Last updated 14 November 2026 · Reviewed by Riyadh Financial Services Compliance
At a glance
- Riba literally means "increase", and in finance it usually refers to interest charged on money lent.
- Islamic finance links the financier's return to something real: rent on an asset, a sale, or a share in a partnership.
- Our Ijaar home finance has a rental rate, not an interest rate, because you pay rental for the use of the financier's ownership share.
- For the full picture of how the structure works, see how Islamic home finance works.
What does riba mean?
The word riba comes from an Arabic root meaning to increase or grow. In Islamic finance, it describes any increase that's charged simply because money has been lent, or because repayment has been delayed. It's usually translated as interest or usury.
What makes an increase riba is that the return comes from money alone, with no asset, trade or shared risk behind it. Earning a return isn't the problem in itself: trade, rent and partnership profits are all permitted when they're properly structured.
What are the main types of riba?
Islamic scholars usually describe two main types. In general terms:
- Riba al-nasi'ah (riba of delay): an increase charged for lending money or for giving more time to repay. This is the type most people mean when they talk about interest.
- Riba al-fadl (riba of excess): an unequal exchange of the same kind of certain goods, such as gold for gold or one kind of staple food for the same kind, in different quantities. The rule helps stop riba entering through the back door of a trade.
The detailed rules are a matter for scholars. We explain general concepts, but we don't give religious rulings.
Why does Islamic finance avoid riba?
The Qur'an prohibits riba, and avoiding it is one of the core principles of Islamic finance. Scholars commonly give these reasons:
- Fairness: a fixed increase on money lent puts the risk on the person who receives the money, while the provider's return is set regardless of outcome.
- Real economic activity: a return should come from an asset, a trade or a business, not from money on its own.
- Shared responsibility: the financier should carry some of the risks that come with the asset or transaction it earns from.
Islamic finance also avoids gharar (excessive uncertainty in a contract) and maysir (gambling or speculation).
Is interest on conventional lending riba?
Many scholars regard interest charged on conventional lending, including conventional mortgages, as riba. That's why many Muslim households in Australia look for a Shariah-compliant (in line with Islamic law) alternative.
People often search for an "interest-free home loan" or an "Islamic home loan". What they usually mean is Ijarah home finance, a lease that ends in ownership, with no interest. It isn't free: you pay rental for the use of the financier's share, and your payments also reduce the amount financed.
How does Ijaar home finance avoid riba?
Our Ijaar home finance uses Ijarah Muntahia Bittamleek, a lease that ends in ownership. The financier's return comes from rent on a real asset, not from lending money for money.
- The financier appoints you as its agent (wakeel, under a Wakalah agency agreement) to buy the property on its behalf.
- You're the registered owner on the title from settlement. The financier holds a registered mortgage and a beneficial interest (an ownership share).
- You pay rental for the use of the financier's share. With Principal and Rental, you also make payments that reduce the amount financed.
- When all payments are made, the financier's ownership share passes to you.
| Question | Riba (interest on money lent) | Rental under Ijarah |
|---|---|---|
| What you pay for | The use of borrowed money | The use of the financier's share of a real property |
| What the return is linked to | Money alone | A real asset |
| What you pay is called | Interest | Rental, at a rental rate |
| Who's on the title | You, with a mortgage to the provider | You, with a registered mortgage and the financier's beneficial interest |
Why are rental rates set with reference to the market?
The financier funds the property in the Australian market, so rental rates are set with reference to market funding costs. Many scholars accept a market rate as a benchmark for rent, because the return still comes from rent on a real asset. Our guide Is Islamic home finance more expensive? explains what drives the cost.
What are the pros and cons of riba-free home finance?
Possible pros
- A structure based on rental on a real asset, in line with Islamic principles.
- The same consumer protections as other regulated credit, including hardship help and free external complaints through AFCA.
Possible cons
- Approval isn't certain: every application is assessed against credit criteria.
- A variable rental rate can change, and fees and charges apply, so compare the total cost, not just the rate.
How do you get riba-free home finance, step by step?
- Talk to a broker about your plans. If you don't have a broker, contact us and we can refer you to an accredited broker.
- Ask how the structure works and where the financier's return comes from.
- Your broker assesses your income and financial situation and lodges your application with the financier.
- If approved, you review your credit contract, mortgage and Shariah documents before you sign.
How can Riyadh Financial Services help?
Riyadh Financial Services arranges Shariah-compliant property finance through accredited mortgage brokers. Accredited brokers must act in your best interests under Australian credit law (the best interests duty), and they work across Australia, in person or online.
- Ijaar home finance for buying a home to live in or an investment property.
- Refinancing existing finance to Ijaar home finance.
- Al-Mustaqbal SMSF finance for self-managed super funds buying commercial property.
Our product structures are reviewed by our independent Shariah adviser. Ask us for the current Shariah certificate and what it covers. We explain how our structures work, but we don't give religious rulings, and you're always welcome to seek your own scholar's view.
Keep reading:How Islamic home finance works · Ijarah vs Murabaha · Ijaar home finance