Islamic Finance

Why is Interest Haram? Why Does Islam Forbid Riba?[Part One]

“Why does Islam forbid interest?” That’s a question we have all asked or been asked at some point in our lives. Usually it leads to a headache, the discovery that a close friend is actually secretly a raging capitalist/socialist (replace as per your political proclivities), and – the worrying one –  doubt about one’s religion and moral code.

The good news is there are some sensible, clear answers to the question.

The bad news is there are some (nearly as) sensible, clear answers to the answers.

However the really good news is that a novel approach struck me during some recent research I was doing for an article on the nature of money (it is a high octane life we lead here). The approach is a simple, logical argument which doesn’t require detailed knowledge of the Qur’an and hadith on the topic.

But, in order to get to the argument (in a follow-up article to this one), I need to lay the groundwork with an analysis of the usual answers that we can give.

Argument 1

Standardly the argument against interest is that it is exploitative. A rich person is one who has lots of money, and he is in a position to lend. A poor person has little money and is in need of lending money. If he takes out an interest-bearing loan, the net transfer will be from the poor to the rich, which is counter-intuitive and exploitative on all but a really hardline analysis.

But what about the case of a doctor who earns £100,000 a year, who wants to take out a mortgage and pay £1000 a month for 25 years, and own his house at the end of it, rather than £1000 a month in rent for 25 years and own nothing at the end of it? The bank benefits and the doctor benefits – that doesn’t seem exploitative right?

What does one do in such cases where it is not (prima facie) exploitative? Well then one makes the move that in general it is exploitative.

But what if, in our modern context, interest is arguably not even generally exploitative? Some people say that an interest-bearing loan can lead to a lot of growth for a business, or can (as the above example outlines) allow one to get onto the housing ladder and pay less money than they would if they were to rent.

These people are not correct in my opinion (and Argument 1 is fundamentally a very good argument, particularly for fractional-reserve banking economic model (that may require another article to fully unpack)), but it is obvious that if we are to say “interest is exploitative”, we invite counterattacks that say “here is an example of where interest is not exploitative”. So I don’t feel this is an argument without a comeback.

Argument 2

Another line that attempts to cut off any such counterattacks is: “money is simply a means of exchange, and as such Islam does not allow for a thing which in of itself has no value (and is not the objective of the transaction) to be ‘rented’”. The point being made here is simply that we don’t ever go to a shop to buy £5 notes to use as cooking stock, or 50p coins to use as a nail file. We like money because it buys us nice things, not because that piece of paper is really useful itself.

So here any “interest-is-not-exploitative” arguments become irrelevant – as we’re not arguing that interest is exploitative or not in the first place.

One could argue that interest is simply a compensation for usage of money during the term of the loan. I lend you £100 for 2 months; I consequently don’t have access to my £100 for 2 months and should be compensated for that loss of opportunity.

But the proponent of Argument 2 would argue that Islam simply doesn’t allow something like money to be rented. However, then the related question arises: does Islam allow the time-value of an item (the opportunity to use x thing) to be charged for in any case?

The answer to that is yes. One can obviously rent things (my flat for example). One can also charge a different price for deferred payment of a good.

So we’re allowed to “rent” things, just not money (and any item which is used as an alternative to money, such as gold coins back in the day).

But why is that? Well, to understand that, let’s have a look at what we’re “renting” out when we rent out money. Money is a store of value. That is the key quality of money. If one has renting out a gold coin (somehow back in vogue as a currency let’s say), we wouldn’t want the gold coin for itself, but for what nice things it could buy.

On the other hand, a gold wire made out of the same amount of gold for use in a certain circuit, could, by a bold scholar, be argued to be valuable intrinsically. Renting out such an item would then be allowed, as the thing being rented out is the usage of the creation that took a great deal of technical skill and know-how to create, not just the raw gold material.

This is a much more solid argument and lies at the heart of the Islamic prohibition on interest. It’s not that Islam forbids us making money, it’s that Allah has forbidden making money from things which are intrinsically useless.

