Riba

Riba literally means "increase" or "excess." Classical jurists split it into two categories: riba al-fadl, an unequal exchange of the same commodity (gold for gold, wheat for wheat, in different quantities), and riba al-nasiah, an excess charged in exchange for a delay in payment. Modern interest on loans, bonds, and savings accounts falls squarely under riba al-nasiah: a lender hands over money today in exchange for a guaranteed, predetermined larger sum later, with no risk-sharing and no tie to the actual performance of any underlying venture. That guaranteed, time-based increase is the essence of what the Quran forbids.

The Quran addresses riba across several verses, revealed in stages. Surah Al-Baqarah 2:275-279 states plainly, "Allah has permitted trade and forbidden riba," and warns that those who persist in dealing in riba are declaring "a war against them from Allah and His Messenger" (2:279), language reserved for only the most serious transgressions. Surah Aal-Imran 3:130 commands believers not to "consume usury, doubled and multiplied." Surah Ar-Rum 30:39 contrasts riba with zakah, noting that wealth given as riba does not truly increase in the sight of Allah, while wealth given as zakah does. Together these verses place riba among the clearest and most repeated prohibitions in the Quran.

Jabir ibn Abdullah reported that the Prophet Muhammad, peace be upon him, cursed the one who consumes riba, the one who pays it, the scribe who writes the contract, and the two witnesses to it, saying "they are all equal" (Sahih Muslim 1598). The point of that hadith is important for investors: facilitating or participating in a riba transaction carries the same weight as directly profiting from it. That is why Shariah screening does not just ask whether a company charges interest to its customers; it also asks whether the company borrows at interest, lends at interest, or holds interest-bearing instruments as a meaningful part of its business.

In practice, riba shows up in three places on a company's financials: interest income earned on cash reserves (tolerated up to 5% of total revenue under AAOIFI's Shariah Standard No. 21, since almost every large company holds some interest-bearing cash), interest-bearing debt on the balance sheet (capped at roughly 30% of market capitalization), and, for conventional banks and lenders, the entire business model, which fails the screen outright regardless of any ratio. A stock that passes the ratio screens is not riba-free; it simply keeps riba exposure below a threshold that scholars consider minor, and the investor purifies (donates) the small tainted portion rather than keeping it.

It helps to contrast riba with legitimate trade profit. In a sale or a profit-and-loss-sharing arrangement like mudarabah or murabaha, the return is tied to real economic activity and real risk: the seller or investor can profit, but can also lose. Riba removes that risk entirely; the lender is owed a fixed, guaranteed sum no matter what happens to the borrower's venture. Scholars point to this as the underlying reason for the prohibition: riba shifts all downside risk onto the borrower while guaranteeing the lender a return, which Islamic law treats as fundamentally unjust regardless of how small the rate is.