Riba, Its Types and Modern Examples

In Islamic law, the problem of usury (interest) is shaped around two main concepts: Time and Quantity. To fully understand these two concepts, we must first look at the difference between spot exchange and a loan.

1. What Is Spot Exchange (Barter)?

Spot exchange means exchanging goods or money immediately, on the spot, with no time difference. For example, paying money and buying wheat, giving Carrefour and buying rice, etc.

2. How Does a Loan Arise? (The Time Factor)

If the concept of "time" enters the above exchange process, it becomes a loan.

Its logic: You give 100 manats (or 1 kg of potatoes) today, but you get it back, for example, after 1 month. Because time has entered the picture, this is considered a loan contract.

So What Is Riba

In the dictionary, the word riba has meanings such as "increase, multiplication and growth". In fiqh terminology, it denotes "an additional amount without counter-value that is stipulated for one of the parties in the exchange of money and standard (fungible) goods for one another".

The Two Main Types of Usury (Riba)

It is precisely because of the violation of the above "Time" and "Quantity" factors that two types of interest arise:

A) Riba al-Nasi'ah (Usury on Loans) – Interest arising from time (increase, multiplication, an additional amount without counter-value)

This is the classical and best-known type of usury. Namely, the lender stipulates that what he lent (money, fungible goods, etc.) be returned with an excess. The increase here (interest/riba) is taken in return for time.

This is the fundamental rule of a loan in Islamic law: A loan must be returned exactly (without addition) as it was given and in the amount it was given.

• Characteristic: The increase is determined in advance at the time the contract is concluded.
• Modern equivalent: Bank loans, interest applied on late debts.
• Example: I lend you 1000 AZN today, and a month later you will return 1100 AZN to me. The 100 AZN in between is "Riba al-Nasi'ah".

B) Riba al-Fadl (Usury in Trade) – Interest arising from quantity

In Islamic law, Riba al-Fadl means that one party receives a greater quantity than the other when goods of the same kind are exchanged. This riba arises not in a loan but in a spot purchase-sale (barter). If there is a difference in quantity (weight) between the parties, that is, an excess (riba), during the immediate exchange of goods of the same kind, it is considered trade interest. It is explained on the basis of the 6 commodities mentioned by the Prophet, peace be upon him (gold, silver, wheat, barley, dates, salt).

• Example 1: Giving 1 kg of high-quality dates (or potatoes) and immediately receiving 1.5 kg of lower-quality dates in return. Islamic law requires strict equality (1 kg = 1 kg) in the immediate exchange of strategic goods such as gold, wheat and dates. If the quantities are not equal, "Riba al-Fadl" arises.
• Example 2: Giving 10 grams of 750-carat gold and receiving 12 grams of 585-carat gold on the spot. Despite the difference in quality, a difference in quantity (12 > 10) in goods of the same kind is considered "Riba al-Fadl".
• Characteristic: In the exchange of goods of the same kind, one party receives a greater quantity of goods than the other. This explains the meanings of this riba as increase, multiplication, an additional amount without counter-value.
• Purpose: Closing the paths leading to riba (Sadd al-dhara'i).

The main difference between the schools of thought concerns the "illah" (cause) of this prohibition, that is, on account of which characteristic a commodity is considered a riba commodity.

The approach of the four major schools to this question:

1. The Hanafi School

According to the Hanafis, two conditions must be present for riba (usury) to arise in a commodity: Unity of kind and Measurability (by weight or volume).

• Illah: Wazn (things sold by weight) or Kayl (volume, things sold by litre/container).
• Result: If a commodity is sold by the kilo or by the litre (for example, iron, copper, oil), then when the same kind is exchanged for one another the quantities must be equal. Otherwise Riba al-Fadl arises.
• For example: According to the Hanafis, giving 10 kg of quality iron and receiving 12 kg of lower-quality iron is usury.

2. The Shafi'i School

The Shafi'is look at the matter more from the standpoint of the essence of the commodity (what it is used for).

• Illah: "Naqdiyyah" (the characteristic of being money - gold/silver) and "Ta'umat" (being food).
• Result: Riba al-Fadl can occur only in gold, silver and things that are people's food.
• For example: According to the Shafi'is, since iron or copper is not food and is not considered money, exchanging them in different quantities is not considered usury (of course, we are talking about barter). But giving 1 apple and receiving 2 apples (since both are food) is usury.

