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ETFs · Index funds · Workplace funds · Stocks · Mana Credit · Compare halal products ↗ · Terms · PrivacyRiba explained simply: the two types, why bank savings accounts and bonds involve it, and what alternatives actually exist.
The Arabic word riba literally means "increase" or "excess." But in an Islamic finance context, it refers specifically to unjust increase: money made from lending money rather than from productive work.
The Quran prohibits it clearly. The hadith literature is extensive on the subject. It's one of the areas where Islamic scholars across all major schools agree.
This is the type most people think of. You lend £1,000 and require £1,100 back. The extra £100 is riba al-nasiah: profit from the act of lending alone, not from any productive activity.
This covers mortgages, credit cards, personal loans, and, critically for investors, conventional government bonds and corporate bonds. When you buy a bond, you're lending money to a government or company in exchange for fixed interest payments. That's riba.
This is less commonly discussed but equally important. It refers to unequal exchanges of the same commodity: trading gold for gold of unequal weight, or silver for silver with a premium. In modern finance, it applies to certain currency exchange arrangements and commodity swaps.
Most individual investors won't encounter riba al-fadl directly, but it's relevant if you're looking at forex trading or certain derivatives.
A conventional savings account pays you interest. The bank lends your money out at a higher rate and keeps the difference. Your "savings rate" is just your share of that interest income. That's riba: your money is being used to fund interest-based lending.
Islamic savings accounts work differently. Banks like Al Rayan and Gatehouse Bank use profit-sharing models (mudarabah or wakala): they invest your money in shariah-compliant assets and share the profit with you. Same result practically, different mechanism. Halal.
When you buy a share in a company, you own a piece of its business. Your return comes from the business doing real things: making products, providing services, growing over time. That's profit from productive activity, not profit from lending.
Islam has a long tradition of permitting trade and business ownership. Stocks, at their core, are just fractional business ownership. That's not riba.
The caveat: the company can't itself be primarily riba-based (like a conventional bank). And it can't carry excessive debt relative to its assets. That's what the screening criteria in a halal ETF check for.
Bonds: generally haram (interest-based lending).
Conventional savings: often haram (interest income).
Screened stocks and halal ETFs: generally halal.
Islamic savings accounts: halal.
The riba test is simpler than most people think: is your money working in a real business, or is it earning from the mere act of being lent?
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