The New Argument

So what is the problem with renting out a store of value? Well, what is this value that we are storing? The value in a £10 note is that which we are willing to give it. If our confidence in the acceptability of the £10 wavers, then our confidence in the £10 will crumble. The thing that gives value to the £10 is its widespread acceptance and our knowledge that we can use this intrinsically worthless little piece of paper to buy things that are intrinsically precious.

So we’re renting out “confidence of many others in society”. I don’t like that – and that, I think, is ultimately why interest is haram. In part 2 of this article on why interest is haram, I’ll explore this line more fully.

But as ever, I’d love to hear your thoughts on the above, any alternative arguments you have found useful, and what you guess I will be arguing in my next article!


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23 Comments. Leave new

  • Shaykh Akram Nadwi said this in a post:

    “A clear, common example of this [people claiming to provide a valuable service to the community while in fact exploiting people in need] is the practice of loan-sharks who lend desperate people money at cruelly high rates of interest and claim to be providing a valuable social service. Even among Muslims there are people who do this though they well know that God has condemned lending in this manner: it is against the law of God to charge rent for the use of money, as if it were just a simple commodity like land or buildings or tools or other property of the kind that can be lawfully rented out. Nevertheless, the loan-sharks claim to be doing normal business, seeking an honest profit by renting out their property and carrying a business risk. This is a lie. If they really do believe this lie, it is as God has said (Surat al-Baqarah, 2:274): they have been so disoriented by the touch of Satan that evil appears to them as good, and goodness appears to them as foolishness: ‘Those who live on usury shall be raised before God like men whom Satan has maddened by his touch.’”

    He speaks about interest being exploitative. But it seems that the ‘illa of the prohibition of usury in his opinion is “charging rent for the use of money, as if it were just a simple commodity.” This looks like it’s the same as your New Argument, right?

    • Sort of – but what I want to discuss in Part Two is “why” charging rent for the use of money is morally repugnant. But JazakAllah khayr for sharing the above. I hadn’t read that before.

    • Robert Hannah
      October 29, 2017 5:06 pm

      I think Ibrahim’s “new argument” is that it is not morally right for a lender to profit from the confidence that society as a whole places in money.

      • that’s pretty much spot-on 😉

        • On some reflection, there are 2 points I can make. 1) Society (the state) does benefit from the seignorage in the modern context – the first round of spending of high-powered money – as the central bank buys government securities. Government can then spend that money on its programs. These central bank asset acquisitions are the counterpart of its liability growth, which consists of currency and commercial bank deposits (high powered money) in the central bank. Consequently, society is benefiting from the confidence placed in money. 2) Do commercial lenders benefit excessively from the confidence placed in money? Actually, their revenue comes from the spread between lending and borrowing – performing the service of financial intermediation – and fees. There are horror stories about executives raking in bonuses while their institutions were bailed out or fail, but for me that is a failure in their corporate governance. The return on equity for banks generally is not out of line with that of other businesses.

  • Thank you Br for the nice arguments. I have also written a 13 part article series on the subject which were published in Islamic Finance News. You can find all these articles in

  • Looking forward to the next part, especially why it is haram to rent out money on the basis that its value is derived from many other factors and not its intrinsic value.

    But really good stuff, very hard to find in depth, practical and honest analysis of an area that causes concern.

  • I heard an interesting argument from yasir qadhi in the following video:

    He basically argues that the core principal behind any Islamic transaction is that RISK MUST BE SHARED.
    I have also heard arguments that concur with this in the following text: Matn Abi Shuja (

    The basis for all Islamic finance and halal transactions is that risk must be SHARED; however, given most of the banking system and modern economy of today, risk is often lopsided and on the consumer/average citizen

  • How does Inflation figure into this discussion?

    If like in most west democracies inflationary targets are 2-3%. Keeping money in a low interest bearing accounts could at least mean that the effects of inflation are at least zero.

    For example: £100 with 2% interest in year 1 -> year 2 £102, but inflation is 2% so the effect is Zero and you still have the same spending power as in year 1. – no gain, no loss.

    So really the question is: is using interest to offset the effects of inflation amount to an injustice?

