The Impact of Riba on Financial Inequality

By
Wahed Editor
September 16, 2022
The Impact of Riba on Financial Inequality

What Is Riba? 

'Riba' in simple words defines any surplus on money lent above what was lent. Usury is another term commonly used to define it, which is the act of charging an exploitative interest rate, however Riba encompasses both usury and interest, and doesn’t differentiate based on the amount of interest charged.

When we take a closer look at the Qur'an, we can clarify the definition of Riba further:

"O those who believe, fear Allah and give up what still remains of the Riba if you are believers. But if you do not do so, then be warned of war by Allah and His Messenger. If you repent even now, you have the right to the return of your capital; neither will you do wrong nor will you be wronged."  Al Baqarah 2:278-9

Origins Of Riba

Riba was a pre-Islamic practice in Arabia “that doubled a debt if the borrower defaulted and redoubled it if the borrower defaulted again” - mentioned by John Esposito, a Professor of Religion. Some destitute Arab borrowers were also held responsible for being enslaved by Riba.

Riba is explicitly banned in Islam, one of the reasons being any transaction involving interest may harm one of the two parties; it constitutes a gamble, which is also prohibited in Islam. Muslims regard interest as the modern equivalent of Riba, and with Riba, one of the parties in a business transaction could suffer an unfair situation or loss based on the beginning of the transaction. Regardless of the circumstances, Islam holds the concept of an interest rate as unfair to both the lender and receiver.

The Real Question: How Is Riba Causing Unequal Wealth Distribution?

It's estimated that the richest ten percent control over half of the wealth in most societies. Sadly, unjust wealth distribution is a well-known phenomenon that arises when there is an unequal distribution of assets, income, and wealth in society. This unequal distribution of income may lead to the division of society, as the bottom of society suffers from this division while the top reaps the benefits of it.​​ For example, in exchange for loans, banks charge high-interest rates (Riba) to small-time depositors, which is then loaned to large-scale investors who set up multinational companies and benefit from it in great amounts. This makes the rich richer, and on the other hand, the poor are drowned in loans with high rates of interest charged, only to fulfill their basic needs. It doesn’t sound very fair, does it?

The Takeaway

While we all agree that in present day modern banking, economics, and finance, interest plays a central role, there’s also no denying that Riba (interest) is the essence of economic injustice. Islam promotes a concept of investing wherein both parties share the benefits of profit while also shouldering the cost of losses. Sounds more fair, right? It may just result in a more balanced economy if we all try to promote practices that help with equal wealth distribution in society. 

Disclaimer:

This material has been distributed for informational and educational purposes only and the opinions expressed represent the views of the author and not necessarily those of Wahed Invest LLC or any of its affiliates, directors or personnel (“Wahed”).  Any assessment of the market environment as of the date of publication is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice. Wahed assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. Any strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security.

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