The word used for 'interest' in the Quran is Ar-Riba, an Arabic word which means 'excess.' In Sharee`ah (Islamic Law), it is the measure of excess in one thing when two things are exchanged in some bargain; or in the case of a loan, an increased amount of the loan at the time of its payment.
In Islam, dealing with Riba is one of the major sins, which entail severe punishment by Allah Almighty. Allah, the Exalted, Says (what means): "Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, 'Trade is [just] like interest.' But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns [to dealing in interest or usury] - those are the companions of the Fire; they will abide therein. Allah destroys interest and gives increase for charities. And Allah does not like every sinning disbeliever. Indeed, those who believe and do righteous deeds and establish prayer and give Zakah will have their reward with their Lord, and there will be no fear concerning them, nor will they grieve. O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal - [thus] you do no wrong, nor are you wronged.'' [Quran 2:275-279]
Abdullah Ibn Mas`ood, may Allah be pleased with him, reported: 'The Messenger of Allah cursed the one who accepts usury and the one who pays it.' [Muslim] The Hadeeth (narration) of At-Tirmithi adds: 'And the one who records it, and the two persons who stand witness to it.'
Both the parties, the one who charges interest and the one who pays it, are equally guilty in the matter of usury. This Hadeeth highlights the intensity of unlawfulness of the usury, or, what has come to be called nowadays interest which can be judged from the fact that not only the person who charges it and the one who pays it are cursed, but even those who write the documents and bear witness to the transaction are condemned although the latter two have no active part in the deal. They have been condemned for their mere co-operation in the matter of interest. Thus, we learn that even co-operation in the deal in which interest is involved is an invitation to the Curse and Wrath of Allah.
The reason for such severity in the matter of interest is that Islam wants to create a society that is founded on fraternity, sympathy, selflessness and sacrifice. If someone is in need of money, the rich should fulfill his needs for the sake of Allah's Pleasure or give him a loan without interest. As against the Islamic system, this system of interest is based on selfishness, exploitation and suppression.
In the interest-ridden societies, the affluent ones are not inclined to co-operate with the needy for the sake of Allah. All they are concerned with is their own interest. Their lust and greed are not reduced in the slightest measure even after draining the last drop of the blood of the poor. This is the reason why Islam has forbidden interest of every kind and regarded it unlawful, no matter whether the loan is for the personal need or commercial requirements.
Some people say that there did not exist any practice of commercial loan in Arabia at that time (the advent of Islam) and people used to borrow money for their personal needs only. On the basis of this plea, they say that the interest, which has been forbidden by Islam relates to the latter form. For this reason, they hold that interest charged on a loan taken for industry and commerce is lawful. They contend that since the borrowers in industrial and commercial sectors make huge profits from such loans, how does it become unlawful if they pay the lender a small fixed annual amount? In their opinion, it is a right of the lender that should be paid to him on his wealth.
But such arguments are totally wrong for two major reasons:
First, the assumption that there was no practice of commercial loans in Arabia is baseless. Commercial loans were certainly in vogue in Arab society and there is no point in debating this fact.
Second, nobody can say with certainty that the amount invested by a person in business will definitely yield a profit because we see every day that sometimes huge investments made in business and industry result in colossal loss, but the lending agency does not bother about it at all and it recovers from the borrower every penny of his loan and interest.
If it is supposed that there is no loss, even then the interest on a loan substantially contributes to the increase in prices of goods. Whatever interest an industrialist pays on a loan is added to the cost of his goods, which ultimately increases their price and, in turn, adversely affects the purchasing capacity of the customers - the masses. This is the reason why Islam has closed this largest source of exploitation, suppression and tyranny by declaring every kind of interest unlawful.
The usury is of two kinds:
First, Riba Al-Fadhl: To take more in exchange of one commodity in the event of barter of two similar commodities.
Second, Riba An-Nasee'ah: To take a larger return of one thing while two identical things are bartered. But in this case the larger return is affected after a fixed period of time.
In Islamic jurisprudence, assets are of two types. One type is of commodities and the other is of the mode of price for exchanging commodities called Thaman (price). Then, every type has a class of varieties. For example, food grains are a type of assets and rice, wheat, etc., are its varieties. Similarly, silver, gold, etc., are varieties of the second type of assets. Coins, currency notes, company shares, etc., can also be considered varieties of this type in contemporary life.
These two types of assets have four varieties:
1. Commodities which are sold by weight.
2. Commodities which are sold by measure.
3. Commodities which can be stored.
4. Commodities which are used as Thaman in sale and purchase.
In all such matters the position of interest-bearing and interest-free things would be as under:
1. When commodities to be exchanged are of the same `type' and `variety,' any increase or decrease in them will be unlawful, as will be their sale on credit; for example, exchange of wheat with wheat and rice with rice. It is essential that these things are equal in measure and/or weight, and are in one's actual possession.
2. If two things to be exchanged are of the same `type' but of a different `variety,' any increase or decrease in them is permissible. Their sale on credit is, however, unlawful. For instance, the exchange of one kilogram of silver with two grams of gold, or the barter of one kilo of barley with half a kilo of wheat, or the exchange of one Dinar with four Riyals. If such a bargain is on a cash basis it will be fair, but any credit in this case is not correct.
3. When the two things to be exchanged are not of the same `type' and are also different in `variety,' then any increase or decrease in them is permissible and their sale on credit is also allowed. For example, exchange of one kilogram of wheat with a gram of gold, bargain of one kilogram of dates with ten Tola (about 116 grams) of silver. Any increase or decrease in them is permissible, as is their sale on credit.
To conclude, we, Muslims, ought to struggle to understand the truth in the Quran and the Sunnah (Prophet's narrations), particularly as it pertains to the prohibition of the usury, and to be faithful to it regardless of the price we may have to pay, in order to gain Allah's Pleasure and avoid His unbearable punishment.