Riba explained
Interest is the prohibition that shapes every other answer in Islamic finance. The definition is narrower, and more demanding, than most summaries suggest.
On this page
What riba means
Riba is an increase. In the legal sense that concerns investors, it is an increase received on a loan of money or fungible goods without a corresponding transfer of risk or of anything of value. The lender is owed the principal plus a stipulated addition, and is owed it whether the borrower’s venture succeeds or fails.
The Qur’anic passage most often cited is 2:275–281, which sets trade and riba against one another rather than treating them as points on a scale. We paraphrase rather than quote a copyrighted translation: the passage permits trade, prohibits riba, and instructs the creditor to relinquish the increase and take the principal. That framing matters, because it tells you what the prohibition is protecting — the difference between earning from an exchange and earning from the passage of time on money owed.
The test that actually matters
The test is not the size of the return or the word used for it. It is whether the amount is owed to you regardless of what happens to the underlying activity. A return that survives the failure of the venture is a return on money, not on enterprise.
The two classical categories
Classical jurists separate riba into two forms, and both are relevant to modern products.
Riba al-nasi’ah is the increase attached to deferment — the additional amount payable because repayment is postponed. This is the form that covers conventional lending: an interest rate is the price of time.
Riba al-fadl is the excess in a hand-to-hand exchange of the same kind of commodity, where a quantity of something is traded for a larger quantity of the same thing. It looks archaic until you apply it to currency exchange, where the rule that like must exchange for like in equal measure and immediate settlement still governs how spot trades are analysed.
The practical consequence for an investor is that a product can avoid the first form and still fall foul of the second. Deferred settlement in a currency trade is the common example, which is why several assessments on this site turn on when settlement actually occurs rather than on the rate charged.
How the prohibition reaches ordinary products
Most readers arrive at this page holding one of four things: a savings account, a bond fund, a brokerage account, or a workplace pension. The prohibition reaches each of them differently.
A savings account paying a stated percentage is the clearest case. The bank owes you that amount irrespective of its own results, which is the structure the prohibition names. A profit-sharing account on a mudarabah basis is a different arrangement, and the question there becomes whether the advertised rate is genuinely expected or effectively guaranteed.
A bond is a loan with a coupon. A bond fund is a portfolio of loans with coupons. No screening label applied to the fund’s distribution changes what the fund holds.
A brokerage account is usually permissible in itself, and the questions sit in its features: margin borrowing, share lending programmes, and interest credited on uninvested cash. Two of those three are typically opt-in, and the third is often on by default.
A common mistake
Treating a Shariah certificate as an answer to this question. A certificate covers a defined scope on a defined date — often the fund’s holdings, not the account features, the cash management, or the securities lending arrangement layered on top. Read what the certificate says it covers before you rely on it.
Where scholars differ
Two disagreements are worth knowing about, because they change what a reasonable person can conclude.
The first is whether interest charged by a modern regulated bank falls under the classical prohibition in the same way as the lending it originally addressed. The overwhelming majority position, and the position taken by AAOIFI in its standards, is that it does. A minority view associated with some twentieth-century reformist writers distinguished bank interest in an inflationary economy from the exploitative lending of the classical texts. This minority position has not been adopted by any major standard-setting body, and readers should know it exists without mistaking it for the mainstream.
The second concerns tolerance for incidental interest income in a company’s accounts. Screening standards accept that a listed company will hold cash and earn something on it, and each sets a threshold above which the holding is excluded. Those thresholds differ, and so do the denominators they are measured against — some use market capitalisation, others total assets, and the choice can flip the conclusion for the same company in the same year. We do not publish a fixed number here, because there is no single industry-wide number to publish.
Where standards disagree
On incidental interest income, AAOIFI’s standards, the Dow Jones Islamic Market methodology, the FTSE Shariah ground rules and the MSCI Islamic series each apply their own test and their own denominator. Scholars advising each body have reached defensible but different conclusions. Two apps can therefore disagree about one company without either having made an error.
A screen is a threshold applied to a disclosure, not a statement about a business.
— Our editorial standard
What each standard tests
The table below describes what the major published standards examine, and why their conclusions diverge. It deliberately omits threshold figures: those are revised, and citing them second-hand is how outdated numbers spread.
| Standard | What it tests | Why conclusions diverge |
|---|---|---|
| AAOIFI Shariah Standards | Sector activity, interest-bearing debt, interest income and liquid asset composition, applied as a set of ratios defined in Standard 21. | Sets the ratios but leaves the reference figure to the adopting institution, so implementations differ. |
| Dow Jones Islamic Market | Sector exclusions plus debt, cash and receivables ratios, each measured against a trailing average market capitalisation. | A market-cap denominator moves with the share price, so a screen can pass or fail on valuation alone. |
| FTSE Shariah Global Equity | Sector exclusions plus debt, cash and interest income ratios measured against total assets, reviewed on a published cycle. | A total-assets denominator is insensitive to price but slower to reflect a change in the balance sheet. |
| MSCI Islamic Index Series | Sector exclusions plus leverage, cash and receivables tests, with a defined dividend purification calculation. | Purification is calculated at index level, which is not the same figure an individual holder would derive. |
| Scheme or fund board | Whatever the mandate document says, which may be one of the above, a variant, or a bespoke policy. | Scope is set by contract, so two funds citing the same standard can still screen differently. |
Descriptive summary of published methodologies as at June 2026. Consult the current rulebook from each publisher before relying on any screen.
What to do with this
Read the explainer on cost-plus sale next, because murabaha is the structure most often offered as the alternative to interest-based finance, and understanding it makes the others legible. Then read one assessment in full and follow the working rather than the verdict — the point is to be able to repeat the reasoning on a product we have not covered.
When you have a specific product and a specific balance in mind, take the documentation to a qualified scholar and a licensed adviser. That conversation is what this page is designed to prepare you for.
Sources
- Qur'an 2:275–281 (paraphrased; translation not reproduced)
- AAOIFI, Shariah Standards, Standard 1: Trading in currencies
- AAOIFI, Shariah Standards, Standard 21: Financial paper (shares and bonds)
- S&P Dow Jones Indices, Dow Jones Islamic Market Indices Methodology, current edition
- FTSE Russell, FTSE Shariah Global Equity Index Series Ground Rules, current edition
- MSCI, MSCI Islamic Index Series Methodology, current edition
- Account terms and key investor information documents of the product types described, read on the review date
Related explainers
Structure
Cost-plus sale
murabaha
The bank buys the asset and sells it on at a disclosed mark-up. The requirement people miss is genuine prior ownership.
Prohibition
Uncertainty in a contract
gharar
Ambiguity about price, subject matter or delivery, and the line between tolerated uncertainty and a wager.
Practical
Purification of investment income
How to calculate the impermissible share of a return, the methods standards use, and where the calculation is disputed.
This is educational content, not a fatwa or personalised financial advice. Investment carries risk, including loss of capital. Verify any specific product with a qualified Shariah scholar and a licensed financial adviser before investing.