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Options for Muslims in Ribaa Based Economies


Many people have been asking about Ribaa, bank loans and mortgages.

Let us first review this issue from the perspective of the objectives of Deen that we have been talking about. Interest based economy is totally counter to the kind of just, fair, excellent and loving society that Islam wants to create. If interest is charged on lending money to those who are going through hardships, it is against the spirit of caring, sharing and generosity that Islam promotes. Lending money on interest so that people can acquire the things of luxury that they really have no means to buy otherwise is also counter to Islamic philosophy. It develops the mentality of living beyond the means which often lands people in mental hardships (anxiety, stress, worry) and financial hardships. It also makes the things costlier for people than they should have been. For business loans, it violates the principles of fairness and justice. If times are good for business, the lender does not get a fair reward, which he could have earned as equity investor. In bad times, the businessman is left with all the risk but very little or no reward, while lender can call his loan even imposing bankruptcy on the borrower. This is just a brief overview.

From economic theory perspective, the teachings of the Qur-aan and Sunnah are quite clear in that the economy of an Islamic state must be interest free, where money or any medium of exchange for financial transactions does not have any time value. In other words, just the passage of time does not justify any increase in the quantity of the medium of exchange (money). For business purposes, the only kind of investment allowed is equity investment, in which risks and rewards of the business are shared by all owners and where the value of the investment increases or decreases, purely through the business activities, not because of the passage of time. Whether capital needs of the business are temporary, short term, or long term, they must only be met with equity financing, not through interest bearing loans. Temporary needs can be met with temporary equity investments for only a particular transaction or set of transactions, sharing the profit/loss from that transaction/set of transactions.

For personal needs of people, the loans must be interest free, given with the spirit of helping a person out of a personal crisis or problem situation. Naturally, such loans are not meant to satisfy ‘wants’ of the people who want to live beyond their means. Rather they are for people who encounter a temporary setback and need help to get out of it through community help. The Islamic society is based on the spirit of giving, sharing and helping rather than the attitude of benefiting from the misfortune of others. That is why the Holy Qur-aan contrasts an economic system based on Ribaa (earning interest for the growth of worldly wealth regardless of the circumstances of the debtor) with Islamic economic system that is centred on the spirit of Zakaah (giving for the pleasure of Allaah).

Unfortunately, there is no Islamic society in existence at this time the economy of which is based on Islamic principles. So what should Muslims do in this case? First of all, every Muslim has an obligation to assign the highest priority to dedicating his/her life, resources and abilities to implement the complete Islam as done by the Messenger of Allaah in Madeenah, where all the systems of state -- economic, legal, social, political, etc., everything -- are fully Islamic. If that objective does not have a high priority in a Muslim’s life, raising questions about subjects like Ribaa is an exercise in futility. Muslims who do not make the establishment of Islam in this world as a complete system of life their mission of life, are not appreciated by Allaah SWT. There is no point in their worrying about Ribaa, if they cannot be bothered to make the Islamic system a reality in this world.

(Considering that this emails reaches to readers in many parts of the world, the nature of Muslim’s work for the establishment of Islam needs to be clarified. The types of activities undertaken in the Islamic struggle or mission will be very different for Muslims living in different parts of the world depending on their numbers and the status of the Islamic movement in their lands. For example, the Muslims living as a minority will aim at sharing the beauties of Islam with their non-Muslim compatriots and inviting them to Islam (Da‘wah). Their situation corresponds to the Makkan stage of the Islamic movement and Muslims in these circumstances must stick to the style of Islamic work carried out in Makkah. Even so, the kind of work and response to resistance to Islamic Da‘wah depends on what stage of Makkan life the circumstances of the Muslim community correspond to. For example, the conditions of Muslims in USA correspond to the early periods in Makkah when the persecution of Muslims had begun to be inflicted -- not only as an accepted, but also as a ‘patriotic’ practice.)

For those who have dedicated themselves to the Islamic mission that is appropriately defined according to the conditions of the societies they are living in, it is a legitimate question to ask what should they do in the meantime until the fruits of their efforts materialize in the establishment of an Islamic system.

The opinions of the scholars differ so greatly in this respect, that it is extremely difficult to say one way or the other. In fact, giving a general opinion (verdict) applicable to everyone, is fraught with great dangers, such as the following:

If a general opinion (or verdict) is given that in the interim, until an Islamic financial system is properly implemented, people can use the Ribaa system and accept/pay interest as the situation requires, the dangers are that:
  • It will become an accepted practice and the Muslims will, in time, even lose sight of the vision that they are required to establish an interest free economic system. This is such a great danger that it is tantamount to changing Islam out of its shape. And this has happened to some other things that the scholars had suggested in the past as interim solutions such as living under un-Islamic rule, living without an Islamic state (Khilaafah), lack of Jihaad, etc. The majority of Muslims do not even think about these things that were, in fact, a crucial part of the faith of earlier Muslims.
  • The participation of Muslims living in the Muslim-majority countries in the interest-bearing transactions will strengthen the existing non-Islamic system currently in place in their countries, rather than weakening the current system by boycotting on a mass level and replacing it with the Islamic system.

