Why Is Interest Haram? 10 Reasons Why Islam Prohibits Riba

Assalamu alaikum and greetings to all my brothers and sisters in faith! Today, we will embark on a journey to understand why is interest haram in Islam. This is a topic of great significance, as it has far-reaching implications for how we conduct our financial dealings and shape our economic system.

First and foremost, let us define what we mean by Riba. In simple terms, Riba refers to taking an extra amount of money, beyond the principal amount, for lending money or delaying payment of a debt. Although common in conventional banking systems, this practice is considered haram, or forbidden, in Islam.

The importance of this topic cannot be overstated. A deep understanding of the reasons behind the prohibition of Riba will help us make informed decisions in our financial dealings and lead a life that is in line with the teachings of our beloved Prophet (peace be upon him) and the principles of Islam.

This article highlights 10 reasons why is riba haram in Islam. By exploring these reasons, I believe we will better appreciate the significance of Riba-free financial transactions in our lives and communities. So, let us begin!

What is Riba?

The origination of term interest dates back to the 17th century with the emergence of the banking system at the global level. Interest means giving and/or taking any excess amount in exchange for a loan or debt.

“Every loan that derives a benefit (to the lender) is riba” – Prophet Muhammad (Peace Be Upon Him).

Why Is Interest Haram?

Interest (riba) is considered haram in Islam because it goes against the principles of fairness, justice, and mutual cooperation that are at the heart of the Islamic faith. In Islamic finance, charging or paying interest on loans is seen as a form of exploitation, as it creates a situation in which the lender benefits from the borrower’s need for money, without offering any real value or service in return.

Here are 10 reasons why Interest is Haram in Islam:

1. Prohibition in the Quran and Hadiths

References from the Quran:

The Quran has several verses that categorically prohibit Riba, such as Surah Al-Baqarah, verse 278, which states: “O you who believe! Fear Allah and give up what remains of your demand for Riba (usury) if you are indeed believers.”

The Quran also highlights the unjust nature of Riba and its impact on society’s economic and social well-being, as stated in Surah Al-Imran, verse 130: “O believers! Do not consume interest, multiplying it many times over. And be mindful of Allah, so you may prosper.”

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. (Surah Al-Baqarah, verse 275)

References from the Hadiths:

The Hadiths of the Prophet (peace be upon him) further emphasize the severity of the issue, such as in a hadith reported by Abu Huraira (may Allah be pleased with him) that the Prophet (peace be upon him) said: “The trader’s profit is lawful, but Riba is haram.”

Another hadith reported by Abdullah ibn Hanzalah (may Allah be pleased with him) states that the Prophet (peace be upon him) said: “Avoid the seven dangerous things.” The people asked, “O Messenger of Allah! What are they?” He said, “Associating partners with Allah, magic, killing the soul which Allah has forbidden except by right, consuming Riba, consuming the property of an orphan, fleeing from the battle field and slandering the chaste women who are guilty of nothing.” (Bukhari and Muslim)

Also, Hadiths contain many sayings of the Prophet Muhammad (peace be upon him) that condemn the practice of riba. For example, in Sahih Bukhari, it is narrated that the Prophet said, “The Prophet cursed the one who accepts riba, the one who pays it, the one who writes it down, and the two witnesses to it, and he said they are all the same.”

In Sahih Muslim, it is narrated that the Prophet said, “On the night of Ascension, I met with Moses who asked me: ‘What did Allah prescribe for your Ummah?’ I said: ‘He prescribed for them the lawful and the prohibited.’ He said: ‘Did Allah forbid riba for them?’ I said: ‘Yes.’ He said: ‘By Allah, Allah has forbidden riba for them and blessed them in their transactions. But they hasten, and I fear they will fall into it.” These Hadiths further emphasize the prohibition of riba in the Islamic faith.

2. Riba Creates an Unjust Social System

Riba creates an unjust social system and exploits vulnerable members of society, particularly the poor. For example, consider a scenario where a poor individual needs funds and turns to a wealthy lender for help. In turn, the lender charges a high-interest rate on loan, effectively exploiting the borrower’s desperation for financial assistance. This unjust system leads to the rich becoming richer and the poor becoming poorer, exacerbating the wealth gap in society.

Riba also has severe consequences for the economy as a whole. For example, consider the scenario where a wealthy lender lends many borrowers money at a high-interest rate. Over time, these borrowers will find it increasingly difficult to repay their loans, leading to widespread defaults. This will reduce economic activity, as fewer funds will be available for investment and spending. This can lead to economic downturns and recessions, negatively impacting society.

To mitigate the negative effects of Riba, Islam promotes a fair and just financial system where society’s wealth is distributed equitably. For example, the concept of Zakat, one of the five pillars of Islam, requires Muslims to give a portion of their wealth to those in need. This helps reduce poverty and promotes a more equitable distribution of wealth in society. Additionally, Islamic finance promotes the principles of risk-sharing and mutual benefit, where profits and losses are shared between the lender and borrower, fostering a more cooperative and equitable financial system.

