Wherever they live and whatever occupations they pursue, observant Muslims face questions and challenges about integrating their faith with daily life. But a deeper look shows that we have a few things to learn from them.
Because certain Islamic beliefs and practices challenge the expectations and protocols of institutions dominated by non-Muslims, it can be hard to break tradition.
Three commonly known concepts for Muslims are haram, halal, and riba. Each influences Muslims’ everyday conduct and activities. Here, we discuss whether and in what forms riba is permissible for Muslims.
Riba refers to financial interest payments, including usury. But the topic is complex. Let’s find out why.
Haram vs Halal in Islam
Halal and haram are part of Islamic religious law (Shari’ah). These concepts draw boundaries around or lay down prohibitions against certain practices and behaviours.
This concept is not familiar to all faiths, so we will explain before discussing riba and how haram and halal apply to it.
Haram refers to what is forbidden or illegal, according to Islamic law. There are several things that Muslims consider haram, including, for example:
- Instrumental music
- Toys that resemble living things
- Staring or looking directly at people of the opposite sex
- Being GLBTQ or interacting with those who are
Although examples like these and others might sound harsh or unreasonable to non-Muslims, each has a moral grounding in the Islamic faith.
As the opposite of haram, halal comprises things considered lawful in Islam. Often, it is safe to assume that anything not proscribed as haram is halal. But there are nuances that require attention.
For example, most Muslims eat meat. But the meat must come from non-carnivorous animals, and those animals must have been slaughtered humanely and according to Islamic traditions. How an animal died is also a determining factor.
Applying Halal and Haram
Historically, haram and halal have applied most often to food consumption — perhaps because that is such an everyday activity. We should point out that haram and halal apply to the action of eating a particular food, not the food itself.
And since these terms apply to actions, it comes down to a matter of human choice and judgment. After all, haram foods will exist regardless of whether someone chooses to eat them.
Thus, the broader concept can apply in various situations, one of which is riba. The act of riba is entirely a human decision and has always been.
As with other halal vs haram distinctions, though, determining which side of the line a given situation or concept falls in can be tricky when it comes to riba.
What Is Riba?
Riba is an Islamic concept generally referring to growth, excess or increase. In other words, the term refers to interest paid on loans or gained on bank deposits.
Riba can also mean the pursuit of illegal, exploitative business or trade gains by assessing exorbitant rates of interest — usury, in other words.
The Origins of Riba
The early origins of riba date to ancient times and predate the writing of the Qu’ran. While riba is mentioned indirectly throughout the sacred text, specific passages capture an enduring message.
That message synthesises passages like the following, along with several others that reinforce the overall meaning:
- “Allah has allowed trade and has forbidden riba” (2:275)
- “You who believe, do not consume riba, doubled and redoubled. Be mindful of God so that you may prosper.” (3:130)
It can be quite a challenge to interpret sacred texts from ancient times in ways that apply to life today. That’s why many subsequent writings explain Islamic finance and when to treat it as riba.
Not surprisingly, the most prominent are the founding Islamic texts, the Hadith — which comprise the authoritative record and proclamation of the Qur’an, Islam’s sacred scripture, by the prophet Muhammad.
The Hadith integrate Muhammad’s words and teachings and is second only to the Qu’ran itself as an authoritative Islamic text.
All forms of Islamic finance prohibit riba. But not all financial transactions constitute what would be considered riba, according to the Qur’an or the Hadith.
The Types of Riba
There are two types of riba. The first type, the most common, is a loan contract (Riba al-Nasiyah), whereby any amount over the original loan amount charged by the lender.
The second type is a sale or exchange contract (Riba al-Fadl). This type applies only to commodities like rice, wheat, oil, sugar, etc. If two people exchange the same product in unequal amounts, the extra would be riba.
How People Today Think of Riba
Quite a few Muslims today have only vague if any notions about the concept of riba. Even so, others consider it essential. For instance, scholars of Islam have hypothesised a “riba-free” society and consider it the right path for all.
