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  7. Riba (Interest) in Islam: 5 Key Insights to Navigate Financial Transactions

Riba (Interest) in Islam: 5 Key Insights to Navigate Financial Transactions

A digital caliper measuring a one euro coin with tiny figurines of a person pointing and another observing, symbolizing the precise evaluation and balancing of financial transactions in relation to the blog 'Riba (Interest) in Islam: 5 Key Insights to Navigate Financial Transactions'.
From Hazrat Abu Hurayrah (ra) : The Prophet (saw), said: “On the night of Ascension I came upon people whose stomachs were like houses with snakes visible from the outside. I asked Angel Jibrīl (as) who they were. He (as) replied that they were people who had received interest.” (Ibn Majah, Kitab al-Tijarat, Bab al-taghlizi fi al-riba; also in Musnad Ahmad)

Introduction to Riba (Interest)

Riba, which translates to “increase” or “excess,” refers to the practice of charging or paying interest on loans, and it is a major sin in Islam. The principle behind the prohibition of Riba in Islamic finance is the belief that money should not be treated as a commodity that can be traded for profit beyond its actual value. 

This leads to the avoidance of interest-based transactions, which are seen as exploitative and unjust, creating imbalances in society. Instead, Islamic financial systems advocate for equitable alternatives like profit-sharing and ethical investment, ensuring fairness and social justice.

Quranic Stance on Riba

The Quran categorically forbids the practice of riba, detailing its prohibition in Islam. For instance, in Surah Al-Baqarah, the divine instruction is straightforward. 

Allah Almighty says in the Quran,

O believers! Fear Allah, and give up outstanding interest if you are ˹true˺ believers. [Surah Baqarah Ayat 278]

This verse serves as a firm directive to the faithful, compelling them to renounce all forms of riba, thereby establishing a clear connection between piety (taqwa) and financial ethics.

Read More: Taqwa in Islam – A Strong Connection with Allah Almighty

Furthermore, Surah Al-Imran, verse 130, reinforces this prohibition:

O believers! Do not consume interest, multiplying it many times over. And be mindful of Allah, so you may prosper. [Surah Imran verse 130]

This admonition not only cautions against the intake of riba but also links the avoidance of such practices with the attainment of success, underlining the importance of adherence to divine commandments for prosperity.

These verses collectively underscore the Quranic stance that engaging in riba is an act incongruent with the principles of Islam. 

For those seeking guidance on lawful commerce and the avoidance of riba, read our blog post “Buying and Selling in Islam.” Here you can find nine valuable rules into conducting business in accordance with Islamic principles.

The Harmful Effects of Riba

It’s important to understand that Riba is not only an economic issue but also a moral one. It causes financial harm to others and distances us from ethical principles. The Prophet Muhammad (saw) said that even being close to Riba’s dust can have negative effects (Abu Dawood). Here are some key points to consider regarding the harmful effects of Riba:

1. Violation of justice: 

Engaging in Riba is considered unjust and unfair. The Quran warns us that consuming Riba is like devouring people’s wealth unjustly (Quran 2:275-279).

2. Spiritual degradation: 

Riba is detrimental to our spiritual well-being. It corrupts our souls and distances us from Islamic teachings that emphasize honesty, fairness, and compassion in financial dealings.

3. Lack of barakah (blessings): 

Transactions involving Riba are devoid of barakah or divine blessings. This means that despite apparent gains, such wealth does not bring true prosperity or contentment.

4. Loss of integrity: 

Engaging in Riba compromises our integrity and moral values. It reflects a lack of Tawakal in Allah’s (swt) provisions and a reliance on unethical means for financial gain.

As Muslims, Islam encourages us to seek halal (permissible) means of earning and avoid any transactions involving Riba.

Punishment for Involvement in Riba in Islam

Involvement in riba is a major sin in Islam. In Surah An-Nisa (4:161), Allah (swt) warns that those who persist in disbelief and engage in riba will face a painful punishment. This includes individuals who take interest despite its prohibition, consume people’s wealth unjustly, and commit other sins associated with riba.

Allah Almighty says in the Quran;

Taking interest despite its prohibition, and consuming people’s wealth unjustly. We have prepared for the disbelievers among them a painful punishment. [Surah An-Nisa verse 161]

The Hadith, narrated by Hazrat Jabir (RA), emphasizes the severity of dealing with riba. 

Allah’s Messenger (saw) 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]

This indicates that all parties involved in riba transactions share the sin and its consequences.

However, as we all know, Islam is a religion of mercy and forgiveness. If you engage in riba, sincere Tawbah (repentance) and a commitment to refrain from such actions can lead to forgiveness from Allah (swt). To understand the concept of Tawbah and how to seek forgiveness, check out the link provided.

