There’s lots to discuss in this blog related to riba, from the haram and halal of student loans and forex trading, to the free milk we used to get in primary school. But first, I want to talk about nuclear bombs.

Seventy years have passed this week on the devastation that was visited upon Nagasaki, Japan, when the US military dropped a nuclear bomb on the city. At least 70,000 people died in the horrific week following the attack and survivors described how their skins hung off their arms and backs like rags. It was an awful moment in human history.

But why am I going on about WWII when the title is about riba? Trust me, there is a link.

God tells us to give up trading in riba if one truly believe in him, but if we don’t then we are told to“take notice of war from Allah and His Messenger.” (2:278-279). In the entire Qur’an nothing else gets the same treatment. Nothing else warrants a war being declared upon you by God himself – except riba.

Why is that? Like war destroys societies, rips apart lives, causes mass injustice, destruction of human life and happiness, and puts in charge those who are bankrolling the whole thing, Islam teaches that so does riba. Riba results in a economic structure geared towards inflation, shifting activity from real productivity (actually making things, providing services, innovating) to an illusion of productivity (money begets money directly). It results in starker and starker rich-poor divides, creates boom-and-bust economies, and literally enslaves nations to their creditors. The UK only recently paid off the last payment from its loans funding WWI, which was a hundred years ago. The Greeks are currently being forced by their creditors into corners and policies they never wanted to be in. And this is the state of sovereign nations with large armies, what then of the small businessman? Once he’s forced into borrowing using a credit card with 40% interest, he’s always fighting a losing battle.

So riba is pretty severe isn’t it?

But here’s the thing, most people don’t even know what riba is, never mind avoid it. In fact chances are that you have indulged in riba yourself. Let me prove it to you.

When you join a bank, they give you lots of incentives to open a savings account or current account with them don’t they? “Come to us, we’ll give you £100 for joining. Come to us, we’ll give you 1000 nectar points. Come to us, we’ll give you Amazon Prime for free.”

But did you know that accepting that incentive is haram?

It all comes down to the basic idea behind riba: there needs to be an equal and fair exchange in every transaction. In this case, if you’re loaning your money to the bank, then anything the bank gives you above and beyond your deposited, e.g. your annual interest payment, or, in this case, nectar points, is riba. If you deposit £1000 in your current account you can only get £1000 back, not £1000 + Amazon Prime Membership!

Of course other incentives given by other companies, such as a phone company or a supermarket to buy with them, for example 50% extra free, 1 years free line rental, or £20 cashback etc, all of these incentives are fine, as there is no loan of money involved here, merely a sale transaction taking place. So here it is not money being exchanged for money, but money being exchanged for a bag of carrots + 50% extra free carrots. In a sales transaction like that Islamic law gives you a wide leeway to negotiate and offer whatever you like, it is when money is being exchanged for money that we run into issues.

What we all think is riba

Ask any standard Muslim (let’s call him Kamal) what riba is, and he’ll give you a confident nod. “Of course I know what riba is bruv. Let me give you an example. It’s when you get a £5000 up front from someone and then pay them £5200 back after two months.”

True, that is riba. But there’s more to riba than just that.

What riba actually is

In fact there are two kinds of riba, and both are prohibited. Firstly there is riba al-nasiah, This is the interest of delay as explained by Kamal above. This is the standard understanding of interest that we have today: a person borrows £x on day one and has to pay back £x+interest on day ten when he returns the payment to the lender.

The second is riba al-fadl, which is the interest of unequal exchange. For example, it is prohibited to exchange £20 for £10 with someone, or one bag of rice for two bags of rice. There’s lots of debate in the academia on how exactly this kind of riba works, but a childhood memory captures the essence of it. At primary school when they used to give everyone free milk, that sharp wheeler dealer kid would take one sip of his milk and figure out it had gone off. He’d come over to you and say “let’s swap mate. They’re just the same thing aren’t they?” And so you would, much to your regret. The prohibition on riba al-fadl is designed to stop this.

So riba al-nasiah prevents unequal exchange in loans, and riba al-fadl prevents unequal exchange in sales. Simple.

How we fall foul of riba in our ordinary lives

Below, in no particular order are three of the many ways we all engage in riba without even realising it!