Riba is considered socially destructive by economists, sociologists, religious scholars, and other learned people of various faiths due to the social inequities it promotes and enables.
Why Is Riba Prohibited?
To put it simply, riba keeps poor people poor and rich people rich. The poor are saddled with constantly replenishing debt. Meanwhile, the rich build wealth using primarily the funds they have already accumulated — which only grows due to interest accrual.
Muslims have hardly been the first to see that riba (or the equivalent in other faiths and cultures) is unethical and perpetuates gaps in wealth and privilege. This means things can only become worse, not better.
Loans should be charitable acts (not riba). Islam encourages fair and equitable trade because it involves an equivalent exchange. One party has goods or services to sell, while another has money to pay.
This type of trade encourages economic interdependence, thereby justifying the profit from the sale. With a fair exchange, you take a risk, even though there is no guarantee of increased wealth without contingent liability.
In Islam, a loan is seen as an act of charity, not an opportunity for increased wealth. Its purpose is to help someone in need. Loans (qard) never bear interest. Instead, in qard al-hasan, a borrower must pay only the loan’s principal.
The Qur’an repeatedly contrasts charity with usury (riba) and has been considered one of the seven major destructive sins ever since the time of the Qu’ran’s origin.
Dilemmas Over Riba
Although most modern-day Muslims acknowledge that riba is prohibited, not all agree on what exactly that means. Is there a standard definition of “riba”?
Is there a standard for determining what is riba (and therefore haram) and what is halal? Here are a few examples of how these issues have been resolved.
Can Muslims Invest in the Stock Market?
We know that when it comes to Islamic investment, Islamic principles require that stock investors share in profit and loss, that they receive no interest (riba), and that they do not invest in businesses prohibited by Islamic law.
That’s why we allow our clients to choose where to put their wealth. We only invest what you entrust to us in an Islamically compliant, government-registered superannuation fund. Doing this ensures that your retirement funds are halal.
How Do Muslims Buy Homes?
Buying a home financed by a mortgage is something people do every day. But it is not only haram to buy anything through interest-based financing for Muslims, but it is financially unwise and can become a burden.
Through the financing system, people easily lose their houses by spending before earning. Doing this can lead to severe financial losses and long-term debt. So why buy a home before you have the cash to pay for it upfront?
What if You’re a Muslim and Owe Interest Payments?
Answering this question involves another question, plus two tentative answers. The question is, “how did you let yourself get into interest-bearing debt in the first place”? You would not have been upholding Shari’ah.
The first answer is that you should try to use your faith as a starting point to negotiate your way out of paying the interest. If that doesn’t work, clear the debt by paying as much as you can all at once.
These example dilemmas point to an essential lesson. Sacred texts typically are written over long periods and by multiple individuals. Collective experience attests to an understanding of why things go wrong.
This universal wisdom is not for Muslims only.
Riba in the 21st Century
Learning about the Islamic concept of riba should offer us all better ways to understand life in the 21st Century. Not only are there cross-cultural barriers globally, but there are crippling equity gaps throughout the population.
The teachings of sacred texts like the Qu’ran, the Hadith, and other familiar names may seem archaic and irrelevant — perhaps some are in certain ways. But we must approach them with open eyes, hearts, and minds for their timeless lessons.
Are you a Muslim living in Australia? If so, do you need genuine Islamic guidance on how to invest in halal ways? You will feel good knowing that Crescent Wealth Funds respects you, your investments, and your beliefs.
Feel free to contact us today!
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Ethical Finance and Innovation
Dr. Sayd Farook is the Executive Director of Crescent Foundation. He is Group Chief Operating Officer of Crescent Wealth and Managing Director of Crescent Finance. He previously served as Advisor to the Executive Office of the Vice President and Prime Minister of the UAE and Ruler of Dubai. In this capacity, he envisioned and executed strategic / transformation initiatives for Dubai and the UAE. Prior to that, he was the Global Head Islamic Capital Markets at Thomson Reuters, where he advised and served large corporates, multilaterals and governments in the Middle East, North Africa and South East Asia.