RIBA: MEANING, SCOPE AND APPLICATION

A cardinal principle of Islamic law of contract is the prohibition of riba. Any study or consideration of an Islamic finance related subject is, therefore, incomplete without a discussion of the meaning of riba, the principle underpinning it and its application in commercial transactions today. Riba has been translated, and applied, as a prohibition of interest charged on loans. To say so, however, is to not only oversimplify the matter but to misconstrue it all together because the concept of riba applies to more than just loans; it applies equally to all transactions be they loan or sale or lease.
Riba, as a concept within Islamic law of contract, is a vitiating factor that aims at attaining transactional equity by requiring exchanges to be bargains by way of mutual consent as a basis for eliciting consideration. The principle of riba is, therefore, one that regulates the elicitation of consideration: only commercial exchanges may elicit consideration. Non-commercial exchanges (family and social arrangements or otherwise unenforceable agreements) may not elicit consideration. Evidence of the established validity of this demarcation in Islam is furnished by a universally accepted contract – the wedding contract (Aqd al-nikah).