In any discussion of Islamic economics and finance, the prohibition of riba inevitably will be mentioned. It’s a fundamental tenet of the Islamic economy system.
Riba is usually translated as interest or usury.
So, which one is it? Interest or usury? Are they the same thing? And are they accurate translations of riba?
Let’s figure that out.
We’ll start with the most commonly used word, interest. According to the Merriam-Webster dictionary, interest is “a charge for borrowed money generally a percentage of the amount borrowed”.
For example, if you borrowed $1000 at a 5% annual interest rate, at the end of the year, you would owe $1050. $1000 is principal. That $50 is interest.
As for usury, the Merriam-Webster dictionary tells us it is an archaic form of the word interest. In the past, usury is the word they would have used to describe the $50 extra that you’re paying on the $1000 loan. What we now call interest is the same thing as what they used to call usury.
It’s similar to the way that “common-law relationship” today describes what used to be called “living in sin”. They’re the same thing. It’s people who aren’t married, living together like they are married. We just use a different terminology today than we used in the past.
Since the word usury has been replaced by interest, the word usury is now used a little differently. Today, usury is used to describe exorbitant rates of interest.
For example, if someone was lending money at an interest rate of 60% per year, that could be called usury.
When translating the Arabic word riba into English, this dual usage of the word usury and its similarity to the word interest can cause some confusion.
First, what is riba?
There are two types of riba:
1) Sales-based riba
2) Loan-based riba
Sales-based riba is unequal exchange of the same commodity. For example, if I traded a certain type of wheat for a different quality of wheat. I don’t know in what context this comes up, but in our modern lives, it’s not something that we have to worry about.
Loan-based riba is any excess beyond the principal that is stipulated in a loan-based contract. Note, that there isn’t a minimum amount of excess that qualifies something to be called riba. So even a 1% interest rate counts as riba.
The other thing to note is that it’s a stipulated excess. If the borrower decides to give the lender extra as a token of appreciation when he returns the loan, that’s not riba. That must be entirely voluntary and not something that the lender requests, though or else it fits into the definition of riba again.
So in summary, interest is riba. Usury is also riba. You can translate it either way.
Just don’t get confused and think that if riba is translated as usury, then it only refers to very high interest loans. That’s simply not true.
Riba refers to any excess beyond principal that is stipulated in a loan-based contract. Today, we refer to that excess as interest.