Riba also known as "Usury". Riba is forbidden in Islam and considered as a major sin. Simply, unjust gains in trade or business. While the term "Riba" is often equalized as "Interest" by many who say: 'buying and selling is but a kind of usury' - while God has made buying and selling lawful and usury unlawful. There are two types of Riba discussed by Islamic jurists: An increase in capital without any services provided and second type is speculation which is prohibited in Islam. Commodity exchanges in unequal quantities, also prohibited in the Islam.

When currencies of base metal were first introduced in the Islamic world, paying a debt in a higher number of units of this fiat money was not considered Riba; jurists were concerned with the real value of money (determined by weight only) rather than its numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight of gold (the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight), therefore having the same real value.

RIBA – INTERESTRiba is often considered as interest by many but actually only interest is not Riba. Riba is not only limited in financial terms. In interest, the creditor receives a fixed rate of return, no matter how much profit or loss the venture makes.

The creditor does not show any interest about the purpose of the loan. He does not want to participate in socio-economic development. The knowledge skills and ability are avoided of debitor by the creditor. The formula by which Interest is calculated is:

Interest = Principal amount x Rate x time100

Interest is an increased amount and considered as Riba because of following reasons:

1. It is unearned income over the principle 2. Return of principle with additional amount is ensured3. There is No risk of erosion of capital4. It is actually transfer of asset from poor to rich5. No effort is required.

RIBA – PROFITProfit is not Riba because it is not the additional gain without profit but it participate in socio economic development. There is the knowledge, abilities and skills of one person and other person finance him. The finance gets complete knowledge and information for which the finance is required. Both parties share profit according to ratio.

No doubt, profit is increased amount but this increased amount is earned through efforts and participation which cause socio economic development that is why we can say that profit is not Riba. We can summarize the word profit in following sentence:

“Profit is positive gain from business operations or an investment after substracting all expenses, use and loss.”

The formula for calculating profit amount is:

Principal amount – sales = Gross Profit – Cost = Net Profit x Ratio of investment=Profit

This profit is distributed according to equity participation. Profit is not the earning through wrong means because of following reasons:

1. It is the positive end result of business operations.2. It is earned by investing labour and capital.3. There is not any surety.4. There is a risk of erosion of capital5. It ensures equal distribution of profit and loss.

Socio-Economic Life through Riba:1. Riba makes a man selfish and miser.2. It creates hostile relationship between rich and the poor.3. Moral decay spread out.4. It impacts on saving investment and production.5. Riba creates Idleness among savers.6. It increases price level and inflation.7. Because of inflation unemployment increases8. Riba induces to destroy wealth.9. It exploits labours10. It imposses unnecessary burden on a nation.

Any earning through wrong mean is Riba. Riba is not limited only financial transactions but it has a huge area and interest is only a small part of it. The statement that interest is Riba is wrong. In interest the creditor receives a fixed amount at return but in Profit the increased return is not Riba because this increased amount is earned through efforts, skills, knowledge and participation and through financing. Riba has a negative effect on human life and causes crime, inflation and other negative traits.