If a general opinion (verdict) is given to stay away from interest altogether, there is danger that some people may have to suffer undue hardship while trying to avoid interest, while in their situation, the justification (Rukhsah) could have been made for them to get involved in some interest based transactions in the interim period. (Rukhsah is a temporary permission to deviate from a specific Islamic teaching, given to save people from unbearable/unnecessary hardship.)

Hence, it is not advisable to issue a general opinion (verdict) applicable to all Muslims. The best idea is to examine individual situations case by case in the light of the circumstances of that person. It is even more desirable that the person considers everything for himself/herself and makes a decision of his/her own instead of seeking a Fatwa (verdict) from some scholar. In other words, the person should seek Fatwa from his/her own heart based on his Islamic knowledge and understanding. For those who have dedicated their life to the Islamic mission, their heart will always give the best Fatwa.

Of course, the path of ‘Azeemah suggests avoidance even in the interim, whenever it is in one’s control. (‘Azeemah is the level of dedication to Islam where a person remains steadfast on Islamic teachings regardless of how severe the hardships of doing so and how much sacrifice a Muslim has to make. Only when a significant majority of Muslims practice ‘Azeemah, Allaah’s help comes to Muslims, Ummah flourishes, Islam prospers and Islamic movement succeeds.)

However, there are some transactions that cannot be avoided in any circumstances such as interest credited on certain accounts and pensions plans (not RRSPs – they are in one’s control and can easily be invested in non-interest bearing investment vehicles). The question is what to do with the interest credited to one’s account.

There is growing feeling among Muslims that it should not be left with the banks because either it will be donated to charities that work on non-Islamic projects or it will unduly benefit or strengthen the banking institutions. So if it is withdrawn from the account, where should it be spent? Opinions differ. Many think that it should be donated to Muslim charities because it is public money and should be spent on public welfare projects for poor Muslims. The best suggestions that I have heard was from Syed Maudoodi that such interest should be collected on the community level to be used as community capital for establishing non-interest based financial institutions. All such interest received by individuals could be pooled to establish a small organization that can provide interest free loans to needy Muslims – either to help them through times of crises or to help the poor establish some small businesses for earning their livelihood. The benefit is that neither is the money left with the financial institutions to be used for non-Islamic purposes, nor is it used by anyone Muslim personally. Rather, it becomes a community asset helping to establish alternatives to the Ribaa system.

This should still be considered as only an interim step and interest should be accepted even for these good goals with compunction lest the Muslims develop an attitude of accepting non-Islamic interest-based economic set up as normal part of life.

A case can also be made that if someone or some organization has a huge amount of money in a non-interest bearing account, the financial institution is unnecessarily being given the opportunity to make big gains on that amount, thus contributing to strengthening of the Ribaa system. It is in essence the same thing as leaving the interest with the bank without withdrawing it. Should these big sums of money be put in a higher interest bearing account to earn better interest and adding that interest to the Ribaa free loan fund mentioned above? This is stepping into dangerous territory. Now we are not only accepting what is given, but also planning to get more. We are stepping right into the traps Shaytaan uses to lead people away from Islamic practices. From accepting to demanding more, step-by-step, soon we will lose the thought of even anything being wrong with the system of Ribaa.

So what to do with huge sums of money? For long-term investment, stock and real estate markets provide a reasonable alternative. But for the short term we must sacrifice the urge to get more interest because of the complicity it creates towards the Ribaa based system.

The medium-term goal should be for the Muslim to set up their own financial institutions such as credit unions so that they can be run according to Islamic principles as much as possible. Considering the size and amount of Muslim money from individuals and institutions sitting with major banks helping them with big profits, it should be very feasible and viable project to establish our own financial institutions, if Muslim communities put their mind to it. Many Communities much smaller than Muslims in Canada, for example, have established their own credit unions.

The long-term solution must remain, as mentioned earlier, the establishment of Islamic systems in every aspect of life democratically (through majority voting) wherever we are.

In summary:

The Islamic goal is to establish Ribaa-free economy and every Muslim has a responsibility to work towards the goal of establishing complete Islamic systems, including Ribaa free economic system, in a unified Islamic society or state. While working towards that goal, the following course of action could be adopted in the interim:
  • A person should assess on his/her own if he/she can or cannot do without a mortgage or business loan;
  • Wherever, interest income cannot be avoided, it should be taken out of the financial institution, pooled together in a fund to give interest free loans to the needy;
  • Sizeable surplus cash not needed for a few years should be invested in appropriate equity investments; and,
  • Muslim must join their hands and establish their own financial institutions such as banks, credit unions and mutual fund/investment companies.

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