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  7. Managing Debt in Islam: A Guide to Ethical Borrowing and Lending

Managing Debt in Islam: A Guide to Ethical Borrowing and Lending

Managing Debt in Islam: A Guide to Ethical Borrowing and Lending
Managing debt is an integral part of Islam’s financial and ethical responsibility. Borrowing and lending in Islam must adhere to principles such as the prohibition of interest, ensuring fairness and integrity.

Understanding Debt in Islam

Understanding debt is an integral part of Islam’s financial and ethical responsibility. Debt refers to the obligation incurred by borrowing money or goods with the intention of repayment. Managing debt is crucial in Islam as it is closely linked with principles of financial responsibility, social justice, and ethical conduct. Borrowing and lending in Islam must adhere to principles such as the prohibition of interest, ensuring fairness and integrity.


Islam encourages financial responsibility, advising against unnecessary borrowing and excessive debt. We are urged to work hard, save money, and invest wisely while being mindful of our expenses and avoiding frivolous purchases. Charity is also emphasized to benefit individuals and society, bringing blessings and prosperity. By practicing financial responsibility, we can achieve long-term stability and peace of mind while fulfilling our religious obligations.


The Islamic Stance on Loans

Islamic teachings on loans and borrowing aim for fairness, justice, and ethical conduct, as outlined in the Quran and Hadith. These principles guide the Islamic stance on loans.


Prohibition of Interest (Usury):

One of the fundamental principles of Islamic finance is the prohibition of interest, also known as riba. This means lenders cannot charge interest on loans, and borrowers cannot pay interest. The main reason behind this prohibition is to ensure that wealth is not accumulated unfairly and that financial transactions are conducted just and ethically.


The Quranic verses in Surah Al-Baqarah (2:275-279) mention the prohibition of interest and emphasize the importance of justice in transactions.

Allah Almighty says in the holy Quran:

“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. Whoever refrains—after having received a warning from their Lord—may keep their previous gains, and their case is left to Allah. As for those who persist, it is they who will be the residents of the Fire. They will be there forever. Allah has made interest fruitless and charity fruitful. And Allah does not like any ungrateful evildoer. Indeed, those who believe, do good, establish prayer, and pay alms-tax will receive their reward from their Lord, and there will be no fear for them, nor will they grieve. O believers! Fear Allah, and give up outstanding interest if you are ˹true˺ believers. 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.

Surah Al-Baqarah (2:275-279) 

For more information, visit this blog: Riba (Interest) in Islam: 5 Key Insights to Navigate Financial Transactions.


Permissibility of Qard al-Hasana (Virtuous Loan):

Qard al-Hasana is a type of loan in Islamic finance where a lender provides funds to a borrower without expecting any profit or interest in return. “Qard” refers to a loan, while “Hasana” means excellence or goodness.


Surah Al-Baqarah (2:245) compares Qard al-Hasana to lending to Allah (swt), promising abundant rewards.


Allah Almighty says in the Quran,

Surah Al-Baqarah (2:245) compares Qard al-Hasana to lending to Allah (swt), promising abundant rewards.
Who will lend Allah a reasonable loan that will multiply many times over? It is Allah (alone) who decreases and increases (wealth). And to Him, you will (all) be returned. [Surah Al-Baqarah (2:245)]

The Hadith narrated by Hazrat Abu Huraira (ra) emphasizes the importance of Qard al-Hasan and fulfilling financial obligations in Islamic practice.

The Hazrat Muhammad (saw) said, “The best amongst you is he who pays his debts in the most handsome manner..” 

[Sahih al-Bukhari 2393]

Ability to repay:

Before taking a loan, the borrower must assess their ability to repay it within a reasonable timeframe. Islam emphasizes financial responsibility and discourages borrowing beyond one’s means, as excessive debt can lead to economic hardship and strain.


This principle is essential for upholding trust and justice in our Muslim community. As such, we must conduct ourselves honestly and ethically when dealing with debt, ensuring that our actions align with Islamic principles.


Punishment for Not Paying Debt in Islam

As Muslims, we have a moral and religious obligation to settle our debts. It is considered a sin if we have the means to repay our debts but choose not to. Fulfilling these obligations is integral to our faith, and we must remember it. The Hadiths provide clear guidance on this matter, with stern warnings about the consequences of neglecting such obligations.


Suspended Soul: 

The warning emphasizes that a believer’s soul remains in a state of uncertainty or suspension until their debts are settled. Hazrat Abu Hurairah (ra) states,

“The believer’s soul is suspended by his debt until it is settled for him.”

[Jami` at-Tirmidhi 1078]

Threat of Punishment: 

According to Islamic teachings, severe warnings about the consequences of failing to repay debts exist. Hazrat Abu Huraira (ra) narrated a Hadith from Sahih al-Bukhari that emphasizes the divine intervention in the affairs of those who fulfill their debt obligations instead of those who do not. 