RationaleAs an exchangeable term with Riba, interest is defined by Ismail Ozsoy, professor of economics in Fatih University, Istanbul, as "an unearned or unequally distributed income." Riba or interest is unearned when the realized income that is earned out of the loan is less than the interest rate, and it is unequally distributed income when the realized income is higher than planned.Ozsoy argues that the main characteristic of interest is that either the borrower or the lender would absolutely and inevitably be subjected to a loss and an injustice in any case, for its rate is fixed at the very beginning, but it is impossible to predict the outcome of the business at which the loan is used, profit or loss, or how much either would be. Thus, it can be identified with an absolute injustice for either side of the transaction. It does not matter whether the interest rate is high or low and whether it is called interest or usury because the different kinds of interest or different rates change only the address, or the direction, of the injustice; it is sometimes the payer and sometimes the receiver of interest who is exposed to this injustice and/or financial loss.Ozsoy argues that injustice and unequal distribution of income is an indispensable nature of interest as well as usury, which is considered to be an excessive rate of interest. As a matter of fact, while any high rate of interest may expose the borrower to a financial loss in hard economic conditions, any low rate may expose the lender to a loss in favourable economic conditions where return on capital is high. This case reveals that there is not any acceptable rate of interest, low or high, from the standpoint of the equitable distribution of income. That characteristic of interest arises from the fact that its rate is predetermined despite the impossibility for mankind of predicting whether or not a profit will be made, and even if, how much it will be.Ozsoy compares the interest mechanism to a two-bladed saw, or a knife, that cuts on both sides, such that either the borrower or the lender must pay more than they received—one or the other side is unavoidably injured by the interest mechanism.Interest is the income earned by the borrowed financial capital regardless it is in the production process or not. Interest is the allocation, to the capital owner, of an unearned, undeserved, unborn, unavailable and imaginary income that might be attained without producing anything and without

contributing any value to the revenue of the society. It imposes all the risks on the debtor directly and on the society indirectly but not on the lender although it is directly related to him/her.[18]

Interest mechanism prevents the fair distribution of positive or negative outcomes of economic activities among the lender and borrower and worsens the income distribution. This occurs either by providing the capital owner a certain and fixed percentage of earning in any case regardless of the negative outcome of the business, or by limiting his earning with only a predetermined amount of return in case the borrower entrepreneur earns considerably high income out of his/her financial capital.[19]

The main reason advocated by Siddiqi and Ganameh as to the rationale of prohibition is that it is oppression involving exploitation. In matters of consumption loans, it is necessary that those who have wealth should assist those without, and in productive loans, a guaranteed return on capital is unjust given the uncertainty surrounding entrepreneurial profits, whereas a return to both parties as a rate of profit would be more equitable.[20]

Taji al-Din argues the reason appears to be the restriction in circulation of wealth among those who already have it. Lenders would not provide loans to those they believe are unable to repay so such wealth would be restricted to those able to service the debt. This is something forbidden categorically by the Quran and the effects on society result in the accumulation of wealth amongst those who have it and increase the divide between the rich and poor.Mawdudi believes the cause relates to the undesirable resulting effect of an imbalance between production and consumption. This is caused by the transfer of purchasing power from those with a high propensity to consume to those with a low propensity to consume. The latter group reinvests its income in production, increasing production and decreasing consumption demand. The cost of capital results in increased prices of consumption goods, accentuating this process. Mawdudi believes that this is the source of evils in the economy such as stagnation,depression, monopoly and ultimately imperialism. Interest-free loans and the prohibition of return on capital along with zakat, wages, profit and profit-share recreates this balance. The focus shifts to the entrepreneur whose activity becomes the only source of income along with wages, giving him the upper hand in society. Siddiqi and Ganameh cite the hadith of "income devolved on liability" in this context.[21]

Some argue[who?] that interest allows the creation of a group of people who contribute nothing to society, simply generating income from capital. This starves society of their contribution and the rationale of prohibition is to reverse this.Ibn Rushd argued the rationale relates to the possibilities of cheating that exists in Riba, which is clearly visible in Riba fadl.[22] Other arguments that some writers[who?] try to extract from indications on the divine texts include the rationale being corruption, unjust acquisition of property rights, destruction, and a detrimental personality.Hameedullah believes the reason is the unilateral nature of the risk born in these agreements. [23] The Islamic principle is for a reward, there must be some liability incurred; otherwise, a return is prohibited.

Relevance to modern timesSiddiqi suggests the key to whether the idea of prohibition of Riba is effective is whether it can produce stability and efficiency in the economy and if it is conducive to growth and development and increase justice and fairness.The model of profit-sharing on the liability side of the banking system would make the financial system more stable than using Riba. The sharing arrangements between suppliers and users of resources for producing wealth improves business cycles and stability in the economy.