3. Riba Leads to Economic Instability

Riba directly impacts the economy and can contribute to the formation of economic cycles. These cycles can lead to instability in the financial sector and cause widespread harm to individuals and businesses. The repetitive cycle of boom and bust seen in the economy is a clear example of the harmful effects of Riba.

Using the interest in financial transactions can result in an unequal distribution of wealth, with the rich becoming richer and the poor becoming poorer. This can cause a decrease in consumer spending, leading to a slowdown in the economy. Additionally, interest-based loans can lead to increased debt, creating a cycle of debt for individuals and businesses and causing further instability in the economy.

Islam emphasizes the importance of stability in all aspects of life, including finance. This is why Riba is prohibited in Islamic finance, as it can contribute to economic instability and harm the overall financial system. The aim of Islamic finance is to provide stability, fairness, and equality in financial transactions, and the prohibition of Riba is crucial in achieving these goals.

4. Riba Undermines the Principle of Trust in Financial Transactions

Islamic finance is based on the principle of mutual trust and cooperation between the parties involved in a financial transaction. This starkly contrasts conventional finance, where transactions are often based on legal contracts and enforcement mechanisms. In Islamic finance, trust plays a critical role in maintaining the stability and fairness of financial transactions.

Unfortunately, Riba undermines the principle of trust in financial transactions. A lender effectively takes advantage of the borrower’s money needs by charging interest. This creates an unbalanced relationship between the lender and the borrower, leading to resentment and mistrust. For example, if a borrower cannot pay the interest on a loan, the lender may become aggressive and take legal action, which can harm the relationship between the two parties. Another example is when lenders charge exorbitant interest rates, which can lead to a vicious cycle of debt for borrowers, eroding trust in the financial system.

It is important to note that trust-based financial transactions are not only fairer but also more stable. When parties in a financial transaction trust each other, they are more likely to make responsible decisions, which can help to prevent economic instability. In Islam, trust-based financial transactions are considered to be in line with the teachings of the Quran and Sunnah, which promote fairness, justice, and mutual cooperation.

5. Riba Is Considered a Form of Gambling

Firstly, let’s understand the definition of gambling in Islam. Gambling is defined as a game of chance where a person risks their money or possessions to win more. In Islam, gambling is considered haram as it is seen as a form of wastefulness and a means of earning money through unjust means.

Now, let us consider the similarities between Riba and gambling. Riba and gambling are forms of earning money through unjust means and involve risking one’s money. In Riba, a person lends money to another person at a higher interest rate, hoping to earn a profit. This is similar to gambling, where a person bets on the outcome of an event with the hope of winning more money.

It is important to note that gambling is prohibited in Islam, as it goes against the principles of fairness, justice, and trust. Therefore, it is logical to conclude that Riba is also haram as it shares similar characteristics with gambling.

6. Riba Encourages Greed and Materialism

In Islam, having material wealth is not the goal. It’s seen as a tool to help fulfill religious duties and responsibilities to God and others. But, being too focused on wealth for its own sake is dangerous and can lead to greed.

Riba, by its very nature, is a system that rewards those who lend money over those who borrow it. It creates an incentive to hoard wealth and to seek greater profits rather than to use one’s wealth to help others. This kind of mentality, when taken to extremes, can lead to an obsession with material gain and a disregard for the well-being of others.

Islam teaches us to be moderate and self-restrained in our financial dealings. All Muslims are encouraged to seek balance in their lives, to avoid extremes, and to avoid becoming so consumed with material wealth that we neglect our spiritual and moral responsibilities. In this way, Islam provides a framework for a just and equitable financial system grounded in trust, fairness, and moderation.

7. Riba Violates the Principle of Mutual Cooperation

Now consider the importance of cooperation in our society and how it relates to the practice of financial transactions. In Islam, cooperation and mutual benefit are highly valued and encouraged as they promote unity, stability, and growth within our community. However, the practice of Riba, or interest-based lending, directly opposes these principles.

The Prophet Muhammad (peace be upon him) has taught us that cooperation and mutual support are the hallmarks of a strong and cohesive community. When we work together, we can achieve greater things and overcome challenges more easily. In the Quran, Allah says, “And cooperate in righteousness and piety, but do not cooperate in sin and aggression.” (5:2)

On the other hand, Riba encourages competition and conflict, as it pits borrowers against lenders in a zero-sum game. It creates a situation where one party benefits at the expense of the other, contrary to the spirit of mutual cooperation that is so important in Islam. Moreover, Riba can lead to economic hardship and poverty, especially for those who cannot afford to pay back their loans with interest.

To promote cooperation and mutual benefit in financial transactions, Islam advocates the practice of profit and loss sharing, in which both parties share the risks and rewards of a business venture. This creates a situation where both parties are vested in the venture’s success and are incentivized to work together for the greater good. By avoiding Riba and promoting cooperation and mutual benefit, we can build a strong and just financial system that aligns with the principles of Islam.

8. Riba Goes Against the Principles of Charity and Compassion

This is another reason why Riba (usury) is prohibited in Islam. It is because Riba goes against the principles of charity and compassion. These values are deeply ingrained in our Islamic teachings and are crucial for fostering strong relationships and building a just and compassionate society.

