Riba Explained: How Islamic Finance Avoids Interest
Sep 16, 2026 · 5 min read
Riba is at the centre of Islamic finance. Here is what it means, why it is prohibited, and which contracts are used instead.
What riba means
Riba literally means increase or excess. In finance it refers to a predetermined return charged on a loan, in other words interest. Classical Islamic jurisprudence prohibits it, along with excessive uncertainty and speculation without a real underlying transaction.
The reasoning
The common explanation is that money should not earn a guaranteed return simply by being lent. Returns should be linked to real economic activity and the sharing of risk. Scholars discuss this at length, and interpretations of how the rule applies to modern banking vary.
Contracts used instead
A murabaha is a sale in which the seller discloses cost and adds an agreed margin. An ijara is a lease. A mudarabah is a partnership between a capital provider and an entrepreneur who share profits by agreement. A musharakah is a joint venture in which partners share profit and loss according to their contributions. Each replaces a loan with a transaction tied to an asset or a venture.
What this means for savers and investors
Islamic banks offer profit-sharing deposits and financing based on these contracts. In investing, funds screen out companies whose main business is prohibited and cap leverage and interest income through ratio tests. Any small impure income is typically purified through charitable donations.
A note on diversity of views
Standards differ between scholars, jurisdictions and index providers. If a decision matters to you, consult a qualified Sharia scholar or the sharia board of the institution you are dealing with.
