rate loans authorized (halal) in Islam?
Are interest rate loans authorized (halal) in Islam?
Does the Quran really forbid interest rates? We will demonstrate that the traditional Sunni interpretation that any loan based on interest rates is forbidden in Islam is in fact partially wrong.
The Quran sets a limit regarding interest rates, and defines a maximum above which any interest rate or profit on a loan becomes usury, which is categorically forbidden in the Quran.
We will see that the Quranic system implies a divine limit which prevents usury, which undermines most societies in the world today, while allowing a stable economic growth, and would also solve the catastrophic problem associated with national debts, which threatens the world economy and a durable peace in the world.
1. What is an interest rate?
The interest is a percentage that is set in advance, that a person or entity will have to pay to another entity or person who is lending an amount of money. An interest rate is an income on a sum that is lent in exchange of a price to pay to borrow.
The interest rate is the percentage of that income in comparison to the sum lent, which is most of time expressed over a year.
The lender has by definition an “interest” to lend money in exchange of an income, and would otherwise have no interest to lend any money, except in rare cases.
The rate and terms of payment of this income are generally determined when a loan contract is signed. This percentage generally takes into account the length of the loan, the nature of the risk incurred, and the guarantees that the borrower brings to the table.
2. Focusing on the term “interest rate” is irrelevant
What follows will seem a commonplace for many, but unfortunately has to be said because of corrupted traditional Sunni and Shia beliefs.
Let’s imagine five cases in which a person borrows $10,000 over 10 years.
1. A person borrows $10,000 over 10 years at a compound interest rate of 2.5%.
2. A person borrows $10,000 over 10 years, and pays $7000 to have the right to borrow that sum, which he or she has to pay back over 10 years.
3. A person borrows $10,000 over 10 years at a compound interest rate of 7.5%.
4. A person borrows $10,000 over 10 years, and pays $11,000 to have the right to borrow that sum, which he or she has to pay back over 10 years.
5. A person borrows $10,000 over 10 years at a compound interest rate of 25%.
Sunnis and Shias claim that it is forbidden to borrow money paying an interest rate, no matter what the situation is, and claim that borrowing money in exchange of a fixed amount is authorized. One of the goals of the above examples is to prove that such a belief does not make any sense when you borrow money over a fixed period of time, because borrowing money in exchange of a fixed sum is always exactly the same as paying an interest rate, which can obviously be abusive in some cases. I am not debating here: It is a very simple mathematical fact, and the table above proves it in a simple way:
- In case number 2, a person borrowed $10,000 over 10 years, in exchange of a promise to repay the sum, plus a $7000 premium, which is exactly the same as paying a 5.5% interest rate.
- In case number 4, a person borrowed $10,000 over 10 years, in exchange of a promise to repay the sum, plus a $11,000 premium, which is about the same as paying a 7.7% interest rate.
Are you going to tell me that borrowing $10,000 over 10 years at a 2.5% interest rate like in case number one is forbidden (where the customer only pays $2,800.35 to borrow the sum = 2.5%), when borrowing the same sum paying $7,000 as a premium is authorized? (Case Nº2, which is equivalent as paying 5.5%)
For information, case number 2 is the same figure that was provided as an example in a CNN article in 2015 that was explaining how Sunni Muslim are starting to implement real estate loans in America. In other words, such a loan was approved by the Sunni religious authorities in America. My point is that it is absolutely hypocritical to claim that borrowing a sum at a low interest rate over a fixed period of time is forbidden (case Nº1), while paying more money for the same loan in exchange for a fixed sum can be acceptable.
Would you choose to repay a loan that is costing you $7,000 to borrow the money over 10 years (case Nº2, which is equivalent as paying 5.5%) because you have been told that it is religiously acceptable, and turn down the same loan at a 2.5% interest rate (which will only cost you $2,800.35) because you blindly think that borrowing money at an interest rate is forbidden?
Anyone who would choose paying more money (case Nº2) simply because he or she does not want to hear the word interest rate is either stupid, brainwashed or both, and should stop reading the rest of the article which shows what the Quran exactly says regarding interest rates, because such a person will refuse no matter what to use the most basic logic that God has endowed us with. If I am asking you if you prefer to jump from a wall that is 3 meters high or 10 meters high, what will you answer? We are asking the same kind of question here.
We will first study Quranic verses which deal with usury, and will see afterwards that God set a very precise limit in the Quran that defines what usury is.
