Riba can be simply defined as excess. Within the context of Islamic Finance Riba can be broken down into two major categories. Riba an Nasiyah and Riba Al Fadl.
Riba An Nasiyah
Riba An Nasiyah is the primary and most common form of Riba (Interest) in the modern-day. This is a type of loan where money is lent out with a term of repayment and an excess amount (interest) is clearly defined in the contract. The prophet saw said, ” Every loan that draws profit is one from Riba”. It is also quite clearly defined in the Quran 2:275-279. Modern-day mortgages, car loans, student loans, and personal loans all fall under this category.
Wisdom Behind the Prohibition of Riba an Nasiyah
Firstly, we should realize that there is nothing in the entire creation of the world which has no goodness or utility at all. But it is commonly recognized in every religion and community that things that have more benefits and fewer harms are called beneficial and useful. Conversely, things that cause more harm and offer fewer benefits are taken to be harmful and useless. Even the Quran, while declaring liquor and gambling to be haram, proclaimed that they do hold some benefits for
people but the curse of sins they generate is far greater than the benefits they yield. Therefore, these cannot be called good or useful; on the contrary, taking these to be acutely harmful and destructive, it is necessary that they be avoided.
The case of Riba an Nasiyah is not different. Here the consumer of Riba does have some casual and transitory profits coming, but its curse in this world and in the hereafter is much too severe compared to this benefit and even in this world most revenue earned from Riba is quite low when compared to other halal opportunities. The Riba consumer suffers both spiritually and financially because they could have used this money in a more productive manner. Further, the issuer of this riba-based debt contributes to a society ridden with debt which slows down the rate at which people spend, consume and donate.
Riba Al Fadl
Riba Al Fadl is rarer in modern society but still exists. With Riba Al Fadl it is impermissible to exchange the same type of goods for goods of greater or lesser quantity/ quality. For example, you can not exchange 1lb of dates of lower quality for 0.5lb dates of higher quality. This falls under Riba Al Fadl. In fact, there are six items that are expressly prohibited to do this with. Gold, Silver, Dates, wheat, salt, and barely. If extrapolated this would include most items that are the same in nature.
The Prophet (Saw) Said :“Sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver, sell dates in exchange of equivalent dates, sell wheat in
exchange of equivalent wheat, sell salt in exchange of equivalent salt, sell barley in exchange of equivalent barley, but if a person transacts in excess, it will be usury (Riba). However, sell gold for silver anyway you please on the condition it is hand-to-hand (spot) and sell barley for dates anyway you please on the condition it is hand-to-hand (spot).”
Wisdom Behind the Prohibition of Riba Al Fadl
Mainly this prohibition is to keep things fair and to close any backdoors to other types of Riba.