ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَـٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَـٰٓئِكَ أَصْحَـٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَـٰلِدُونَ۔

“Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. They say, “Trade is no different than interest.” But Allah has permitted trading and forbidden interest. After receiving a warning from their Lord, whoever refrains may keep their previous gains, and their case is left to Allah. As for those who persist, it is they who will be the residents of the Fire. They will be there forever”

What does interest mean in Islam?

When you take out a loan, you expect to pay back more than what you received. This is called interest. The lender expects to earn money by giving you a loan. This is based on the principle of diminishing returns: the more you borrow, the more you’ll have to pay back. In the real world, interest rates vary from country to country. In some places like the US, interest is calculated by compounding. This means the more you borrow, the more interest you’ll have to pay back. In Islam, interest is called Usury, Riba, or Interest.   It’s a fixed rate of return for lending money. The interest rate is known at the start of the loan.

 Why is Riba Haram in Islam?

The main reason why interest is haram in Islam is that it is considered a breach of the principle of helping others freely without expecting anything in return. As with all other things in Islam, the prohibition of interest is based on the Qur’an, the Hadith, and the Sunnah. The Qur’an has several verses that warn against usury. 

          يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ لَا تَأْكُلُوا۟ ٱلرِّبَوٰٓا۟ أَضْعَـٰفًۭا مُّضَـٰعَفَةًۭ ۖ وَٱتَّقُوا۟ ٱللَّهَ لَعَلَّكُمْ تُفْلِحُونَ

O, believers! Do not consume interest, multiplying it many times over. And be mindful of Allah, so you may prosper 

Why Riba is prohibited in Islam?

the majority of Muslims agree that riba is forbidden, but there is significant disagreement on what exactly defines riba, whether it is outlawed under Sharia law or is just discouraged, and whether it should be punished by individuals or by Allah. Islam prohibits interest but encourages other ways of earning money. For example

·       Earning money from speculation (e.g. stocks, shares, futures), gambling, hoarding, and other unethical means is haram and considered a curse from Allah.

Types of Riba in Islam:

Riba is forbidden in general. But there are certain exceptions where riba is allowed.,

riba al-fadl:

when an individual is unable to repay a debt, the lender can accept repayment in the form of something else besides money. This is called ‘debt deferred’ and is allowed in Islam. This is done when the lender is willing to forgive a portion of the original debt.,

Riba al-Nasiyah:

 when the debt is guaranteed by a group of people, some scholars say that the guarantor can charge an additional amount above the original debt amount to cover his risk. This is called ‘debt guaranteed’ and is allowed in Islam.

What is Riba in Islamic banking? Islamic Loans That Don’t Harbour Riba:

Several Islamic financial institutions provide interest-free loans. For example, the Islamic Development Bank is a multilateral organization with 57 member countries. It provides long-term, interest-free loans to poorer countries. In the West, a few companies provide Islamic home financing, auto financing, etc. Interest rates on these loans are fixed and are not calculated on the original amount. So if the original amount is $100,000 and the rate of interest is 5%, then the amount you have to repay is $110,000. If the rate of interest is 2%, then the amount you have to repay is $102,000. interest is a fixed rate of return for lending money. The interest rate is known at the start of the loan. Interest is prohibited in Islam but there are exceptions where it is allowed. Islamic financial institutions provide interest-free loans.

What Are the Alternatives to Riba in Islam?

Islamic Bonds: These are debt-based instruments that don’t entail interest payments.

Savings: Muslims can save money in a bank to earn interest. This is halal because you are depositing the money with the bank and not asking for a loan.

Partnerships: Partners can invest money in a business and share profits without charging interest. 

 Zaibatsus: These are large enterprises that use a mix of debt and equity financing. Profits are plowed back into the business.

Renting: When renting an asset, you’re not borrowing it. For example, if you rent a car, you’re not asking the owner to purchase the car for you  

How Can Interest Be Halal in Islam?

 A Muslim can earn interest on money that is rightfully his. He can deposit money in a bank and earn interest. If he needs to take a loan, he can get an Islamic mortgage. In this case, he is not paying back the original amount plus interest. He is paying back the original amount plus an amount equivalent to the interest. In short, he is paying a fixed amount that is predetermined. He knows exactly how much he has to repay and when. There are no hidden charges in Islamic mortgages. You can also make interest halal by trading things. For example, if you want money from your friend, you can give him an asset in return. If you want money from a lender, you can give them an asset in return. In both cases, the deal is not one-sided. You are giving something in return for money.

How Does Interest Work?

 Imagine Sarah owes cash to a friend and he charges her 10% interest. This means she has to pay back $110 (the original amount plus 10%). In the real world, interest is calculated on the original amount (i.e. $100) and not the new amount (i.e. $110). This means her friend will charge her interest of $100. These are the steps in the real world: $100 + $10 (interest) = $110 (new amount) This is the same in the Islamic world: $100 + $10 (interest) = $110 (new amount) But in the Islamic world, you first have to deduct $10 from $100, i.e. $90. After that, you have to add $10 to $90, i.e. $100. In short, you pay back $100.

Conclusion:

We’ve seen that interest is a fixed rate of return for lending money. The interest rate is known at the start of the loan. Interest is prohibited in Islam but there are exceptions where it is allowed. Islamic financial institutions provide interest-free loans. There are other ways to make interest halal. There are many ways to make interest halal. You can trade assets, get an Islamic mortgage or find other creative ways to get money without interest. Whatever you do, just remember that interest is a surefire way to make money but not a good Muslim.