Why Interest Is Haram in Islam?

📖 Why Is Interest Considered Haram?

In Islam, the concept of money differs from that of the contemporary view. In Islam, money is merely a medium of exchange and is not identified as an asset all by itself. So charging an Interest on money or the creation of money from money, without any economic trade is clearly prohibited ( Imran. M, 2021).

Allah mentions in Surah Baqarah: but Allah has permitted trade and forbidden usury. (2:275)

💹 What is the Difference between Interest and Profit?

It is important to note that this prohibition does not include trade and profit. As mentioned before in Surah Baqarah, Allah has explicitly permitted trade as opposed to Riba.

The fundamental difference between the two, is that Riba is any return that is guaranteed or fixed from a loan or debt, and the risk is borne solely by the borrower.

And in case the borrower suffers a loss, the lender is still entitled to compensation of his loan with interest. These elements are precisely why riba is condemned.

This is contrary to Profit from trade or investment. In either form, there is a risk to both parties and there is a mutual effort and capital that is put into the venture.

For example, in a Mudharabah contract, an investor provides capital to a business, while partnering with someone of management or entrepreneur skills to run the business. At the end of the venture, both split the profit among themselves according to the pre-agreed ratio (50:50, 40:60 etc.).

This is what sets trade and interest apart. Trade allows for both parties to involve themselves in the business and share the risk, rather than one lending the money and receiving a fixed amount regardless of the outcome.

🔟 Common Misconceptions About Riba

The conversation on Riba can be a contentious issue in Islamic Finance, which can cause many misconceptions about the nature of Riba and what constitutes interest in Islam.

The following are some of the common misnotions regarding the issues:

1️⃣ Riba is only about money lending, not business transactions

Islamic Law defines Riba into two categories: Riba al-nasiah and Riba al-fazal. The former is related to interest on debts, also known as Riba al-Quran. The latter is related to business transactions, also named Riba al-fazal.

We find explicit prohibition regarding this latter type of Riba in the Hadith of the Prophet (PBUH) mentioned in Muslim:

Also in Mishkat Al-Masabih:

This directly contradicts the argument that Riba is only what was done in the time of Jahilliayha (Era of Ignorance) and clearly outlines the laws with regards to business transactions.

2️⃣ If both parties agree willingly, its not riba.

This is also a false notion. Riba has nothing to do with mutual consent. Just like clear prohibition has come for gambling, or prostitution and there is no caveat for consent, likewise it is prohibited to charge any form of interest regardless of whether one party agrees or both agree. A fatwa from Shaikh Salih Al-Munajjid also outlines this by saying, "Mutual consent to commit haram doesn't make it Halal. So accepting interest doesn't make it permissible.

3️⃣ Inflation-Adjusted interest is allowed

As mentioned earlier, a gain on any loan is known as Riba. In contemporary finance, due to the concept of Time value of money, which claims that money's value decreases as time goes on, repayments on loans are indexed for inflation.

So if someone owes 1000 USD over a course of 5 years, then the price will be adjusted to cover the cost of inflation on the value of the loan.

This is strictly prohibited in Islam. This goes back to the Hadith of exchanging commodities of homogeneous nature should be done on spot, and without any excess on the value.

Therefore any form of indexation or inflation adjusted repayment is haram (Mufti Fara Adam, 2021).

4️⃣ Riba is only haram if it is Exploitive or extreme

This is also incorrect. The Quran and Hadith make no distinction on what amount of usury and interest is haram and what isn't. The Quran refers to the riba received in the time of Jahilliayah, and its oppressive nature.

The hadith is very clear on the prohibition and in Sunan Ibn Majah its mentioned:

This Hadith restricts any argument for the allowance of riba on a smaller and conservative scale.

5️⃣ Riba existed only in ancient times, not modern banking

This is also an excuse used by advocates of interest today, that the prohibition of usury relates to the one in the time of the Prophet (PBUH), and today's riba is totally different.

This attitude was prophesied in an hadith mentioned in Sunan Abu Dawud: A time will surely come upon people in which none will remain but that he consumes usury. If he does not consume it, he will be afflicted by its dust. (3331)

Another thing to be noted is that widespread practice does not make something halal, as several Fatwa bodies across the world (OIC Fiqh Academy to National fatwa bodies) have affirmed that today's banking interest is Riba.

6️⃣ Islamic banking is just a trick, it's the same as interest

This is an oversimplification and often misrepresentation of modern forms of Islamic Finance. Authentic Islamic finance products are designed to avoid interest and promote asset backed finance.

For example, if an Islamic bank finances a house through murabaha and ijarah, they take ownership and investment risk in the property, and earn a profit as a seller or lessor, not as a money-lender.

And although the profit rate may resemble an interest rate, the means of earning it are different, which makes a large difference.

7️⃣ If I donate the interest to charity, then taking it becomes halal

A gross assumption which is false. Taking or giving interest in any circumstance is not allowed,and the intention plays no effect on the outcome.

