A Comparative Analysis of Interest Rates and Usury in the Islamic Banking System with Emphasis on the Prohibition of Usury

Abstract

The objective of this study is to conduct a comparative analysis of interest rates and usury (riba) in the Islamic banking system, with an emphasis on the prohibition of usury. This research has been carried out using an analytical–descriptive method. The data for the study were collected through a documentary–library approach, using books, articles, websites, and reputable scientific portals as research tools. The findings of the study indicate that interest, in essence, is a cost that an individual must pay in return for receiving and using financial facilities, whereas usury (riba) refers to an increase, superiority, or excess that is taken in return for a loaned sum, which is expressly forbidden in the Holy Qur’an. The relationship between riba and interest implies that riba applies to initial loans of a consumptive nature. However, in modern banking, borrowing tends to have a productive nature and contributes to profit generation. Consequently, the conclusion can be drawn that, since interest is the cost of using money in productive activities in modern industry and commerce, it is not forbidden. In this context, the borrower invests the loaned sum in new industries and commerce, generates profit, and therefore must pay a share of that profit as interest. Hence, what the Qur’an has prohibited is riba—not interest. Furthermore, the research findings underscore the importance of understanding the philosophy behind the prohibition of riba for the development of the Islamic financial system, encouraging jurists and Muslim economists to conduct extensive research on the matter. Ultimately, the study concludes that a zero interest rate is not consistent with the theory of the prohibition of riba in Islamic economics. The prohibition of riba in the Islamic economic system leads to the realization of optimal conditions in practice within Muslim societies, in contrast to capitalism, where achieving optimal conditions—defined as the realization of all possible returns—is theoretically unattainable. The mental and objective foundations of interest proposed by capitalist economists have aimed to legitimize and naturalize the demand for loan interest. However, the theory of the prohibition of riba is based on the notion that interest lacks any natural or real foundation.