3. Quranic verses which deal with usury
الَّذِينَ يَأْكُلُونَ الرِّبَا لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ الَّذِي يَتَخَبَّطُهُ الشَّيْطَانُ مِنَ
الْمَسِّ ذَٰلِكَ بِأَنَّهُمْ قَالُوا إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ
الرِّبَا فَمَن جَاءَهُ مَوْعِظَةٌ مِّن رَّبِّهِ فَانتَهَىٰ فَلَهُ مَا سَلَفَ وَأَمْرُهُ
إِلَى اللَّهِ وَمَنْ عَادَ فَأُولَٰئِكَ أَصْحَابُ النَّارِ هُمْ فِيهَا خَالِدُونَ
(2:275) Those who profit from usury will not be able to stand except in the manner of someone that satan throws off balance by pushing him; This is because they say “Trading is actually the same as usury”, when God authorized trade and forbade usury. Therefore, whoever receives the warning of His Lord and refrains, will keep his gains, and his fate will remain in God’s hands, but whoever recidivates: Those are the companions of the fire, in which they will abide permanently.
يَمْحَقُ اللَّهُ الرِّبَا وَيُرْبِي الصَّدَقَاتِ وَاللَّهُ لَا يُحِبُّ كُلَّ كَفَّارٍ أَثِيمٍ
(2:276) God annihilates usury, and favors charity; and God does not like ungrateful sinners.
يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَذَرُوا مَا بَقِيَ مِنَ الرِّبَا إِن كُنتُم مُّؤْمِنِينَ
(2:278) O you who believe, fear God, and forfeit any usury that remains [unpaid], if you are believers.
يَا أَيُّهَا الَّذِينَ آمَنُوا لَا تَأْكُلُوا الرِّبَا أَضْعَافًا مُّضَاعَفَةً وَاتَّقُوا اللَّهَ لَعَلَّكُمْ تُفْلِحُونَ
(3:130) O you who believe, do not profit from usury doubled several times (literally: “doubled multiplied”). And fear God, so you may experience [real] success.
وَأَخْذِهِمُ الرِّبَا وَقَدْ نُهُوا عَنْهُ وَأَكْلِهِمْ أَمْوَالَ النَّاسِ
بِالْبَاطِلِ وَأَعْتَدْنَا لِلْكَافِرِينَ مِنْهُمْ عَذَابًا أَلِيمًا
(4:161) As a result of profiting from usury, while they were unmistakably enjoined to stay away from it, and because they wrongfully consume people’s wealth: We have prepared for the unbelievers among them a painful retribution.
وَمَا آتَيْتُم مِّن رِّبًا لِّيَرْبُوَ فِي أَمْوَالِ النَّاسِ فَلَا يَرْبُو عِندَ اللَّهِ وَمَا
آتَيْتُم مِّن زَكَاةٍ تُرِيدُونَ وَجْهَ اللَّهِ فَأُولَٰئِكَ هُمُ الْمُضْعِفُونَ
(30:39) And what you pay towards usury will increase people’s wealth, but will not find favor beside God. But what you pay in zakât hoping [to find] God’s countenance: Here are those who will prosper many times over.
4. Definition of an usury rate according to the Quran
4.1 Significance of « ribâ »
First of all, the word “ribâ” (رِّبَا) is different from the word “interest” (فوائد = fâeda) in Arabic. The word “ribâ” (رِّبَا) is derived from the root word “rabâ” (ربَا) which means “to increase”, “to grow”, “to swell”, “to raise” (a child).
The word “ribâ” means specifically “usury” or “usury rate”, which explains why it is a different word than the word fâeda (interest). One of the vices associated with usury rates is that they will grow endlessly as long as the loan and interest won’t have been paid off, and in an exponential manner if someone cannot pay enough, like it can happen in case Nº5. We are going to explain why this concept is completely forbidden by the Quran, as well as the fact that paying beyond a certain limit also qualifies as “ribâ”, even if it is a fixed sum.
2:275 establishes a fundamental difference between trading, which generates profits based on work and exchanging goods and services, and ribâ which is forbidden because it is based on earning unhealthy profits by doing nothing else than lending money, often at a compound rate and without any ceiling, which can lead people to bankruptcy or long term debts that are very difficult to pay off.
This said, one can also argue that someone may have worked very hard in order to be able to lend money, and therefore deserves remuneration if he or she decides to lend. There is obviously nothing wrong to generate a profit by lending money; we are simply going to see that God set a limit in order to prevent the lender from generating unhealthy profits earning money passively.
