Why Is Interest Haram? (Islamic Guide On Riba)
Interest (riba) is haram in Islam because it makes the rich richer and the poor poorer. The inequality in the dealings between the parties is disliked in Islam.
There are many factors due to which Islam considers interest or riba forbidden and prohibits Muslims to deal in any form of interest. If you want to know why interest is haram and what Muslims should do about it read the full article.
Why Is Interest Haram?
In short, interest increases the wealth of the rich by taking it from the poor. For example, the most common form of interest (riba) is what people have to pay on loans to a bank. In this case, the person taking a loan is poor in front of the bank which is clearly the rich party here.
When that person repays the loan he pays back the loan amount and the interest on top paying much more than what he owed to the bank. At the end of the transaction, the rich (bank) got richer and the poor (person) got poorer.
Islam discourages these types of transactions as they create great imbalances in the finances of the community and indulge in inflation. As a result of the interest (riba), it’s hard for a normal person to live in these hard financial times not to forget we get financial crashes.
Islam is a religion of peace and practices equality in every aspect. If anything creates inequality Islam not only dislikes it but also makes it haram or prohibited for Muslims.
Allah says in the Quran:
“Allah has made interest fruitless and charity fruitful. And Allah does not like any ungrateful evildoer.”
[Quran 2:276]
Receiving or paying interest is considered a major sin in Islam, and a normal transaction is highly recommended. All Muslims should abstain from all forms of interest and only engage in routine transactions free of riba.
Types Of Interest (riba)
There are two types of interest in Islam which we will be discussing so you get in-depth knowledge about both.
Riba al-Nasiyah
The best example of riba al-nasiyah is when a poor takes a loan from the rich and accepts to pay back the loan and an interest where the interest depends upon the time loan has been taken. The loan from the bank is the best example of riba al-nasiyah where a certain percentage of interest is added every month.
Depending on the months to return the loan the interest varies and as long as the poor take to return the amount the interest keeps on multiplying.
Riba al-Fadl
When the interest on the loan is not varying because of the time and the interest is fixed from the start that interest is called riba al-fadl. A simple example would be a transaction between two people where a person lends 100 packets of a product and in return will accept 110 packages after the stated time period on the contract.
Another example will be a loan for a static amount of fees for the loan for a certain time. If you get a loan and you need to pay back the loan and extra which will be static and varying over time this interest will be called riba al-fadl.
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Islamic Rulings On Interest
There are many places in Islam where interest (riba) is condemned and has been declared haram for Muslims. Allah allows trading and forbids interest. Both the giver and the taker of the interest are at fault and will pay in the Hereafter.
Allah says:
“Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. That is because they say, “Trade is no different than interest.” But Allah has permitted trading and forbidden interest.”
[Quran 2:275]
Prophet of Allah (peace be upon him) as well warned Muslims against interest which is considered a grave sin. In short, the Prophet (peace be upon him) said that Muslims are allowed to trade the same item of value in return and no increase or decrease should be made.
It was narrated that Muslim bin Yasar and ‘Abdullah bin ‘Atik said:
“Ubadah bin As-Samit and Muawiyah met at a stopping place on the road. ‘Ubadah told them: ‘The Messenger of Allah forbade selling gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates”‘- one of them said: ‘salt for salt,”‘ but the other did not say it-“unless it was like for like, hand to hand. And he commanded us to sell gold for silver and silver for gold, and wheat for barley and barley for wheat, and to hand, however we wanted.”‘ And one of them said: “Whoever gives more or ask for more has engaged in Riba.”‘
[Sunan an-Nasa’i 4560]
Muslims are not permitted to take out a loan if interest is involved as it is a major sin in Islam.
Islam has considered interest haram for everyone rich or poor but what if Muslims still indulge in transactions involving interest?
For all the Muslims who are still involved in any part or form of interest out there, Allah has warned that it is as if they have declared war against Allah and the Prophet (peace be upon him). All Muslims around the globe consider Allah and the Prophet (peace be upon him) as the highest authority and going to war with them will eventually mean they are standing against Islam.
Allah says:
“O believers! Fear Allah, and give up outstanding interest if you are ˹true˺ believers.
[Quran 2:278-279]
If you do not, then beware of a war with Allah and His Messenger! But if you repent, you may retain your principal—neither inflicting nor suffering harm.”
In another Hadith, the Prophet (peace be upon him) explains that all the parties involved in the transactions involving interest (riba) are at fault and cursed.
Jabir said that Allah’s Messenger (ﷺ) cursed the accepter of interest and its payer, and one who records it, and the two witnesses, and he said: “They are all equal.”
[Sahih Muslim 1598]
If you assist someone in committing sin, you will also bear the full burden of that sin. According to the Prophet (peace be upon him), the people who consume interest, pay it, witness it, and write it down are cursed, for both witnesses and those who write it down are involved in confirming this transaction, and thus they are also involved and shares the sin.
Is Bank Interest Haram?
Customers receive interest on traditional savings accounts as an incentive for keeping their money in their bank. In contrast, if you take out a loan, you must repay the principal plus interest.
It is not allowed to use the interest (riba) that banks pay to their customers. They must dispose of it by donating it to charitable organizations or needy people without gaining any reward in return. Bank interest is deemed haram by the majority of Islamic scholars.
The Scholars of the Standing Committee for Issuing Fatwas said:
The interest which the banks pay to depositors on the money that they deposit in them is regarded as riba (usury). It is not permissible to make use of this interest, and the customer must repent to Allaah from depositing his money in riba-based banks. He should withdraw the money that he deposited and the interest, keep the original amount and donate the extra to charity, to the poor and needy or for renovating public facilities etc.