EntrepreneurshipWith the abolition of interest, Siddiqi argues that the economic focus becomes attached to entrepreneurial activities, using the vehicle of mudarabah, resulting increasing economic activity. Although it may be thought that without interest, incentive to save drops, Keynesian analysis

indicates that savings are a function of income and interest is minor. As such, if income can be increased, savings should increase, even in the absence of interest.Mannan argues that interest holds back investment in production, whereas Mawdudi points out that projects that could be socially useful, generating a small return and prevented as interest rates prevent capital being utilized on such projects.Without interest, capital can be more efficiently allocated to productive projects based on the rates of profit rather than more credit-worthy individuals. A system based on profit-sharing also harmonizes the interests between investors and entrepreneurs increasing efficiency.

Trade cyclesMany writers see the destabilizing effects that interest has on trade cycles. The basic idea is that different interest rates and their variations allow for speculative institutions. Speculators hoard capital for the purpose of chasing higher rates, which in turn deprives the deployment of capital for productive purposes. It is argued that these vast movements of funds contribute to the fluctuations in the trade cycles and make economic planning and organization problematic.With the absence of interest, writers argued there will be less speculation due to the absence of the interest rate and the reduced levels of debt that will result. That is not to say there will be no debt: non-interest modes of finance allows debt but less. Decreased levels of speculation would thus result in a more stable environment.

The word ‘Riba’ as appearing in Holy Quran is translated in English as ‘usury’ by some translators and as ‘interest’ by few. In Arabic language, it literally means an "increment” or “excess" but in essence it means unfair advantage or profiteering, which is prohibited by Allah (swt). For instance giving RS. 4800 for change of a RS. 5000 currency  note would be Riba, even though there is neither interest nor  increase. Usury is not only unfair advantage but also excessive and wicked charge of interest and is condemned by Bible and Quran as also other faiths.The Muslim economists, bankers and insurers who have intensely studied Quranic verses and hadiths find that among most of the ulema (clerics of Islam) and jurists of Islam considerable misunderstanding and misconceptions are found about banking interest and insurance. Quran like Bible prohibits usury and refers it as a kind of Riba.

Conventional Bank Interest and Profits 

Banks provide a variety of financial services much different than the greedy and professional moneylenders and pawnbrokers of ancient times. Governments and laws lay down stringent requirements for their solvency and paid up capital and monitor and regulate their operations. 

When the bank pays you interest on your deposit they pay you out of their overall profits. When the bank charges you interest on the loan they charge it as the substitute for profit that they would otherwise make by investing in share market, real estate etc. Al Azhar's verdict for PAYING  pre-determined profit (interest) is apparently based on the principle of pooling the overall profits of the bank on all types of investments plus their own flat fees for account handling, lockers, guarantees, monetary transfers etc. instead of the cumbersome and expensive procedure of sharing profits and losses under each transaction of debt separately. But Al Azhar's plea for Qarze Hasana (loan without interest or obligation to repay) to the poor and needy, is not commercially viable and only philanthropic and charitable institutions could do that or the government can do that on the lines of

social security benefits for poor in US and Canada.

Bank interest rate about equal to or less than likely profit on investment of the same amount as loaned cannot technically or logically be regarded as taking unfair or unethical benefit and thus it cannot be treated as usury/Riba. 

It may be noted that under the sharia compliant modes of financing one often ends up paying higher profits to the lender than the regulated bank interest and the reason is said to be that risk of loss is there for the lenders. In view of the modern risk appraisal methods for granting loans and the laws that protect the interests of the borrowers and lenders it can safely be said that modern banking as regulated by the laws is serving the needs of the business and consumers in much better way and more economically than any other method in history.

