every debt, which carries a stipulation binding the debtor to pay to the creditor any sum of money in excess of the principal sum of the debt.
Example: John borrows £1000 from Martin and promises to pay it back after a month. However, John finds himself unable to pay the debt off after a month and so Martin, the creditor, stipulates that John either pays the debt off without any excess of the principal sum of the debt or pay £1100 after another month. If, however, he still cannot possibly pay that sum off either after a month, Martin will defer payment another month on condition that John pays £1200.
- Ribaa on Loans
In this type of ribaa, a person takes out a loan from another person or from a bank with the stipulation at the time of the contract that the borrower must pay an annual interest both parties agree upon of, say 5%, on the borrowed amount to the lender.
Example: John is interested in a house which is worth £100,000 but does not have enough money to purchase it, so he takes out a loan from the bank on condition that he must pay the bank £150,000 in monthly instalments over a period of five years.
Ribaa is strictly forbidden in Islam and is one of the major sins as long as the loan is taken out with interest, whether it is an investment loan for financing a business or industry or purchasing a vital asset such as a house or property, or a consumer loan for personal, family or household purposes.
However, purchasing goods in instalments at a price higher than the actual price paid in cash is not considered a form of ribaa.
Example: A person has the choice to purchase a kitchen appliance for £1000 and pay for it in cash or for £1200 in monthly instalments, paying a monthly amount of £100 to the owner of the store from which he purchased the appliance.