Charity and compassion are essential components of Islam. They are considered acts of worship and a means of seeking the pleasure of Allah. Our beloved Prophet Muhammad (peace be upon him) said, “The most beloved of people to Allah are those who are most beneficial to people.” (Sahih Bukhari)

On the other hand, Riba has a detrimental impact on these values. It encourages greed and the accumulation of wealth at the expense of others. The exploitation of the weak and vulnerable is a direct violation of the principles of charity and compassion.

In Islam, financial transactions should promote mutual cooperation, compassion, and charity. This is why Riba is prohibited, and alternatives such as profit-and-loss sharing and gifting are encouraged. Our duty is to strive to create a financial system grounded in compassion, charity, and mutual cooperation. In doing so, we can promote a just and equitable society and earn the pleasure of Allah.

9. Riba Can Lead to Moral Corruption

Money is a powerful tool and can significantly impact our moral values. It can easily corrupt our intentions and actions, leading us astray from the path of righteousness. This is why it is crucial for us to be mindful of our financial dealings and ensure that they align with our moral principles.

Riba can damage our moral values by promoting greed, avarice, and materialism. These traits directly conflict with the values of compassion, fairness, and selflessness at the heart of our faith. The pursuit of Riba can also lead to actions such as deceit and exploitation, further eroding our moral values.

Islam places a high value on moral integrity and expects its followers to maintain their values and principles in all aspects of their lives, including financial transactions. The use of Riba in financial dealings goes against this principle and can lead to moral corruption. This is why it is essential to choose financial transactions that align with the teachings of Islam and promote moral values such as trust, cooperation, and compassion.

10. Riba is Against the Principles of Accountability and Transparency

Financial transactions must be open and honest, with no room for deceit or deception. This is why accountability and transparency are so highly valued. By keeping all parties fully informed and ensuring that all transactions are recorded accurately, we can maintain the integrity of our financial dealings.

The practice of Riba, however, is inherently opaque and lacks accountability. This is because interest-based lending is often shrouded in secrecy, with the true cost of borrowing hidden behind complex financial instruments. This lack of transparency makes it difficult for people to fully understand the true impact of their financial dealings and can lead to exploitation and abuse.

In Islam, we must always strive for accountability and transparency in our financial dealings. This means making sure that all transactions are fully disclosed and that the terms of any agreement are clear and understood by all parties. By doing so, we can ensure that our financial dealings are based on trust, honesty, and fairness and that we are always held accountable for our actions.

Alternatives to Riba available in Islam

1. Profit and Loss Sharing (PLS) – The basic principle of PLS is to share the profits and losses between the financer and the entrepreneur in a predetermined ratio. This financing system is based on the principle of risk-sharing and mutual cooperation. In this system, the financer participates in the business and shares its profits and losses, making it an ideal alternative to Riba.
2. Murabaha – Murabaha is a cost-plus financing method where the financer buys a commodity at a cost and sells it to the customer at a marked-up price. The customer is aware of the cost and profit margin, making the transaction transparent and in line with Islam’s principles of accountability and transparency.
3. Ijara – Ijara is a form of leasing where the financer provides the necessary funding for a specific project or asset, and the customer rents it for a predetermined period. The customer is responsible for the maintenance and usage of the asset, while the financer receives the rent. This financing system promotes mutual cooperation and benefits both parties without involving Riba.
4. Musharaka – which means partnership in Arabic, is a profit and loss sharing mechanism where two or more parties participate in a business venture and share in the profits and losses according to a pre-agreed ratio. In Musharaka, all parties are actively involved in the decision-making process and bear the risk and reward of the venture together. This contrasts with riba-based loans, where the lender takes no risk, and the borrower bears all the risk alone.
5. Takaful – It is an Islamic insurance system that operates on mutual cooperation and shared responsibility principles. Takaful allows individuals to pool their resources together to protect against financial losses and provide for one another in times of need. This is in line with the Islamic value of compassion and mutual assistance. In Takaful, the participants are the owners of the insurance company, and any surplus generated from the company’s operations is shared among the participants.

Final Thoughts

Understanding why is interest haram in Islam is of utmost importance for both individuals and society as a whole. The reasons discussed above, ranging from the exploitation of the poor to the encouragement of greed and materialism, are all significant factors that demonstrate the detrimental effects of Riba on the economy, society, and individuals.

It is crucial to acknowledge and understand these reasons to ensure that our financial dealings align with the teachings of Islam and are in line with the principles of fairness, justice, and mutual benefit. It is also important to be aware of the alternatives available in Islam, such as Mudaraba, Murabaha, and Ijara, which provide ethical and responsible financial options for individuals and businesses.

Finally, Riba-free financial transactions are not only necessary for compliance with the teachings of Islam, but they also provide a more stable, fair, and just financial system that benefits all members of society. May Allah guide us toward financial transactions that align with His teachings and bless us with wisdom, compassion, and justice. Amin.

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