3. The Maliki School

Although the Malikis are close to the Shafi'is, they set a more specific condition regarding food.

• Illah: For gold and silver, being a "price"; for foods, being "muqtat" (a staple means of sustenance) and "muddakhar" (storable, non-perishable).
• Result: If a food is not a staple provision or spoils quickly (for example, vegetables, some fruits), Riba al-Fadl does not arise in them.
• For example: According to the Malikis, 1 kg of radish may be exchanged for 2 kg of radish, because radish is not a staple type of food that is stored in warehouses for a long time.

4. The Hanbali School

Although there are two different opinions in the Hanbali school, the most well-known opinion is close to the Hanafi school.

• Illah: Everything measured by weight (wazn) or volume (kayl).
• Difference: Some Hanbali scholars require both the condition of weight/volume and that of being food at the same time.

Important note: All of these discussions relate to the exchange of goods of the same kind (for example, wheat for wheat). If the kinds of the goods differ (for example, giving wheat and receiving barley), a difference in quantity is free, but the exchange must be carried out at that very moment (on the spot).

Examples of Riba in the Modern Era

In the modern economy, Riba al-Fadl (usury arising from a difference in quantity) appears before us in more complex forms compared with the classical period. Especially considering the AAOIFI standards and modern banking practices, this topic still retains its relevance.

1. Currency Exchange (Sarf Transactions)

Modern paper money is classified in the category of "fulus" (copper coins) or "naqdayn" (gold-silver) in classical fiqh. According to international Sharia standards (for example, AAOIFI Standard No: 1), a difference in quantity is prohibited when currency of the same type is exchanged.

• Example: Giving an old or torn 100-dollar banknote and receiving 95 dollars in return "because it is new or small" is considered Riba al-Fadl. Because in money of the same kind (USD-USD), both equality and immediate delivery are conditions.
• Different currencies: When giving manats and receiving dollars, a difference in quantity (the exchange rate) is free, but the exchange must be in cash (spot). Because if time enters the picture and it becomes deferred, it has now turned into a loan contract. That is, I give you 100 dollars and tomorrow you give me 170 manats. But as we said above, a loan must be returned identical, in its like, otherwise riba arises

2. Gold and Jewelry Items

This is one of the most frequently encountered and discussed issues in the modern era.

• Example: Giving old (used) gold to a jeweler and, adding a "labor fee" (craftsmanship charge), receiving a smaller quantity of new gold.
• The Sharia position: According to the majority of classical scholars, working the gold does not change its "cash" (money) character. Therefore, a difference in weight is prohibited.
• The AAOIFI approach (Standard No: 57): Taking modern needs into account, although in some fatwas gold is now seen as a "commodity" (goods), most scholars still recommend that this transaction be carried out in two stages (first selling the old and receiving the money, then buying the new with that money) so that no suspicion of Riba al-Fadl remains.

3. Digital Assets and Cryptocurrencies

The issue of Riba al-Fadl comes up when cryptocurrencies are exchanged for one another.

• Example: Giving 1 "Wrapped Bitcoin" (WBTC) and receiving 1.0001 Bitcoin (BTC).
• Analysis: If these assets are regarded as the same "kind" (tied structurally to the same underlying asset), the slight difference in quantity carries a risk of usury. Here the scholars' "illah" (cause) approach comes into play: Are these assets money (as the Shafi'is/Malikis would say) or measurable goods (as the Hanafis would say)?

4. Commodity Barter

Especially in the agricultural and energy sectors, there is the possibility of Riba al-Fadl in "swap" (exchange) transactions.

• Example: A logistics company exchanging 1000 litres of high-quality diesel fuel it holds for 1100 litres of lower-quality diesel from another company.
• Difference between the schools:
  • According to the Hanafis and Hanbalis: Since fuel is measured by the litre (volume), this is directly Riba al-Fadl. The difference in quality is not considered, and the quantity must be equal.
  • According to the Shafi'is and Malikis: Fuel is not a "food". Therefore, exchanging it with a difference in quantity (if both parties agree) is not considered usury.

How Can One Protect Oneself from This Risk in Modern Trade?

Islamic financial institutions and the AAOIFI standards propose the principle of "Two Independent Contracts" to solve this problem:

1. The first commodity is sold for cash at the market price.
2. With the money obtained, the second commodity is purchased independently.

In this way the danger of "unequal exchange of goods of the same kind" (Riba al-Fadl) is removed.