Ribaa or interest is sometimes defined as `the money paid for the use of money borrowed'. This definition confuses some people and they mix up ribaa with rent, whereas the two are quite different from each other.
Rent is a payment made periodically for the use (not consumption) of an asset, eg, for the use of some land, building, machinery, etc.
On the other hand, any financial arrangement must qualify two simultaneously present conditions to be classified as one containing ribaa:
i) There is a predetermined fixed increment for the lender over and above the commodity lent, and the increment must be paid back to the lender within a specified period of time.
ii) The commodity lent is used up (consumed) by the borrower, and then it is `re-created' for the purpose of returning it to the lender along with the fixed increment or interest.
Mr B rents his house to Mr A for one year at Rs. 500 per month. If in one of these months Mr A does not have Rs. 500 to pay the rent, he would have to only vacate the house, thereby returning the asset he was using. He would not have to `re-create' the building to return it back to the lender. This arrangement involves rent not ribaa.
But supposing Mr A had borrowed some wheat from Mr B for a specified period of time and had to pay Rs. 100 every month as interest, this arrangement would involve ribaa. The reason is that Mr A would first use up (consume) the wheat and then would have to `re-create' it (or its value) to return it to Mr B. If in a certain month Mr A did not have Rs. 100 to pay the interest, Mr B, under this arrangement, would be demanding not only the increment but also the `re-creation' of the commodity lent.
In the first case, Mr A is never overburdened. If he is unable to pay the rent, he would have to return the borrowed asset only. However, in the second case, the lender has the legal right to demand not only the remaining unpaid interest but also the `re-creation' of the commodity lent from a man who does not have even Rs. 100 to pay the monthly interest. The second agreement involving ribaa, therefore, is a clear case of gross exploitation of the borrower. The only probable alternative left with Mr A in such a case would be to sell his personal property to pay the interest and to return the commodity borrowed.