We are not allowed to intentionally indulge in haram on the pretext of charity. However, unintentionally accumulating interest from banking is unavoidable, and one must make sure they dispose of it through charity.

There is no reward for it, as it should have been avoided from the beginning.

8️⃣ Only Muslims are Prohibited from Earning Riba

This issue stems from a debate in the Hanafi school of thought, In a weak narration, its mentioned that: There is no riba between a Muslim and a non-Muslim in dar al-harb (a state of war)." [Al-Ma'rifah (Bayhaqi) discussed in Hidayah (Al-Marghinani) and Al-Umm (Shafii)] .

The Hanafi scholars discussed this issue under the pretense of whether it is permissible to take interest from hostile (Harbi) non-Muslims.

However, this issue referred to spoils of war rather than interest based loans, and even so, the vast majority of scholars reject that scenario today, as we are not in a state of war.

The Quran's rulings don't discriminate between ethnicity or religion, and are implemented across all jurisdictions.

The concession that some scholars give is only in the case of dealings with interest based banks, where they offer an interest percentage and even that should be avoided as much as possible.

9️⃣ Late penalties are not Riba

They often are. Most of the times, late payments incur a fee which is calculated as a percentage of the outstanding amount or fixed fee.

This is a form of interest paid to the lender for extra time, and it mirrors that of the forbidden practice of the time of the pre-Islamic Arabia, where one would have to pay his loan on time or incur an increase for more time.

The Islamic alternative is that the lender may stipulate some form of compensation for actual damages caused by late payment, however that fee may not be consumed by the lender, rather must be given away to charity.

In short, any flat fee for late payments is completely prohibited and backed by the fatwa of the Islamic Fiqh Council of the Muslim World League as well as various other bodies.

🔟 Islam Forbids Profit

Islam is not against making money or earning a profit. The Prophet (PBUH) was also a merchant and many of his companions were also successful traders.

The Quran also promotes the idea of trade and profit. What Islam prohibits is the guaranteed profit on a loan, which results from unjust and unfair increase which isn't based on any economic activity. Muslims are allowed to seek profit from means of legitimate trade, service, risk sharing partnerships.

So, it is absolutely false that Muslims cannot generate profit, rather it is encouraged as long as it is fair and from an economic activity that benefits both sides.

Interest is different from Riba: The word 'riba' literally means an increase or excess. Many contemporary scholars attempt to bypass the prohibition by claiming that the Riba of the past is different to the one in today's banking system.

In reality, there is no classical scholar past that has made any distinction between the two. All the major schools of Islamic law and modern fatwa authorities have reiterated that what banks call "interest" is not outside the Qur'anic prohibition.

The interest of today is Riba, and it doesn't matter whether you call it yield usury or finance charge, if it is an assured increase on the debt or trade, then is Riba and Haram.

🌍 What if I live in a NON-Muslim Country where Interest is Unavoidable?

This is a real concern that many Muslims around the world are facing. In Non-Muslim countries, the entire financial system tends to run out of interest and it becomes difficult to avoid it.

The general guidance for something like this is to minimize your exposure to RIba, and seek halal alternatives if possible — such as the riba-free loan alternatives in the UAE.

However in the case that no alternative is available, like when employers pay via bank direct deposits, which are based on interest or affordable housing options can only be taken through conventional loans.

Then in that case it is an exception of Islamic law due to dire necessity (Dharurah). However it is important to be cautious and consult knowledgeable scholars on these matters before indulging in Haram.

Living in a Riba based society is most certainly a test from Allah. As mentioned previously, the Prophet (PBUH) predicted a time where it would be difficult to escape Riba.

THe key is to stay conscious of Allah's rulings and not become complacent. Engaging in riba should be done out of necessity and under the guidance of scholars and practitioners.

🎁 Can I give Interest Money to Charity?

It is the consensus of scholars that riba money is impure wealth. A Muslim cannot keep or use it under any circumstances.

Therefore, the practical step is to get rid of it through charity without the inte=nsion of reward. There are two scenarios that should be identified; one is if you actively earn riba (which is unequivocally haram and sinful) and the other is if you unintentionally have gotten riba due to mandatory bank interest or pension funds.

IF one knowingly earns interest, then there is the initial sin that must be repented from, and the excess must be given to charity. On the other hand, if you accidentally and unavoidably find yourself holding interest, then you should not consume it, and discard it to charity.

Shaykh bin Baz and other scholars have even advised to take the interest amount for the bank yourself and spend it on a poor community as a way to eliminate it from your possession.

So the answer to whether the interest can be given to charity is no. Interest is haram, and the accumulation of it, with the intention of charity is also haram.

At the end of the day, Allah is the sustainer of all life on earth, and giving up something harmful for the sake of Allah is a blessing. THe Prophet (PBUH) says, "Verily, you will never leave anything for the sake of Allah Almighty but that Allah will replace it with something better for you." (Musnad Ahmad, 23074).

So reliance on Allah will surely bring peace of mind and barakah, which no amount of interest can ever buy. And Allah knows best.

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