Riba is prohibited on the grounds that it goes against the Islamic principles of fairness, societal wellbeing, and justice.
WHY IS INTEREST (RIBA) FORBIDDEN IN ISLAM?
In any transaction involving riba, an imbalance is created between the borrower and the lender.
The lender receives a guaranteed profit which is the interest payment paid over and above the actual loan amount.The lender does not assume any of the risks in this transaction, and Islamic finance places emphasis on risk and profit sharing.
Interest is considered one of the major sins in Islam. That alone means that many Muslims will shun interest-based products and services.
WHAT DOES THE QURAN SAY ABOUT INTEREST?
The Quran has multiple verses that explicitly prohibit riba. These include the following:
- Quran 3:130 - this verse states 'O, you who believe, do not consume riba, doubled and multiplied, but fear Allah'.
- Quran 2:275: this verse states 'Allah has permitted trade and forbidden riba'.
The absolute prohibition on riba goes beyond the concept of exploitation and usury. It encompasses the concept of ensuring that social, economic, and ethical considerations are part of financial transactions.
Islam emphasises the greater societal good and social wellbeing. Management of funds and income should not be used in practices that cause harm to others. When a borrower is obliged to repay a loan with interest, this is seen as an unfair in Islam.
img style="float:right; width:500px; margin-left:10px;Not only does the borrower have to pay back more than they borrowed, but they face the burden of an increased repayment and potentially a debt trap. Riba is also seen as enabling the concentration of wealth amongst the rich, whilst the poor get poorer.
Another important element of riba that is deemed to be harmful to society is that interest itself generates an income but that income is not linked to productivity of economic activity. Riba is a risk-free gain that does not benefit society.
In terms of moral and societal degradation, riba is fundamentally exploitative and undermines Islamic principles of fairness and compassion. Interest-based systems are dependent on the markets remaining stable, so having a riba free option leads to greater financial stability.
Whether you work in industry, or are planning a large project, there are Islamic finance services that are Sharia compliant that can meet your needs.
At the core of the ban on interest lies the Islamic teaching that wealth should be earned honestly and not through exploitation. If someone comes to you in need and asking for a loan, and you are able to lend them the money but charge interest, you are exploiting their need and benefiting financially.
In very simple terms, the ban on interest relates to promoting fairness and encouraging productive investments and activity. This will ultimately lead to a more compassionate and equal society.
WILL ALLAH FORGIVE RIBA?
For those who partake in riba, whether that is charging or paying interest, the question of whether Allah will forgive them is connected to the wider Islamic concept of tawbah (repentance).
Muslims view Allah as the most forgiving and the most merciful and repentance is encouraged.
However, any repentance must be sincere and when it comes to riba it means that the person must have sincere regret partaking in riba and must immediately stop. There is also an obligation not to return to riba at any stage of life and to try and rectify any harm caused.
HOW TO AVOID RIBA IN MODERN BANKING SYSTEMS AND ECONOMIES?
Whilst it can be challenging to completely avoid riba in the modern and Western banking system, there are interest-free alternatives available in the modern financial markets. The growth of Islamic finance means that more and more services and products are available for those wanting to comply with Sharia rules relating to financial transactions.
The Islamic finance infrastructure and architecture are continually in development and construction.
Products including halal mortgages, halal funding options, halal student loans, and halal index funds mean Muslims can partake in the banking systems without breaching Islamic rules. There are many alternatives to interest-based financial instruments.
WHAT ABOUT STUDENT LOANS, CREDIT CARDS, AND MORTGAGES?
All types of financial products are available on the financial markets these days. You should always undertake due diligence to assess the Sharia compliancy of financial products.
Halal and interest-free loans have revolutionised professional industries that focus on societal wellbeing and social responsibility.
There are even interest-free cryptocurrency and bitcoin options available within the United Kingdom and beyond.
ARE THERE ANY PERMISSIBLE FORMS OF INTEREST?
The short answer to this question is no. Riba is strictly prohibited in Islam. However, this does not mean that you cannot find alternative financial products that can provide you with the funding or returns you need.
Whilst there is no form of interest that is allowed, there are Sharia-compliant financial contracts that are sustainable alternatives. These include murabaha and musharaka contracts that enable risk and profit sharing.
