“Why does Islam not allow 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!

15 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?

    Reply
    • 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.

      Reply
    • 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.

      Reply
      • that’s pretty much spot-on 😉

        Reply
        • 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.

          Reply
  • 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 http://www.ideasfd.org/if-corner.html

    Reply
  • 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.

    Reply
  • I heard an interesting argument from yasir qadhi in the following video:
    https://www.youtube.com/watch?v=mICixMTW_qs

    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 (https://www.amazon.com/Ultimate-Conspectus-Matn-al-Ghayat-al-Taqrib/dp/0985884029/ref=sr_1_fkmr1_1?ie=UTF8&qid=1544802738&sr=8-1-fkmr1&keywords=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

    Reply
  • 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?

    Reply

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