  1. Selling Debt
    Some Muslim companies end up having debts owed to them. Francis from down the street still owes you £1000 for the furniture he bought off you a year ago and you’re struggling to get him to pay. So you decide you will sell the debt on to Clive, who pays you £800 for your £1000 debt. You take it as you think £800 is better than nothing, and Clive takes it as he thinks he can strong-arm Francis into paying the full £1000 and making £200 profit. But this transaction is haram. As it is selling money at less than equal amounts. The Shariah sees selling debt at less than par value as selling money for less money. An alternative way of trying to get your loan back is by hiring someone for £200 to get the £1000 back. This would be Islamically fine. (There might be a business idea here for the entrepreneurially-savvy Muslim!)

  2. Forex trading
    These days all sorts of online trading is available. Most of this is unambiguously haram (e.g. CFD) as it is some form of spread betting and so you are not in fact actually buying and selling an asset but are betting with a betting company on what you think will happen to a particular share.
    Forex trading is slightly different in that you actually buy and sell money. From the outside it looks pretty legit, money exchange, what could be wrong with that? Some companies even offer “Shariah compliant” accounts where they won’t pay you or charge you interest on the money in your account. But in Forex trading too, something is haram.
    You see you are buying using leverage (google the term). This means that the broker is extending to you an interest-free loan so that you can buy £100,000 worth of currency, even though you only have £1000. This is important as currencies only move a tiny bit every day, so unless you’re buying in big amounts, you’re only going to make a few pence a day!
    But the problem here is that the company is getting back more than the £99,000 it lends you as you pay it back £99,000 + brokerage fee. So this is getting back something extra every time and consequently this is not allowed. There is a structural riba built into the transaction.

  3. Student Loans
    This is a big one right now for students in countries such as the UK where university fees are ridiculous and the Government extends an interest-based loan to you so that you can pay to go to uni.
    There are many arguments out there right now that try and make it halal for Muslim students to take these loans and go to university. Unfortunately none of these arguments stack up. No it is not a necessity, yes there are alternatives, and yes it definitely is riba.

I am aware that by saying a number of things I have said are riba-based, I am poking a hornet’s nest with a stick, and many people will have questions or disagree. Please let me know (with solid reasons) why you might disagree, or any questions that you may have.

I do also plan to do a much more detailed and rigorous article on the issue of student loans in the coming weeks so hear about that first by subscribing to our newsletter (box at the top right of the page).

Remember to share with your friends and get them involved in the debate too.

PS: This article was recently featured by our friends over at Wahed. Check them out (and get a £25 bonus) through this IFG link here.

17 Comments. Leave new

  • Waliur Rahman
    August 12, 2015 12:33 am

    Fascinating article and a worthwhile! Would be good to have a bit more detail in your falling foul of riba section, although I appreciate you’re trying to keep it to the point.

    May Allah swt reward you for your efforts in educating us!

    Reply
    • JazakAllah khayr, cheers Waliur. Hope things are well! You must visit next time you’re up in Manchester/Stoke area.

      You’re right I’ve not gone into detail on these issues. I’m almost trailering much more detailed articles on each of the practical applications in coming weeks and months. But did you have any specific problems/queries?

      IK

      Reply
  • …so the link to WW2?

    Reply
    • Is that war is something so horrible and riba has been linked to that in the Qur’an, showing the severity of the warning.

      Reply
  • …so the link to WW2?

    Reply
  • Asalam-u-alaikum Ibrahim,

    A great blog you have here. Islamic Finance is an area I am particularly interested so will be reading reguarly. I do have two real life scenarios, for which I’d be very interested in finding out if they are permissible or not.

    1. Credit Card Balance Transfers – There are now numerous 0% interest Balance Transfer deals on the market however you have to pay a transfer fee. If we take the holistic approach you have written about in your article, then would this form of financing become haraam? E.g. You borrow £1000 + 3% transfer fee = £1030 – so you are in effect paying more than you borrow. I have seen this question come up before, and the consensus I have known until now is that is permissible – You pay no interest but you end up paying more due to a fee.

