What is Riba?
In short
Interest (usury) charged or paid on a loan. Prohibited in Islam.
Also known as: interest, foiz, usury
Riba is any stipulated excess paid on a loan — in other words, interest (usury). In Islam both charging and paying riba are strictly prohibited, and much of Islamic finance is built around creating interest-free alternatives.
Where a stock investor meets it
- At the company level. Almost every large company borrows at interest or keeps cash in interest-bearing deposits. That is why screening checks the debt ratio and the interest-bearing assets ratio, and interest income counts as impermissible income.
- At the investor level. In a margin account you pay interest on the broker's loan. Most scholars consider margin trading impermissible for this reason.
- Idle cash. Some brokers automatically pay interest on uninvested cash in the account.
Alternatives
Instead of interest, Islamic finance uses profit-and-loss sharing (mudaraba, musharaka), cost-plus sale (murabaha) or leasing (ijara). Instead of bonds — sukuk. For small amounts of interest income at the company level, purification is applied.
For information only, not a fatwa.
Example
An illustrative case: an investor buys $10,000 of stock — $5,000 of their own money and a $5,000 margin loan at 8% a year.
- One year of interest: $5,000 × 8% = $400 — this is a riba payment.
Second case: the broker pays 4% a year on $2,000 of idle cash → $2,000 × 4% = $80. This is interest income; many scholars advise giving it to charity rather than using it. If the broker lets you switch that feature off, you can do so in advance.
Mistakes and tips
When opening a brokerage account, check whether you can choose a cash account rather than a margin account.
Find out from the broker's terms whether idle cash is automatically swept into an interest-paying option.
A company having some interest-bearing debt does not by itself exclude it from screening — what matters is whether the ratio is within the standard's limit.
Halal finance terms are explained for general information — not a fatwa. Not investment advice either.
Frequently asked questions
- Is investing in stocks considered riba?
- A share is an ownership stake in a company, not a loan, so it is not riba in itself. But the company's interest-bearing debt and income are checked through screening.
- What should I do with interest my broker paid on idle cash?
- Many scholars advise giving such interest to charity rather than using it personally. For your specific situation, it is best to ask a trusted scholar.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
- What a stock is and why its price movesA stock is a real slice of a business. IPOs, market cap, how price forms, where returns come from, and the risks.Open lesson · 11 min
- Halal investing basicsHow a stock passes a Shariah screen: business activity, the three AAOIFI ratios with numbers, doubtful cases and what is off-limits.Open lesson · 12 min
- Growth vs value stocksDefinitions and metrics of both styles, growth quality, value traps, interest-rate sensitivity (with a discounting example), style rotation, the halal universe's tilt and a blended portfolio.Open lesson · 12 min
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