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Glossary

Riba

Category — Islamic Finance
Riba is an increase in a loan or sale transaction that accrues to the lender, seller, or buyer, without the provision of an equivalent counter value to the other party. Riba is forbidden by Sharia. To be lawful, any profit or benefit should be linked to the performance of a real asset and its risk. Riba means the growth and increase in something in Arabic.

Muslim jurists have divided Riba into two categories:

1. Riba al-Nasi’ah

It is known as debt Riba, it is considered to be the primary form of Riba. The consensus of Muslim scholars stated that this type of Riba is the equivalent of interest paid on loans.

Riba al-Nasi’ah consists of the addition to the principal amount of a predetermined premium. This premium is paid to the lender in exchange for the loan or in exchange for extending time in repayment of the loan. It is linked to the amount paid and the duration of the loan.

2. Riba al-Fadl

This is known as Riba sales, it is the excess compensation to one party resulting from both:
•Exchange or sale of certain homogeneous goods
•The deferred sale of certain homogeneous goods
Riba al-Fadl occurs where the value of the assets offered by one party is in the excess of the value of those offered by the other.

The prohibition of Riba in Islam:

Muslims prohibited Riba, due to the severe damage it causes to society, the economy, and production. The economic damage lies in the fact that usury is an improper means of earning the following:
1. The money obtained as Riba does not come as a result of productive work.
2. The money obtained as Riba drives people to laziness and unemployment and enables them to increase their wealth without effort
3. Riba leads to the phenomenon of inflation in society.
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