Introduction

The prohibition of riba (usury or interest) is a cornerstone of Islamic economic ethics. The Qur’an explicitly condemns riba, and the Prophet Muhammad ﷺ emphasized the severity of engaging in it. In response to this prohibition, Islamic finance emerged as an alternative system designed to avoid interest-based transactions. However, critics often argue that in practice, Islamic finance is merely “conventional banking with Arabic terminology,” serving as a backdoor to riba. This article explores whether such criticisms are valid.

The Principle of Islamic Finance

Islamic finance is founded upon three central principles:

1. Prohibition of Riba – Money cannot generate money by itself.

2. Risk-Sharing and Fairness – Parties must share profit and loss equitably.

3. Asset-Backed Transactions – Every contract should be tied to real assets or services, ensuring transactions reflect genuine trade.

In theory, Islamic finance seeks to replace interest with trade (bay‘), leasing (ijarah), and profit-sharing partnerships (mudarabah and musharakah).

Common Contracts in Islamic Finance

1. Murabaha (Cost-Plus Sale): The bank purchases an asset and sells it to the client at a marked-up price, payable in installments.

2. Mudarabah (Trust-Based Partnership): The bank provides capital while the entrepreneur contributes expertise; profits are shared according to a pre-agreed ratio.

3. Musharakah (Equity Partnership): Both parties contribute capital and share profits or losses proportionately.

4. Ijarah (Leasing): The bank retains ownership of an asset and leases it to the client in exchange for rental payments.

These contracts are intended to distinguish Islamic finance from conventional lending, where interest is charged on borrowed money.

The Criticism: A Backdoor to Riba?

Despite its ideals, modern Islamic finance has been criticized for resembling conventional banking in practice:

Murabaha Concerns: In many cases, the “asset purchase” is purely notional. The bank never truly assumes ownership or risk, and the transaction effectively mirrors a loan with interest.

Risk Aversion by Banks: Instead of sharing risks with clients (as in mudarabah or musharakah), most banks prefer fixed-profit models, transferring all risk to the customer.

Profit Rates vs. Interest Rates: In practice, Islamic financial products often peg their profit rates to conventional interest benchmarks (e.g., LIBOR or local base rates).

Cosmetic Changes: Critics argue that the difference between paying “interest” and paying “profit on deferred payment” is semantic rather than substantive.

These concerns lead to the charge that Islamic finance is merely a rebranding of riba.

Scholarly Perspectives

Supportive View (Majority of Contemporary Scholars):

Islamic finance remains permissible as long as contractual requirements are fulfilled.

Even if the outcomes resemble conventional banking, the legal structure (i.e., aqd, or contract) differentiates trade from interest.

Imperfect implementation does not invalidate the principle itself.

Critical View (Minority Scholars and Economists):

When banks avoid genuine risk-sharing and merely replicate conventional loans, the spirit of Shariah is violated.

They contend that some practices constitute “form over substance,” thereby functioning as a backdoor to riba.

Conclusion

In principle, Islamic finance is not a backdoor to riba. It provides a framework grounded in trade, asset-backing, and risk-sharing, which distinguishes it from conventional interest-based systems. However, in practice, the implementation of Islamic finance varies widely. Some institutions adhere closely to Shariah principles, while others mirror conventional banking with minimal structural changes.

Thus, the responsibility falls upon both financial institutions and consumers: institutions must strive for authenticity and transparency in contracts, while consumers should seek knowledge and carefully evaluate the products they use. Ultimately, the distinction between genuine Islamic finance and a disguised form of riba lies in the substance of the contract and the integrity of its execution, not merely in its label.