ACCA Financial Management (F9) Certification Practice Exam

What is the financial principle followed when dealing with riba?

1. Interest is encouraged

2. Interest is prohibited

3. Loans must have fixed interest

4. Interest rates should be regulated

The correct answer is: Interest is prohibited

The financial principle followed when dealing with riba, which is often translated as "usury" or "interest," is that interest is prohibited. This is grounded in Islamic finance, which emphasizes ethical financial practices. The concept of riba is seen as exploitative because it generates income from money rather than productive activity, leading to inequalities and injustices in society. In Islamic finance, transactions must be based on fairness and risk-sharing, which is why any guaranteed fixed return on loans, as implied in other options, goes against the principles of Sharia law. Therefore, the prohibition of interest promotes the idea of investing in ventures and sharing in the risks and rewards, aligning financial activities with ethical values and social justice. This principle serves as a foundation for more equitable and transparent financial systems within Islamic finance, ensuring that lending practices do not harm borrowers unduly or create unproductive wealth for lenders.