Jabir ibn ‘Abdallah, reporting on the Last Sermon of Prophet Muhammad (SAW), said:

The Prophet (saw), addressed the people and said “All of the riba of Jahiliyyah is annulled. The first riba that I annul is our riba, that accruing to ‘Abbas ibn ‘Abd al-Muttalib [the Prophet’s (saw) uncle]; it is being canceled completely.”

(Muslim, Kitab al-Hajj, Bab Hajjati al-Nabi, ; may also in Musnad Ahmad)

Riba in Modern Banking

Islamic banking prohibits the charging of interest as it is deemed unjust as taught by Islam. However, riba has a broader meaning in modern banking practices and can refer to any unfair or exploitative practices involving interest rate charges. 

To provide financing services, Islamic financial institutions use alternative modes of financing based on profit-and-loss sharing, leasing, or sale-and-purchase agreements. 

Some of the most commonly used methods include:

Mudarabah:

This is a profit-sharing partnership where one party provides capital while the other manages the investment. Both of them, then share the profits according to pre-agreed ratios.

Musharakah:

This is a joint venture between partners who contribute capital, and they share the profits proportionally based on their investment.

Ijarah:

This involves leasing an asset to a lessee in exchange for rental payments.

Sukuk:

These are Islamic bonds that represent ownership in an asset or project, with returns based on the profits generated by the underlying venture.

Islamic Saving and Investment Accounts:

Instead of receiving fixed interest, depositors receive a share of the profits generated by the bank’s investment activities.

These halal methods of profit generation in Islamic banking promote equity, risk-sharing, and ethical finance, all of which are based on Islamic principles.

For detailed analysis, read the following blogs:

  1. Buying and Selling in Islam: 9 Rules of Trade
  2. Understanding Halal and Haram in Islam

Interest vs. Profit in Islamic Finance

Islamic finance distinguishes itself by prioritizing ethical and equitable financial practices, where profits are earned through legitimate trade, investment, and entrepreneurial endeavors. 

Unlike conventional banking systems that rely on interest—a predetermined and fixed return on loans or debt—Islamic banking adheres to profit and loss sharing principles. This approach is deeply rooted in the ethical values of Islam, promoting fairness and transparency in financial transactions.

Investments in Islamic finance are utilized in Sharia-compliant manners, ensuring that the profits are halal. Islamic banks do not engage in interest-based transactions; instead, they derive profits through trading and investing in permissible goods and services. 

Participatory financing models like Mudarabah and Musharakah allow investors to become integral parts of a system. As described earlier, these methods not only value our contributions but also share profits justly.

For more insights into the differences between riba (interest) and ribh (profit), you can visit Musaffa Academy

FAQs on Riba and Financial Transactions in Islam

Is it permissible to buy a house through financing that involves an interest in Islam?

Any transaction involving riba, which is interest, is deemed haram (forbidden) in Islam. This prohibition extends to financing a house through loans that involve interest. However, Islamic finance provides alternative solutions such as Diminishing Musharakah. In this arrangement, both you and the bank jointly own the property, with your payments gradually increasing your equity share without the accrual of interest. This method is in harmony with Islamic principles and offers a permissible way to finance a home purchase.

Can you donate interest money to Islam?

Interest, or riba, is unequivocally prohibited in Islam. Accumulating interest money through bank accounts or other financial instruments is not allowed for personal benefit. The appropriate action for such funds is to donate them to charitable causes without the intention of receiving any reward. This donation serves to cleanse your wealth from the taint of riba. It’s important to note that while you may not earn a religious reward for this act of charity, it ensures adherence to Shariah law.

What are some permissible and riba-free financial practices in Islam?

Islam encourages financial dealings that are fair and equitable. Trade transactions are permissible as long as they are free from deceit, usury (riba), and other unethical practices. Investments in halal (permissible) industries that do not involve alcohol, gambling, or other haram activities are encouraged. Moreover, Islamic banking and finance have developed various instruments like Murabaha (cost-plus financing), Ijarah (leasing), and Sukuk (Islamic bonds) that comply with Shariah principles.

Conclusion: Avoiding Riba in Daily Life

To comply with Islamic financial principles, it’s crucial to avoid interest in our financial management. Here are actionable tips and insights to help us avoid interest:

  1. Investing time in learning about Islamic finance principles and the concept of Riba in Islam is beneficial.
  2. Understanding halal (permissible) and haram (forbidden) will guide our financial choices in accordance with our faith.
  3. For investments, we should seek Halal opportunities that allow our wealth to grow without engaging in interest-based transactions.
  4. It’s better to plan and save for significant expenses, like homes or vehicles, rather than depending solely on loans. Islam also encourages us to manage debts sensibly.
  5. Consulting scholars or financial advisors knowledgeable in Islamic finance is advisable for complex financial matters, ensuring compliance with Sharia laws.

By adopting these practical tips and insights, we can avoid interest and save more money over time.

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