    • good question – and there is an argument to be had there. However my view is that you can avoid inflation by investing in halal options instead. Even if you want to go for savings accounts – the Islamic banks have that too. check out for a comparison of rates.

    • Muhammad Sahi
      April 3, 2020 2:34 am

      This happened because people are involved with interest based investments. The root cause of inflation is interest, get your facts right, this is why it’s Haram to do investment with interest. Because people wealth is being worth less and cost of living becomes expensive each year, because of interest

  • Dear Ibrahim,
    I really appreciate the effort of battling this question logically, than just by the Ayat alone.
    I still have a question that bothers me, I do agree that money is a store of value and that a curreny note or coin don’t hold physical value itself. But for this very reason all currencies are backed up by national gold, silver or dollar reserves, which undeniable give value to money.
    I might be completely wrong and might have got this completely wrong, hopefully you could correct me
    Thank you and regards,
    Ali Sajjad

    P.S. If we follow argument 2, doesn’t that also make Bitcoin or crypto currencies as a whole haram too.

    • Ibrahim Khan
      April 20, 2020 8:03 am

      Most currencies these days are no longer backed up by commodities. This changed a few decades ago.

  • Zenia Phonharath
    September 11, 2020 5:31 pm

    I’d add extra nuances that synergize with this. If I may?

  • Interesting arguments and thinking on this article. I would like to add that Islamic laws (Quran) was revealed in piecemeal over 22yrs based on the actions and needs of the people. Thus Islamic laws are generally there to protect the ummah as a whole with the laws and looks at the benefit of the overall community rather than individuals. As Allah is aware of the nature of people and knows majority will always need guidance to better judgement and morality.

    If the purpose of interest being forbidden is for individuals with greed and a mechanism ie money lending business, not to take advantage of the poor and needy whilst lending money by creating inflation from nothing other than the currency that has no intrinsic value, then in the context of someone earning interest from the bank can this fall into such condition?

    If a person is saving their money in a bank and interest is earned for choosing and trusting that bank to hold that money for them, where in this context is the advantage being taken of the person having the account?

    The only logical thing I can deduce would be that the banks make money through late fees, and interest in lending mortgages and loans and that money then comes back to the earned money by banks which pay your interest earned from your saving as it increases for the banks.

    What do you guys think of this and is that how the banking system works in practice?

  • best face mask
    January 6, 2021 4:58 am

    It’s rare to see a post like this, that shows the writer is commited to providing value! You certainly made me think! Thank You-I hadn’t considered things from that angle otherwise. Will share this…

  • Rihana Nifuhan
    April 5, 2021 2:08 pm

    Very good arguments but please correct me if I am wrong but is it not that the money is a representative of all assets and growth of the economy. If so then value of money is derived by the health of an economy (underlying asset) and in the last couple of decade we have seen the printing of money QE and this is in fact reversing the process ie using the value to change the fundamentals of the economy and this is representative in the stock markets with over decade long bull runs … Still contunuing even during a global pandemic So in fact whether you call it money, gold or paper it’s a representative af an economy and therefore stores value its a tally but like mentioned QE shows that they (a country’s assets and its money, paper or gold) are synonymous… An ndividual lends money he is lending his part of the economy that he has contributed and gained to someone else who can do the same this means the lender bears the opportunity cost… How is he compensated?? Isn’t Interest rates is nothing more than a name given to this Compensation… Please help me understand this please… I am confused because it seems like there are good arguments in Islam for interest rates but when we look at money and interest rates and what they are they are nothing more than tallying and compensation mechanisms with large concepts placed such as rent, insurance, interest, profits… .. This can be similar to the dowry method is some Culture’s or in Islam from a man to a woman… Compensation mechanisms complicated and labelled as good and evil… But I don’t think God has derived the good and evil from these but people have…. E. G. Based on the exploitation argument the traditional UK mortgages are far better with interest than most Islamic mortgages because I won’t be exploited under the name of Islamic mortgage … to pay more out of the pocket for the same house…please advice me on this and please forgive me if the above seems contradictory to any of your beliefs


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Why is interest haram? [Part Two]
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