    2. This could be considered the opposite to my query above – where we do pay interest but end up paying the same or less due to a discount.
    Scenario: Vehicle Manufacturers now often provide discounts and dealer contributions when purchasing a vehicle on finance, so the vehicle ends up sometimes cheaper or the same than if you were to purchase it cash. E.g.:
    Cash Price: £34k – after all applicable discounts and haggling.
    Finance Price: £34k – £4k dealer contribution = £30k + £4k finance charge (interest) = £34k

    If we take a holistic approach and look at what riba is in essence, ignoring what it says on ‘paper’ about the interest charge, then your paying exactly the same, £34k for a £34k vehicle. Would something like this be permissible?

    Jazakallah.

    Reply
    • Jzk khayr for your thoughtful and well-laid out comment and queries.

      1. This is fine, for exactly the reason you said. I write this blog in as simple language as possible to try and make it accessible and at times I end up simplifying it too much that the nuance is missed! Where you are paying over and above the £1000, there is a suspicion of riba if the other party has done nothing to deserve this extra payment. But here the card company has transferred across the debt and done some paperwork/legwork, then this is fine. Wallahu A’lam.

      2. This is not permissible. The money amount can match, but that is not sufficient for the transaction to be permissible. This is because riba has many other macroeconomic impacts and affects the justice in society, and the risk matrix is different here. But above all, Allah has said unambiguously that it is haram. However this is a common area of contention for people on islamic finance and does deserve a much more detailed response, so do subscribe to the blog if you haven’t already and inshAllah I’ll be touching on this theme in the coming weeks and months!

      N.B. I’m not a mufti btw, so do feel free to check these answers with scholars! AlQalam.org.uk are a great resource as are islamqa, though I do disagree with them on some things!

      Reply
  • Assalamu Alaykum,
    I just came across your blog after reading your excellent article on 5pillars. Uk site. Can you please advise on halal investments that I can put my money into (from the sale of my house). Jazaka Allahu khairan

    Reply
    • There are a couple of options I’d recommend to you:

      1. A stocks portfolio. You should get a financial advisor ideally, and learn about the area yourself. There are specific rules regarding investment in stocks from a Shariah perspective and this is certainly an area I will be covering in a future blog (so do subscribe), but as a serious investor I’d recommend you buy a couple of basic books on Islamic Finance to get up to speed. Any books by Tarek El Diwany, Hashim Kamali, and Professor Gamal are good shouts. But I’ll also be doing a blog in the coming weeks and months on good introductory books to buy for an islamic finance/economics library.

      I’m assuming you want to invest in something more volatile than property – as that is what you have just sold – but if that is not the case and you’d be interested in investing in property as a business venture, then that is again something I would advise you look into. You could perhaps do both property and stocks in order to diversify your portfolio and mitigate risk.

      With a well-rounded portfolio you ideally also want to have some steady-return bonds or gilts, but of course as these are not allowed in Islam you can’t go for these options. You can instead explore offerings by Islamic banks on their saving products, or if you have access to Middle East markets, look into buying sukuk.

      You can also opt to buy a bunch of shares in investment funds (including Islamic investment funds) so that is something you can explore too.

      This is a brief response to an interesting and useful question. I’ll try and do it more justice when I do the blog on Islamic investing.

      2. Please drop me an email at ibrahim[at]islamicfinanceguru.com with a brief note about the kind of sectors you are interested in investing and how much you are looking to invest. I can then add you to our growing list of investors and entrepreneurs who get in touch with me regularly looking for ideas to invest in, or people to invest in their ideas!

      In the coming months, when the list reaches a critical mass I am planning to formally launch some sort of linking-up of Muslim entrepreneurs and investors so that we can benefit our Muslim community and grow in our wealth at the same time.

      Reply
  • Mohammed Khan
    August 19, 2015 12:19 pm

    Salaam Ibrahim- hope all is well iA

    ive read this article twice now and I do think its beneficial but more importantly easy to understand.

    I agree with you on all thats written. Would like to ask with regards to 0% finance/interest on purchases, transfers etc. My instinct tells me that even these should be avoided since the contract may involve interest or penalties in the form of interest ‘in the case’ of scenarios that are stipulated in small prints OR that 0% interest is only for a specified term after which some form of interest kicks in. The above are ony examples but i hope you understand the point and if so, then even though one isnt directly indulgng in riba, would it be seen as witnessing and condoning it which according to the well known hadith is haraam.

    So i basically stay away from all types of financing unless its completely clean from any sign of interest. This is what my heart tells me, what is your view on this?

    jzk in advance.

    p.S would I be able to join the investment ideas email list since I too have some money that im looking to invest?

