Definition of riba
In Islamic finance, riba is commonly translated as interest rate or excess. The prohibition of riba is the cornerstone of Islamic finance.
Riba symbolises both the earning of money on money via a predetermined rate on a loan and a social injustice.
Although making profit is allowed in Islam, earning money on money is not, because there is no productive and/or trade activity creating additional wealth.
Riba also creates social injustice because lenders requiring interest on loans tend to profit from the weak position of borrowers. Thus, because social justice and fairness in business are the most important parts of muamalat (economic transactions), riba is prohibited by Shariah, or Islamic law.
The market offers two types of non-riba products. The first is the cost-plus financing where the bank (lender in conventional finance) buys products and resells them with a certain margin to the client (borrower). Payment can be differed just like conventional credit instalments. The second option consists of profit and loss sharing when the bank builds up an SPV (special purpose vehicle) with the client with the aim of buying a product (a house for instance) and permits the client to buy out the participation of the bank in the SPV, also on differed payment.