What Is Interest (Riba, Usury)

In conventional economics, interest refers to the cost of borrowing money. It is typically expressed as an annual percentage rate. However, interest income has been debated throughout history.

Adam Smith, who is considered the father of economics, admitted that interest is not a direct natural income. He says in his famous book Wealth of Nations:

"The interest of money is always a derivative revenue, which, if it is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue, unless perhaps the borrower is a spendthrift, who contracts a second debt in order to pay the interest of the first."

Thus, Smith points out that interest income may be an unearned gain that has to be paid despite the debtor's bankruptcy.

The scope of interest in Islamic finance is wider than in conventional finance. In Islamic (halal) finance, interest is interchangeable with riba and usury. It can be defined in a broad sense as follows:

"Interest refers to an actual or potential excess or an unearned income transfer from one party to the other in the exchange of two monetary values of goods or services traded upon in cash or on credit. Consequently, it inherently causes injustice and loss for one of the parties involved, either for its being unearned income or when earned, unequally shared."

The most typical examples include:

• Lending 100$ with a 5% interest rate for one year, as widely recognized by all, which is called the interest of debt;
• Selling 100 kg of wheat in exchange for 100 kg or another amount of barley on credit, which is called the interest of term (time);
• Exchanging cash 100 $ for deferred 90 €, also called the interest of term;
• Exchanging 10 kg of quality wheat for 11 kg of poor-quality wheat in cash. It is called the interest of surplus, which is unknown and can hardly be understood by most.

Interest is a measurable or potential imbalance in loans or exchanges where one party gains at the expense of the other. It manifests as an unequaled excess, lacking an equivalent that can be equitably matched. be equitably matched.

Over time, interest policies create economic disparities among members of society, production factors, and economic sectors, leading to significant political, social, economic, and financial challenges.

Except for the interest of surplus, all other interest-bearing transactions are future-oriented. Since no one knows what the future brings or takes away, the outcome of these transactions often favors one party while inevitably disadvantaging the other, rather than being mutually beneficial. often favors one party while inevitably disadvantaging the other, rather than being mutually beneficial.