The Islamic theological research committee of Egypt's Al-Azhar institute - seen by many as the philosophical center of the dominant  Sunni strand of the faith - has in the recent past voted 21-1 to approve fixed interest rates or pre-determined rate of profit.. 

But orthodox ulema do not agree and forcefully rejected the Al Azhar verdict. It would be recalled that the judgment of Shariat Bench of Pakistan to abolish the interest dealings in Pakistan was not allowed to be implemented by the Supreme Court of Pakistan and it was directed that first the problem of inflation and reduction in purchasing power money be found. Despite lapse over 5 years there is no solution and the principal value of money as compared with gold, wheat and various other commodities continues to regress. 

The Nature of Usury at the dawn of Islam 

In the following extract from Imam Malik’s Mutawat the practice of usury as prevalent at the dawn of Islam is described. 

Malik related to me that Zayd ibn Aslam said, "Usury in the Jahiliyya was that a man would give a loan to a man for a set term. When the term was due, he would say, 'Will you pay it off or increase me?' If the man paid, he took it. If not, he increased him in his debt and lengthened the term for him “ 

Malik said, "The disapproved of way of doing things about which there is no dispute among us, is that a man should give a loan to a man for a term, and then the demander reduce it and the one from whom it is demanded pay it in advance. To us that is like someone who delays repaying his debt after it is due to his creditor and his creditor increases his debt." Malik said, "This is nothing else but usury. No doubt about it." 

Please note that the above hadith does not distinguish between loan of cash or goods. 

Malik spoke about a man who loaned one hundred dinars to a man for two terms. When it was due, the person who owed the debt said to him, "Sell me some goods, whose price is one hundred dinars in cash for one hundred and fifty on credit." Malik said, "This transaction is not good, and

the people of knowledge still forbid it." 

Malik said, "This is disapproved of because the creditor himself gives the debtor the price of what the man sells him, and he defers repayment of the hundred of the first transaction for the debtor for the term which is mentioned to him in the second transaction, and the debtor increases him with fifty dinars for his deferring him. That is disapproved of and it is not good. It also resembles the hadith of Zayd ibn Aslam about the transactions of the people of the Jahiliyya. When their debts were due, they said to the person with the debt, 'Either you pay in full or you increase it.' If they paid, they took it, and if not they increased debtors in their debts, and extended the term for them." 

Please note that the length of terms is not indicated but in those days the period did not usually exceed one year or so for which almost 50% excess is excessive. Further it appears that repayment of loan in installments was rarely practiced.

Banking is a Trade Islam does not prohibit profits in trade but prohibits exploitation or unethical means in trading. Banking is a trade and financial service, much different than the concept of Baitul Maal, money lenders and pawn brokers of ancient times. At the dawn of Islam there were no banks and goldsmiths and merchants accepted deposits for safekeeping or gave loans on harsh terms. Now bank has become a financial intermediary that performs one or more of the following functions: safeguards and transfers funds, lends or facilitates lending, guarantees creditworthiness, and exchanges and transfers money. A narrower and more common definition of a bank is a financial intermediary that accepts, transfers, and creates deposits.

Role of Central Banking The foremost monetary institution in a market economy is the central bank or State Bank as in Pakistan. These are usually government-owned institutions that perform the following functions: They serve as the government's banker, act as the banker of the banking system, regulate the monetary system as well as activities of commercial banks licensed to

work in the country and they look after both domestic and international policy goals, and issue the nation's currency. As banker to the government, the central bank collects and disburses government INCOME  and receipts, manages the issue and redemption of government debt, advises the government on all matters pertaining to financial activities, and makes loans to the government. As banker to the nation's banks, the central bank holds and transfers banks' deposits, supervises their operations, acts as a lender of last resort, and provides technical and advisory services. Monetary policy for both domestic and foreign purposes is implemented and, in many countries, decided by the national banking authorities, using a variety of direct and indirect controls over the financial institutions. Coins and notes that circulate as the national currency are usually the liability of the central bank