Definition

When discussing the subject of “interest free economic systems” it is important to properly define what is meant by “interest” which is sometimes interchangeably used with the word “usury”.

According to the Merriam-Webster dictionary, interest is defined as a charge for borrowed money generally a percentage of the amount borrowed, or as the excess above what is due or expected. Usury is likewise defined as interest in excess of a legal rate charged to a borrower for the use of money.

It is interesting to note that legally speaking, some governments stipulate a criminal rate of interest, in excess of which debtors are not allowed to charge borrowers. In Canada for example, section 347 of the criminal code defines an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 60% on the credit advanced under an agreement or arrangement to be criminal.

So, although many now define usury as excessive or abusive interest rates charged in debt transactions on loans, historically in Christian societies and still in many Islamic societies today, charging any interest at all would be considered usury.

The word used for interest in Islam is called “ribaa” (which we use interchangeably). Linguistically, the word means excess. From an Islamic legal perspective, the word ribaa generally has two meanings, one that is specific and the other more general.

The general definition of ribaa in Islam is:

• all excess in monies (or time) in debt based transactions,
• or illegal sale based transactions.

The more specific definition of ribaa is:

• Loan based ribaa: To the  early Arabs (those who lived around the time of the Prophet of Islam, Muhammad), this is known as ribaa al-nasi’ah, ribaa al-duyun, or ribaa al-jahiliya.
• Sales based ribaa: also knows as riba al-buyu’

Loan based ribaa or interest is simply every excess beyond lent out capital that is stipulated in a loan based transaction. Such excess is usually represented by a fixed or variable rate that is calculated based on the term of the outstanding loan. It is basically excess that is charged on monies that are lent over a period of time.

Loan based interest is clearly not permissible under Islamic law. It is important to note that the operative word in the definition of loan based interest is “stipulated”. If an excess amount is paid by the debtor to the creditor out of the debtor’s free will, when it is not stipulated in the loan contract, is not usually considered ribaa or interest.

Interest is therefore defined as the excessive charge on the use of funds due to the delayed payment feature within a loan contract.

Sale based ribaa on the other hand is related to exchange transactions of commodities of different quality grades. It involves the unequal exchange of an underlying commodity (e.g. wheat) due to the varying qualities of the commodity. This is a far less common form of ribaa, especially in our present day and age, given that most sale based transactions are marked-to-market, where direct exchange of the underlying commodities (of varying degrees of quality) is uncommon.