It is important to note that 30:39 strongly discourages people to pay “usury rates”, in the same way that it is forbidden to charge usury rates. In other words, the verse implies that it is very bad to accept a loan which falls within the frame of the Quranic definition of usury, as it will not only enslave the debtor, but also limit his ability to pay the zakât, which is mandatory for every Muslim and is critical to have a happy and healthy society. God wants the Muslim society to eradicate poverty through the payment of zakât, and usury is a substantial hurdle towards achieving that goal.
We proved in the table that paying an interest rate over a definite period of time is strictly the same as paying a fixed sum of money. Therefore, what is the limit that establishes the difference between a healthy profit on a loan, and what becomes “ribâ” (interest or profit that God defines as usury)? The answer is crucial since we saw that the practice of usury leads straight to hell (2:275).
4.2 3:130 implies a precise definition of “ribâ”.
يَا أَيُّهَا الَّذِينَ آمَنُوا لَا تَأْكُلُوا الرِّبَا أَضْعَافًا مُّضَاعَفَةً وَاتَّقُوا اللَّهَ لَعَلَّكُمْ تُفْلِحُونَ
(3:130) O you who believe, do not profit (literally: “do not consume”) from usury doubled several times (literally “multiplied”). And fear God, so you may experience [real] success.
The above translation is quite literal. The language of the Quran is divinely precise and it is strictly forbidden to make up false prohibition in Islam, which is tantamount to idol worship, the worst possible sin. God does not say that a loan cannot be “doubled”, very simply because doubling the sum is not enough to define precisely what “ribâ” is. It is why He defines “ribâ” as “doubling several times”, or very literally “doubling multiplying”, which means paying more than double the sum lent.
The word ‘ad’âfâ (أَضْعَافًا = plural name) means “doubled”, and the word “mudâ’afatan” (مُّضَاعَفَةً) means “multiplied”.
As an example, we find both names in the same verse in 2:245:
مَّن ذَا الَّذِي يُقْرِضُ اللَّهَ قَرْضًا حَسَنًا فَيُضَاعِفَهُ لَهُ أَضْعَافًا
كَثِيرَةً وَاللَّهُ يَقْبِضُ وَيَبْسُطُ وَإِلَيْهِ تُرْجَعُونَ
(2:245) Who is the one who will lend to God a loan based on righteousness, so He can multiply it for him [to the point] that it becomes double, and this many times over? And God denies or grants abundance, and you will be summoned to Him.
We can therefore conclude from 3:130 that the maximum that a person can charge for a loan is twice the amount that is lent. It is a maximum, and should therefore be generally less. If a person charges an interest rate, the interest rate must by law stop compounding and become 0% if the amount owed reaches twice the sum originally lent, even if the borrower defaults on the loan and stops paying subsequently.
In the table, loans in cases number 1 and 2 are authorized, and all others are forbidden, because the payments are more than double the amount that was lent.
If you borrow 1 dollar, it is legal to charge as much as 1 dollar in interest (“doubling” the amount borrowed), but it is strictly forbidden to continue to “multiply” anything to the amount borrowed subsequently, whether it be 1,1%, 1.2%, 2%, 3%, etc… Doubling the amount borrowed is the absolute maximum.
Therefore, an interest rate that automatically becomes 0% once the interest has reached double the amount lent is not an interest rate like we typically see in some non Muslim corrupted societies, and which can rise indefinitely as long as the loan is not repaid in full.
If such a loan and interest rate is repaid early, there is less interest compounding, and it is therefore less costly for the borrower than a fixed amount that would represent for instance double the amount borrowed or more. If the borrower does not respect the terms, for instance of a real estate loan, the real estate property (or whatever else) can of course be sold to pay back the amount borrowed and accrued interests.
