Riba al-Fadl

Riba al-fadl (Arabic for "riba of excess") is the form of riba that arises when two quantities of the same kind of certain commodities are exchanged in unequal amounts. Islamic law identifies six such commodities in the founding hadith, namely gold, silver, wheat, barley, dates and salt, and requires that each be exchanged for its own kind only in equal measure and hand to hand. Any excess on one side, even if the goods differ in quality, is riba al-fadl and is prohibited.

Riba al-fadl is distinguished from riba al-nasi'ah, the riba of deferment, which concerns increase in return for time and delayed delivery. Together they form the doctrine of riba in sales, which governs modern currency exchange, gold trading and the design of many Islamic finance products.

The rule rests on a hadith narrated by Ubadah ibn al-Samit and recorded in Sahih Muslim and other collections. It states, in substance, that gold is to be exchanged for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, like for like, equal for equal, and hand to hand; and that when the kinds differ, one may sell as one wishes provided the exchange is hand to hand.

From this, jurists derived three rules:

• Same kind: equality in quantity and immediate exchange are both required. Ten grams of gold for ten grams of gold, on the spot.
• Different kinds within the same category: for example gold for silver, or wheat for dates. The quantities may differ, but the exchange must still be immediate.
• Different categories: for example gold for wheat. Neither equality nor immediacy is required, so a deferred or unequal exchange is allowed.

Another well-known report concerns the Prophet's companion Bilal, who exchanged two measures of lower-grade dates for one measure of superior dates. The Prophet called this the essence of riba and instructed that the lower-grade dates be sold for money and the superior dates then bought with the proceeds. The lesson is that quality differences do not justify unequal exchange within the same kind, but trading through money is permitted.

Jurists asked why these six items were singled out, so that the rule could be applied to other goods by analogy. The schools reached different answers about the effective cause (illah):

• The Hanafi and, in one view, the Hanbali schools focused on goods sold by weight or volume, extending the rule to items such as iron or rice.
• The Shafi'i school held that gold and silver are covered because they are the measure of value, or currency (thamaniyya), and the four foods because they are edible.
• The Maliki school treated the foodstuffs as covered because they are staple foods that can be stored, and gold and silver because of their monetary nature.

The view that gold and silver are covered as money has had the largest modern consequence. Most contemporary scholars, including bodies such as the International Islamic Fiqh Academy and AAOIFI, apply the same rules to paper and electronic fiat currency, treating each national currency as a separate kind.

Because currencies are treated like gold and silver, an exchange of two different currencies may be at any agreed rate but must be settled immediately, which modern scholarship generally interprets to include the standard two-day settlement of a spot trade. An exchange of the same currency must be equal: one hundred dollars cannot be swapped for one hundred and two dollars, which is why a loan with interest is also riba. This is the reasoning behind the exchange contract known as sarf, and behind the requirement of possession, or qabd, in currency and gold dealing. Forward and deferred FX contracts are therefore generally impermissible, and Islamic banks hedge currency risk with a wa'd instead.

The rules shape how Islamic investors trade gold. A purchase of allocated gold for cash, settled on the spot, is generally accepted; a gold-for-gold exchange must be equal in weight regardless of form or purity; and a jeweler who trades old jewelry for new is advised to sell the old for money first and then buy the new, following the Bilal precedent. Related issues arise in standards for gold-based products and in the use of monetary gold as a store of value.

Scholars have offered several explanations for the rule. One is that it prevents disguised interest: an unequal exchange of the same commodity, especially with any delay, can replicate a loan. Another is that it protects fairness and transparency in the trade of staple goods and money, encouraging the use of money as a common measure of value, which also addresses the double coincidence of wants problem of barter. Classical writers such as Ibn al-Qayyim argued that the rule closed the door to interest-based dealing. These purposes are connected to the wider aims of Islamic law, the maqasid al-Sharia.