The Prophet (saw) said, “Whoever takes the money of the people with the intention of repaying it, Allah will repay it on his behalf, and whoever takes it in order to spoil it, then Allah will spoil him.” 

[Sahih al-Bukhari 2387]

As Muslims, we are taught to value our debts highly and to make sincere efforts towards repaying them. It’s not just about settling a financial score; it’s about upholding the values integral to our faith.


Dying with Debt in Islam

In Islam, it is considered a grave matter to pass away with debts as it can have significant implications for one’s afterlife. It is believed that until all debts are cleared, the soul may not find peace.


Read More: Concept of Life after Death


If a person passes away while still having debts, it is the responsibility of their family or community to pay off those debts on their behalf. This act of fulfilling the deceased’s obligations is considered a form of charity and is strongly encouraged.


Typically, the following steps are followed to settle debts:


Identifying and Documenting Debts: The first step in settling debts after someone passes away is to locate and document all outstanding debts, including loans, unpaid bills, or any other financial obligations.


Using the Estate to Settle Debts: If the deceased had assets such as property, savings, or investments, they should be used to settle outstanding debts before distributing inheritance to heirs, as Islamic law dictates.


Negotiating with Creditors: In some cases, creditors may be willing to negotiate the repayment terms or even forgive a part of the debt, especially if the deceased person could not settle it due to unforeseen circumstances. Communicating transparently and respectfully with creditors is crucial to finding a mutually agreeable solution.


Seeking Forgiveness from Allah: The family and community of the deceased need to pray for their forgiveness and seek Allah’s (swt) mercy while also taking practical steps to settle their debts.


In Islam, we hold the belief that dying with debt is a grave concern. As a family and community, we must ensure that any debts left behind by our loved ones are paid promptly. By fulfilling their financial obligations, we honor their legacy and uphold the principles of justice and accountability taught in our faith.


Zakat and Debt

The fourth pillar of Islam is Zakat. It is important to understand its implications for our financial responsibilities. If you are in debt, it is crucial to determine whether your assets exceed your liabilities. Zakat is due on those assets if your net assets are above the Nisab threshold. It is a common misconception that being in debt automatically exempts you from paying Zakat, but that is not always the case.


Zakat can relieve financial difficulties. If you know someone who is struggling with debt and meets the criteria for Zakat eligibility, you can use your Zakat to help them. However, this is only allowed if their debt is not the result of actions against Islamic principles, such as gambling debts.


Duas for Clearing Debts

One may seek relief from debts by making sincere supplications to the Almighty.

One may seek relief from debts by reciting this Duas for Clearing Debts
O Allah, suffice me with what You have allowed instead of what You have forbidden and make me independent of all others besides You. (At-Tirmidhi: 3563)

You can explore the importance of Dua more here.


Forgiveness and Relief in Debt Situations

Islamic principles emphasize compassion and mercy, especially in financial matters—Surah Baqarah verse 280 guides dealing with debt.

“And if someone is in hardship, then [let there be] postponement until [a time of] ease. But if you give [from your right as] charity, it is better for you if you only knew.”  [Surah Baqarah verse 280]

This verse highlights the importance of patience and charity in helping others in financial distress. It reminds us to seek guidance and solutions from the Quran during difficult times.


Prophet Muhammad (saw) showed compassion in financial dealings. He helped a man named Makhramah ibn Nawfal, who could not repay a debt to a Jewish merchant. The Hazrat Muhammad (saw) mediated and convinced the creditor to allow more time for repayment. In a generous act of kindness, the Prophet cleared the debt for Makhramah.


Read More: Kindness: A Manifestation of Faith in Islam.


Conclusion – Practical Tips for Managing Debt in Islam

Managing debt responsibly is a significant concern for many, and Islamic teachings offer practical guidance to help you stay financially stable.


Firstly, Avoid excessive borrowing and only take on debt when necessary and within your means to repay. 


Secondly, high-interest debts should be prioritized to reduce overall interest payments. In Islam, minimizing the impact of interest is essential in such a situation.


Thirdly, Creating a budget with a separate line for debt repayment can help you manage your expenses effectively. The Quran advises balancing extravagance and miserliness in our spending habits (Quran 25:67).


Lastly, Use the snowball method” to pay off smaller debts first, gain momentum, and stay motivated. Seek guidance from Allah to manage debts effectively while adhering to Islamic principles.


Managing debt emphasis on aligning financial practices with Islamic principles is rooted in the ethical framework of Islamic finance. It prohibits interest (riba) and encourages virtuous lending practices like Qard al-Hasana. The guide highlights the significance of assessing one’s ability to repay before borrowing and stresses the moral obligation to settle debts promptly.

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