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In Islamic Finance, debt, lending and borrowing are governed by the principles laid out by the Qur’an and Sunnah. These principles emphasize justice, fairness, and the prohibition of exploitation.
This article dives into the Shariah perspective on this transaction, while addressing key questions to provide a comprehensive understanding.
The necessity of debt and borrowing in certain circumstances is a reality that the Shariah of Islam accepts, but with certain caution. Allah Emphasizes in the Qur’an about the importance of documentation of contracts of debt to avoid confusion and disputes:
“O you who have believed, when you contract a debt for a specific term, write it down…” (Surah Baqarah, Verse 282).
Likewise, the Prophet (PBUH) highlighted the seriousness of accumulating debt. He stated that the soul of a believer remains suspended until their debt is settled (Sahih Muslim, Hadith 1885).
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There are various types of debts in Islam. Categorizing them based on purpose and nature, they are three:
An interest-free loan extended to assist someone in need, expecting only the principal amount in return. This practice embodies the spirit of brotherhood and mutual support (Obaidullah & Latiff, 2008).
A sales contract where the seller discloses the cost and profit margin to the buyer. It's commonly used in Islamic banking for asset financing (Usmani, 2002).
An agreement where the bank buys and leases out an asset to the client for a predetermined period and price, transferring ownership at the end of the lease term (Iqbal & Mirakhor, 2011).
Islamic borrowing is guided by principles ensuring ethical conduct:
The borrower must have a sincere intention to repay the debt. The Prophet Muhammad (peace be upon him) said, "Whoever takes the wealth of people with the intention of repaying it, Allah will repay it on his behalf..." (Sahih Bukhari, Hadith 2387).
One should only borrow if they have a reasonable expectation of repayment to avoid undue hardship.
Recording the terms of the debt is essential to prevent future disputes, as emphasized in Surah Baqarah Verse 282
Riba, often translated as interest or usury, is strictly prohibited in Islam. The Qur'an states:
"Allah has permitted trade and has forbidden interest..." (Qur'an 2:275).
This prohibition aims to prevent exploitation and ensure fairness in financial transactions. Scholars agree that any guaranteed interest on loaned money is considered Riba and is thus forbidden (El-Gamal, 2006).
Permissible debt in Islam adheres to the following criteria:
- Absence of Riba: The debt must not involve any interest.
- Ethical Purpose: The borrowed funds should be used for lawful and beneficial purposes.
- Clear Terms: The terms of repayment should be transparent and agreed upon by all parties.
Qard al-Hasan, meaning "benevolent loan," is an interest-free loan extended to help someone in need without any expectation of profit. This practice is highly encouraged in Islam as a form of charity and social solidarity (Obaidullah & Latiff, 2008).
In Islamic finance, debt is considered "good" if it is incurred for productive purposes that benefit the individual and society, such as financing a business or education.
Conversely, "bad" debt refers to borrowing for non-essential, extravagant expenditures that may lead to financial strain (El-Gamal, 2006).
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i) A practicing Muslim should observe the following guidelines while borrowing:
· ii) Ensure that they are borrowing out of necessity and for need purposes only.
· iii) The loan should not be one conditioned on payment of interest.
· v) The borrower should always keep the intension of repaying back the loan.
The intension of the lender with regards to the loan should always be to help his fellow, and not to increase his own profit. The Qur’an encourages the lender to be lenient and compassionate to the borrower if they encounter hardship, The Qur’an says,
“And if someone is in hardship, then [let there be] postponement until [a time of] ease..." (Surah Baqarah, Verse 280).
Furthermore, imposing late fees is generally discouraged in Islamic finance, as it can resemble Riba. Instead, creditors are encouraged to show leniency.
Borrowing in it of itself is not prohibited in Islam yet doing it for the sake of extravagant expenditure or for non-essential items is prohibited. Such practices can lead to unnecessary debt and financial hardship, contradicting the principles of moderation and responsible financial management (El-Gamal, 2006).
Deliberately not paying debts is considered a serious offense in Islam. The Prophet Muhammad (peace be upon him) said:
"Whoever takes the wealth of people with the intention of destroying it, Allah will destroy him" (Sahih Bukhari, Hadith 2387).
However, if a debtor is genuinely unable to repay, creditors are encouraged to grant more time or forgive the debt, as highlighted in Surah Baqarah Verse 280.
Conclusion
In short, Islamic finance views debt as necessary but cautions against excessive borrowing, emphasizing fairness, justice, and the prohibition of Riba (interest). Borrowers must have sincere intentions to repay, use funds for lawful purposes, and document agreements to avoid disputes.
Non-repayment or borrowing for extravagance is discouraged, and creditors are urged to show leniency toward struggling debtors. Allah knows best.
References
· - Obaidullah, M., & Latiff, Z. A. (2008). Qard al-Hasan: A benevolent financing mechanism in Islamic finance. Islamic Economic Studies. Focuses on interest-free loans in Islam.
· - El-Gamal, M. A. (2006). Islamic Finance: Law, Economics, and Practice. Cambridge University Press. Discusses the prohibition of Riba and principles of debt in Islam.
· - Usmani, M. T. (2002). An Introduction to Islamic Finance. Idara-e-Islamiat. Covers Islamic financial instruments like Murabaha.
· - Iqbal, Z., & Mirakhor, A. (2011). c. John Wiley & Sons. Discusses Islamic finance principles, including Ijara.
- Surah Al-Baqarah (2:282) - Emphasizes documenting debts to prevent disputes.
- Surah Al-Baqarah (2:275) - Prohibits Riba (interest).Surah Al-Baqarah (2:280) - Advocates for -leniency towards debtors in hardship.
- Sahih Muslim, Hadith 1885 - The soul of a believer remains suspended until debts are settled.
- Sahih Bukhari, Hadith 2387 - Emphasizes the intention to repay debts and consequences of misusing borrowed wealth.
Disclamer:
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