Riba - It has been argued in vain for long in some circles that the prohibition in Islam is that of excessive interest only. Or that it is the interest on consumptive loans that has been forbidden and as such loans extended for commercial purposes are entitled to an excess over the principal amount lent. Such tendentious arguing fails to give due understanding to verses 278 and 279 of Surah Al-Baqarah (quoted below).

“O ye who believe! Be afraid of Allah and give up what remains (due to you) from Riba (usury) (from now onwards) if you are (really) believers! 2:278. And if you do not do it, take notice of war from Allah and His Messenger! But if you repent, you shall have your capital sums  2:279

However, this does not mean that Islam prohibits any gain on principal sums. In Islam, profit is the recognized reward for capital. When capital employed in permissible business yields profit that “excess over capital” becomes the rightful and just claim of the owner of the capital. As a corollary, the risk of loss also rests exclusively with the capital and no other factor of production is expected to incur it. Another important element of Islamic finance is that profit or reward can only be claimed in the instance where either risk of loss has been assumed or effort has been expended. Profit is therefore received by the provider of capital and wages/remuneration by labor/manager.

A depositor in an Islamic bank can therefore make earnings on his or her deposit in several ways. Through return on his capital when that capital is employed in a business venture; through sharing of profit when his capital is part of the capital that is employed in a partnership, and finally through rental earnings on an asset that has been partially financed by his capital.