Is Interest Really Forbidden In Islam?

The topic has often been taken for granted. Muslims have been taught from young that interest is sinful and should be absolutely avoided. But the fact of the matter is the topic of interest in Islam has been debated by Muslims and Muslim scholars alike for the past 1400 years.

This is an investment club for Muslims by Muslims. Therefore, before any discourse can be taken with regards to investments, the issue of interest in the context of Islam will have to be scrutinized. This is so that we have a more objective view of the different investment instruments that will be at your disposal.

An understanding of this matter in various Islamic perspectives is crucial because interest, as how it is interpreted by the majority of Muslims, involve a wide-spectrum of the different financial instruments that may be part of your overall strategy. These could include fixed deposits, bonds and various other high-yielding savings accounts.

For the majority of Muslims, the issue of whether interest is acceptable in Islam has long been ingrained since time immemorial. This ruling is derived from the following verses in the Quran:

“Those who devour usury will not stand except as stands one whom the devil by his touch has driven to madness. That is because they say: Trade is like usury: but Allah has permitted trade and forbidden usury.... Allah will deprive usury of all blessing, but will give increase for deeds of charity, for He loves not any ungrateful sinner.... O you, who believe, fear Allah and give up what remains of your demand for usury, if you are indeed believers. If you do it not, take notice of war from Allah and His messenger, but if you repent you shall have your capital sums; deal not unjustly, and you shall not be dealt with unjustly. And if the debtor is in difficulty, grant him time till it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew.”

(Surah Al-Baqarah: Chapter 2 Verse 275-280)

Some Muslims believe that interest is inherently evil. They burden the poor and provide an avenue for the rich to get even richer without labour. This according to the Muslims, is clear reason enough why interest has been forbidden in Islam

However the interpretation of the verse above has been in much dispute.

Scholars and theologians alike have pointed out the fact that the verse in the Quran prohibits against the practice of usury or riba, not interest.

The explanation given is that usury, in the context of the time of the Prophet, refers to the pre-Islamic Arabian and Jewish tradition of doubling the amount of debt that a person owes. This amount will keep on doubling every time the borrower misses a payment. This system of debt has led to the suffering and exploitation of many, especially the poor. Those who could not afford to keep up with the obscenely compounding rates usually found themselves inducted as slaves of the lender.

This interpretation is consistent with the meaning of another verse in the Quran that prohibits interest.

“O ye who believe! Devour not usury, doubled and multiplied; but fear Allah; that ye may (really) prosper.”

(Al-Imran Chapter 3 Verse 130)

Several prominent Muslim scholars seem to agree with this interpretation. In 2002, the then Grand Mufti of Egypt Muhammad Sayyid Tantawi issued a Fatwa declaring that interests on bonds and savings accounts are permissible in Islam.

Tantawi explains that interest-based banking instruments are not necessarily evil, because they can benefit everyone involved. The availability of money in interest-bearing instruments has led to the funding of much-needed infrastructure and businesses that benefit the community as a whole. Without interest, capitalism and job-creation today would not have been a reality.

Therefore bonds and interest-bearing savings accounts should be permitted, argues Sayyid Tantawi. He is currently serving as the Grand Sheikh of Islam’s most prestigious institution, the Al-Azhar University and the Grand Imam of the Al-Azhar Mosque.

Tantawi’s fatwa provoked uproars in the more conservative bastions of Islam. The majority of scholars from the four major jurisprudences have rejected Tantawi’s reasoning as inconsistent with the teachings of the Quran and seek for it to be revoked.

Those who staunchly oppose interest often use the following as their main points of argument:

1. That usury and interest are nothing more than just semantics in the English language. The Arabic language, the mother tongue of the Quran, makes no differentiation between usury and interest.

2. Interest is evil and unfair as it rests the burden of risk solely on the borrower. This opens the way for sloth, exploitation and benefit without labour on the part of the lender. They argue that Islam emphasises on diligent work instead of benefiting passively.

3. The sub-prime crisis and predatory lending practices of the west has brought about much problem and misery. This phenomenon of western families going bankrupt is often compared to the practise of debt slavery that existed in the past. This is often used as evidence that interest brings about the undesirable effects that Islam is trying to avoid.

Meanwhile, scholars who believe in interest as a legitimate instrument has brought forward the following points:

1. Muslim scholars have seldom addressed the issue of inflation. As I write this today, oil prices are rising and inflation stands at record highs. Depositors who insist on not taking any interest on their savings are slowly finding their money eroding away due to inflation every year.

2. The monetary system at the time of the Prophet is distinctly different from the fiat based paper money that we have today. In the past, money was often made of minerals or precious metal. Monetary value was often the value of the commodity being used as the money itself. Fiat money on the other hand, is paper that is not backed by an equivalent amount of gold or metal. This means money can be printed to the whims and fancies of governments’ worldwide, giving rise to high inflationary pressures that could not have existed in the olden days.

3. Islamic banking is still inviting much controversy. Critics have pointed out the fact that most Islamic banks are still holding many of its assets in conventional interest-bearing instruments instead of the “Islamic” alternatives that they have been promoting.

4. The Prophet himself may have paid interest on a loan that he made. In the Sahih Al-Bukhari, Volume 3, Book 43 (The Book of Loans), Hadith Number 2394. It is narrated by Jabir bin Abdullah that it has been recorded that the Prophet repaid his debt that he owed Jabir plus he gave him "an extra amount".

In conclusion, the issue of whether interest is acceptable in Islam will perhaps never be agreed upon in the near future. What is important is that you as an investor should fully comprehend both sides of the argument before executing your money decisions.