HOW CAN I HANDLE UNAVOIDABLE INTEREST FROM SAVINGS ACCOUNTS?
For Muslims, it can be challenging to deal with unavoidable interest from savings accounts, particularly if you live in the West. However, if you have an account that, by design or structure, is based on interest then there are some actions you can take to make sure you adhere to Islamic rules about finance.
- Monitor your account
- Switch to an Islamic bank as soon as possible
- Check with your bank to make sure you are not receiving interest on savings and if you are then ask to waive the interest
- Search for interest-free accounts
- If you do accumulate interest then donate that interest to charity. Muslim scholars and experts have confirmed that you can donate the money received.
- When donating interest do not expect to receive any reward.
- Remember, whilst you can personally benefit from riba, it can be donated to those in need via a registered charity.
Whether you are a student looking to finance your education, or a business hoping to fund new processes and equipment, it can be difficult to operate within interest based banking systems. Here are some key things you can be doing:
- Educate yourself on Islamic finance rules
- Seek out Islamic finance loans, experiences, and markets.
- Support Islamic finance initiatives
- Choose Islamic banks and companies who facilitate riba-free products
- Look for and ask for halal alternatives
- Consult with experts and scholars
- Make ethical investments and avoid any industry, job, product or sector that is rooted in haram activities.
- Encourage financial innovation, policy, and ideas
- Build networks with other Muslims
Every Muslim should understand that involving themselves in interest can have spiritual consequences. This can include a spiritual disconnection from the teachings of Islam and Allah's commands. It can also mean there is greater accountability and punishment on the day of judgement.
Not only is interest seen as a bad practice, spiritually it can lead to a loss of blessings and barakah in earnings and family life. There is a whole ethical decline associated with riba that can lead to a mindset that prioritises money and wealth over wellbeing. For Muslims, this is frowned upon.
For those engaging in riba, the spiritual consequences go beyond financial implications. They include a deep sense of moral and ethical responsibility, understanding and complying with Allah's commands, and the pursuit of divine approval.
HOW DO ISLAMIC BANKS OPERATE WITHOUT INTEREST?
Islamic banks operate without interest by adhering to Islamic finance rules relating to operation. Islamic finance products focus on profit and loss sharing and alternative contractual arrangements.
They are able to offer alternative halal products by offering joint venture arrangements, partnerships and Islamically compliant services. Islamic banks also partake in ijarah which is effectively a form of leasing.
Many people wonder how Islamic banks make money and the answer lies in understanding the different forms of products and services they offer.
For example, in a murabaha contract the bank could purchase a house and instead of charging interest on the sale, they sell it to the purchaser for the purchase price plus a mark up. The bank earns a profit via the mark up and not by charging interest.
WHAT ARE HALAL ALTERNATIVES TO COMMON FINANCIAL PRODUCTS?
There are many products and services on the market that offer great alternatives to conventional interest-based services. Here are some listed below:
- Cost-plus financing loans (murahaba)
- Partnerships or joint ventures (musharaka)
- Leasing (ijarah)
- Benevolent loans (qard hasanat)
- Safe custody accounts (wadiah)
- Islamic bonds (sukuk)
The main reason riba is prohibited is the concept that it makes the rich richer and the poor poorer. There is an inequality in the dealings between the parties that is frowned upon in Islam. Interest is seen as perpetuating and often increasing the gap between rich and poor humans in society.
Islam prohibits any transaction that is seen as exploitative, and profiting from lending is seen as exploitative.
Many Muslims in Western societies are unaware that there are financial services and products that are compliant with Sharia law, and they therefore continue to accrue debts and interest on credit cards, mortgage loans, and bank loans.
DONATIONS OF INTEREST MONEY TO CHARITY
As mentioned above, one of the best ways to use any monies received in the form of interest, is to donate the interest monies to charity. What this means is that the recipient of the interest does not profit from the interest monies, instead the donation is used by the charity to serve the poor.
Many Muslims accrue interest by default when using commercial or personal accounts. Most western banks automatically pay account holders any interest accrued on money they hold.
In Islam, riba monies from interest can be donated to charity. The donor must make clear to the charity that the donation money is interest money and not zakat or sadaqah. Riba monies can be spent by charitable organisations on buying essential supplies for the poor. The donation money cannot be used to purchase Qurans or to build a mosque.