    Reply
    • ws Mohammed,

      Jzk khayr for all your feedback and your question.

      1. With regards to your question – the current scholarly view on this is conflicted. Some allow it, others don’t for the precise reasoning you put forward. I am personally okay with it right now for three reasons. a) the implications of saying this is haram are far-reaching; b) these implications include the fact that nearly every standardised contract Muslims enter into in this country would then become haram. Every utility, phone, car, internet contract you sign up to has clearly stated that any defaults will result in interest being charged; c) the entire system we operate in is underpinned by interest (I will be doing a more complete blog post on this topic shortly iA) and you need a credit rating for many things, and you need a credit card to make payments abroad for example, so some scholars have argued that it is okay to use credit cards due to “daroorah” or necessity.

      When you say “transfer”, if you mean credit cards charging a fee to transfer the debt onto the new card, that is fine as it is paying for a service.

      PS: Of course, in an ideal world we wouldn’t have to use 0% finance/credit cards etc, and that’s what we should work towards. But that is really the role of Muslim leaders, scholars, economists, and politicians.

      2. You certainly can joining the investment ideas email list iA – just email me at ibrahim[at]islamicfinanceguru.com (the [at] is actually an “@” sign, I just put it that way to avoid spam bots) with what sectors you’re interested in and how much you’re looking to invest.

      Reply
  • Salaam,

    Very interesting article. For some reason I had missed this a few months ago when I did a full sweep of every article on IFG.

    Regarding the points you mentioned:

    1- The concept that debt is a saleable item is a fantastic concept and according to many (I think I first read it in Money: The Unauthorized Biography) is one reason for great growth in modern economies. I can understand that this is not Islamically permissible, but doesn’t that mean that any Islamic or Sharia-compliant economic system will inherently grow at a much slower rate than a “modern” debt-based economy (although a Shariah-compliant economy would grown more organically and hence wouldn’t be under risk of a bursting bubble since the growth wouldn’t be a bubble)? I can accept that this is true, but I do think there might be another answer.

    2- Would the £99,000 not be an investment on their part? So they have entered into the deal as a business partner? In one of the questions above you mentioned that the fee credit card companies charge for transfer is due to their admin costs. Can we not argue that the brokerage fee is for the broker to pay for their employees, their facilities, whatever overhead they have to pay in order to facilitate trading?

    3- I am aware you discussed this further in the other article after Shaikh Haitham’s fatwa was released so I will keep that discussion there.

    Jazaakumullah Khair,

    Reply
  • Robert Hannah
    December 7, 2017 4:02 am

    There is a “school” of Islamic thought that one could call the “Egyptian school” (Al-Azhar University and some of its muftis, including Tantawi) which has been ambivalent about riba – the latter declaring in fact that bank interest is acceptable in his fatwa of 2002. Modernist scholars such as Fazlur Rahman and Abdullah Saeed assert (quite reasonably, in my view) that modern interest in regulated institutionalized financial markets is not the same as riba at the time of the prophet, which was dominated by unscrupulous money lenders. Riba = interest is a conclusion stemming from the writings of neo-revivalists Sayyid Qutb (Egypt) and Maududi (Pakistan) – who were both quite extreme in their views.

    So you are correct – there are differing views on riba.

    Reply
  • Assalam walykum Brother,

    Would you be able to advise if dropshipping is permissible or not?

    JazakAllah khair

    Reply
  • Asslamu aleikom, jazakom Allah khyran for this article. I was reading smoothly through until I got to this last sentence “PS: This article was recently featured by our friends over at Wahed. Check them out (and get a £25 bonus) through this IFG link here.” And I found myself wondering what makes this different from Riba? If I am depositing an amout of money with Wahed and they are paying me £25 bonus” on top of it. It sounded similar to the bank you’ve mentions “If you deposit £1000 in your current account you can only get £1000 back, not £1000 + Amazon Prime Membership!” Can you please explain this to me further?

    Reply
    • Good question! The difference is that the legal structure of a bank account is an on-demand deposit. What that means is you are actually lending to the bank and so any excess you get back from the bank is equivalent to interest.

      With Wahed, you are not lending to Wahed, you are depositing your money with them for investment. They are offering you a gift as an incentive to do that – so its as halal as a buy-one-get-one-free offer.

      Reply

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