Riba refers to the practice of earning money without incurring any effort or risk, resulting in a guaranteed return. In this arrangement, the lender receives profit while the borrower bears all the risk. This type of transaction is exploitative, as the lender benefits from profit without contributing to the risk or effort, which is why it is prohibited in Islam.
However, interest is often confused with profit-sharing. For example, if a profit of $100 is made on a $400 investment, the calculation ($100 /$ 400 + $100)) results in 0.20, or 20%. This is not riba, as it represents a profit-sharing arrangement where both the lender and borrower share in the outcome rather than a guaranteed return to the lender.

On the opposite side of the spectrum, there are investments characterized by high risk and uncertainty, such as gambling (maysir), and speculative investments like Bitcoin. These activities fall under the concepts of gharar (excessive uncertainty) and maysir (gambling), both of which are also prohibited in Islamic finance due to the inherent risk and unpredictability.
Islamic finance seeks to strike a balance between these extremes—avoiding exploitative practices while steering clear of uncertain, speculative risks. The goal is to ensure fairness, transparency and shared responsibility between the parties involved.