[Fataawa Islamiyyah, 2/404]
It is not allowed to open a savings bank account that involves interest-based transactions. The famous Mufti Taqi Usmani has given a fatwa on this:
“It would not be permitted to open a savings account which engages with interest (riba).”
Now there is a solution to this Muslims should always open a current account. There is a choice in every bank these days and if you have a choice you can decide.
On the other hand in many Islamic countries, we have Islamic banking which is deemed halal by scholars.
If a Muslim lives in a country where there is no Islamic banking available and no current bank account as well and is forced to use a bank with only a savings account then in this particular case that Muslim has to give away or donate the interest amount every month to the poor.
Shaikh answered all the questions related to Savings Bank Account in the following video:
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Islamic Savings Account (Alternative To Savings Account)
These days there is an alternative to conventional banking. Many countries have Islamic banking systems in place for the Muslims who live there.
This is the best alternative as all the bank accounts of Islamic banks are halal for Muslims. Even if a Muslim bank gives you a reward it’s not interest-based and the whole system is backed and proven halal by the scholars.
Islamic bank accounts don’t have a fixed percentage of reward or interest like the conventional banking system. The reward in an Islamic bank is based on the profit or loss of the bank itself.
A bank is also a business and just like investing in any business, you are a partner in the profit and loss of that business you are also a partner in the bank’s profit or loss if you have an account there.
In most cases, the customers of Islamic banks profit from the amount they put in their bank accounts. But there can be instances where the bank goes into a loss and the customers share the loss as well.
As the interest is not involved in any dealing of the Islamic banks they are considered halal and the best alternative to interest-based conventional banks.
Punishment For Paying Interest In Islam
Interest is a grave sin, and Allah has warned those who deal in riba with the loss of their wealth in this world as well as harsh punishment in the afterlife.
Allah says in the Quran:
“But whoever returns to [dealing in interest or usury] – those are the companions of the Fire; they will abide eternally therein.
Allah destroys interest and gives increase for charities. And Allah does not like every sinning disbeliever.”
There are a few sins in which Allah threats Muslims of the consequence of sin. Interest is one which is also known to be a sin if a Muslim commits it is as if he/she has waged a war against Allah and the Prophet (peace be upon him).
Interest consumers are punished in al-barzakh as well(the interval between death and resurrection).
[Sahih Al-Bukhari]
The amount of interest is considered haram and in one instance Prophet (peace be upon him) said that if all other actions of the believer are good but his/her income is haram just like in the case of interest then their dua most likely won’t be answered by Allah.
There are many more punishments defined in Islam and you can find most by clicking here.
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Interest And Islam
There are many different ways a Muslim can get involved in interest and there are specific ways to get out of them. Let’s discuss them so you can get the right information about all.
Can You Give Interest Money To Charity In Islam?
It is prohibited for Muslims to charge interest on debts. Many Muslims earn interest on their bank accounts over time without actively seeking it. No matter what the case Allah instructed Muslims not to take part in any transaction involving interest.
If a Muslim charged the interest of his own accord then the interest amount is haram and it’s a grave sin. But if a person accidentally receives the interest amount and wants to amend the sin then the interest amount can be given to a charity without aiming for a reward.
Can Riba Be Spent As Zakat?
Interest money can’t be used to pay out zakat. Zakat is to be given out from the hard-earned halal money. Interest earned is not halal and is not considered to be the income you earned. A Muslim can only give out interest to the poor or a charity.
Interest From Credit Cards
Credit cards are prohibited because the bank lends money to the user in return for interest, and this interest is the cost of the credit card’s annual subscription. If a Muslim is using a credit card and an amount is owed in terms of interest to the card company. It’s better to pay out the amount as soon as possible and block that credit card.
Usually, credit card companies sign you up on an annual contract and you can’t get out of one if you have already signed it. In that case, scholars suggest that you do not use the credit card for the rest of the time left, and then after the contract ends up you block the card.
How To Deal With The Interest Which You Owe?
If you owe interest to a person or someone you can talk to you should ask that person to forgive the interest in the first place. I know it’s easier said than done but you need to try as Islam demands you to try it out first.
If you owe the interest to a bank or any financial institution and there is a contract binding you then it’s best to pay the interest amount and get out of that contract as soon as possible. Ask Allah for forgiveness and make sure never to make any contract involving interest again.
Buying A House
This one is tricky as some scholars say that mortgage interest is not considered riba so it’s halal. On the other hand, some say that owning a house is not a necessity and so the interest on the mortgage will be considered haram.
The best practice for a Muslim will be to find an Islamic banking mortgage. Most Islamic scholars allow Islamic financing and they have given ruling on it being halal. In the first step, the bank buys the house and then sells it to you on a fixed amount of profit. You need to pay that amount on a monthly basis but it won’t be as interest. The monthly payments will be considered as the rent of living in the house as the bank owns it.
Best Way To Get Rid Of Interest Profit
The best way to get rid of the interest would be to donate it to some charity that helps the poor or just give it directly to any poor people you may know. The interest amount can’t be used in giving out zakat or in any religious activities.
The reason is that the interest amount was not yours in the first place and you won’t be receiving any gain or reward from donating the interest amount. Donating it will clean your money and save you from grave sin.
Final Thoughts
Interest is haram in any form. Muslims should stay away from it as far as possible. Allah has threatened Muslims that if they involve in any interest-based transactions then it is as if they are waging a war against Allah and the Prophet (peace be upon him).
Interest is a major sin. However, there are many factors a Muslim can get involved in interest nowadays. If you owe interest the best way is to get rid of the interest if there is a way. If not then pay the interest and keep yourself away from any interest in the future.
If you have to receive interest from someone then you can donate that amount to the poor or a charity and ask for forgiveness.
And Allah Knows Best.
