Riba
In one sentenceA stipulated increase over the principal of a debt in return for time, or an increase in exchanging riba-bearing items of the same kind; it is prohibited in Sharia.
Simply put
Its best-known form is riba on debts: lending 100,000 SAR on condition of getting back 110,000 SAR. Another form is riba in sales, such as exchanging gold for gold with an increase or a delay.
Islamic finance structures avoid this by having the financier's return arise from selling goods, leasing an asset or a partnership in which it bears the risks, not from lending money at an increase.
Example
A supplier required a customer to pay an extra amount for every month he is late in paying his invoice, with the extra going to the supplier. This is an increase on a debt in return for time, which is why Islamic contracts deal with late payment in other ways set by the Sharia board.
Don't confuse it with
Profit rate in Islamic financeThe profit margin comes from selling goods or leasing an asset, with its price set once at the time of the contract, while riba is an increase on the money itself in return for time.