5. A debt has to be written
يَا أَيُّهَا الَّذِينَ آمَنُوا إِذَا تَدَايَنتُم بِدَيْنٍ إِلَىٰ أَجَلٍ مُّسَمًّى فَاكْتُبُوهُ وَلْيَكْتُب بَّيْنَكُمْ كَاتِبٌ بِالْعَدْلِ وَلَا يَأْبَ كَاتِبٌ أَن يَكْتُبَ كَمَا عَلَّمَهُ اللَّهُ فَلْيَكْتُبْ وَلْيُمْلِلِ الَّذِي عَلَيْهِ الْحَقُّ وَلْيَتَّقِ اللَّهَ رَبَّهُ وَلَا يَبْخَسْ مِنْهُ شَيْئًا فَإِن كَانَ الَّذِي عَلَيْهِ الْحَقُّ سَفِيهًا أَوْ ضَعِيفًا أَوْ لَا يَسْتَطِيعُ أَن يُمِلَّ هُوَ فَلْيُمْلِلْ وَلِيُّهُ بِالْعَدْلِ وَاسْتَشْهِدُوا شَهِيدَيْنِ مِن رِّجَالِكُمْ فَإِن لَّمْ يَكُونَا رَجُلَيْنِ فَرَجُلٌ وَامْرَأَتَانِ مِمَّن تَرْضَوْنَ مِنَ الشُّهَدَاءِ أَن تَضِلَّ إِحْدَاهُمَا فَتُذَكِّرَ إِحْدَاهُمَا الْأُخْرَىٰ وَلَا يَأْبَ الشُّهَدَاءُ إِذَا مَا دُعُوا وَلَا تَسْأَمُوا أَن تَكْتُبُوهُ صَغِيرًا أَوْ كَبِيرًا إِلَىٰ أَجَلِهِ ذَٰلِكُمْ أَقْسَطُ عِندَ اللَّهِ وَأَقْوَمُ لِلشَّهَادَةِ وَأَدْنَىٰ أَلَّا تَرْتَابُوا إِلَّا أَن تَكُونَ تِجَارَةً حَاضِرَةً تُدِيرُونَهَا بَيْنَكُمْ فَلَيْسَ عَلَيْكُمْ جُنَاحٌ أَلَّا تَكْتُبُوهَا وَأَشْهِدُوا إِذَا تَبَايَعْتُمْ وَلَا يُضَارَّ كَاتِبٌ وَلَا شَهِيدٌ وَإِن تَفْعَلُوا فَإِنَّهُ فُسُوقٌ بِكُمْ وَاتَّقُوا اللَّهَ وَيُعَلِّمُكُمُ اللَّهُ وَاللَّهُ بِكُلِّ شَيْءٍ عَلِيمٌ
(2:282) O you who believe, when you contract a debt for a specific term, then write it down; and a scribe among you should write it equitably; and no scribe should refuse to write as God taught him to. He then should write, and the one that incurs the debt should dictate, and he should fear God, His Lord; and he should not retain anything. And if the one who incurs the debt is mentally deficient or in a state of weakness, or unable to dictate, then his guardian will dictate equitably, and call two witnesses among your men to serve as witnesses. And if there aren't two men, then one man and two women that you will agree on will serve as witnesses; this way, if one of them goes astray, then the other one will remind her. And witnesses cannot desist when they are called [to give their testimony]. And do not get weary when it comes to write it, whether its term may be short or long; this is more just when it comes to God, more upright when it comes to testify and closer to avoid any doubt; unless it is an immediate transaction that you make among yourselves. You then do not incur any sin if you do not write it down. And call upon witnesses when you make a commercial transaction, and neither the scribe nor the witnesses shall be harmed, and if you do, then you indeed incur a sin. Fear God! And God knows everything.
An impartial scribe shall write down the debt, which must be dictated by the borrower in front of two male witnesses, or otherwise one man and two women. The Quran is fully detailed and even takes into account a person who is mentally deficient or in a state of weakness: It is his or her guardian who must then dictate.
6. Necessary legislation for short term loans
The Quran establishes in 3:130 the limit above which any loan becomes usury, whether it is expressed in the form of a fixed amount or an interest rate, but it does not mean that charging double the amount borrowed over a very short term should be authorized (for instance a week or a month), as it would clearly be abusive. It is therefore up to any Muslim society to establish fair rules that will take into account the economic climate and the various possible cases in which someone or an entity will borrow (inflation rate, risk, credit score of the borrower…). Therefore, the Quran only establishes a general rule making sure that any amount borrowed cannot more than double, and any society is free to establish additional rules to avoid any type of abuse.
7. Mastering the inflation rate
The fact that it is illegal to charge more than double the amount borrowed for a loan is one of the necessary components that allow Muslim societies to be stable economically and keep a low rate of inflation. Lending money in such conditions when there is a very high rate of inflation would often be equivalent of losing money, especially since 3:130 does not allow taking into account any inflation rate. In a climate of high inflation, very few or no loans would be issued, which would be detrimental to the economic development. It is thus a very strong incentive for any responsible government or authorities to take all necessary measures to curb the inflation rate to reestablish a sane economic environment.
Forbidding usury and allowing reasonable interest rates in Islam in compliance with 3:130 is therefore a factor of long term economic stability and healthy development.
8. How to solve the endemic national debt problem
With such a system derived from the Quran, money borrowed by countries or states cannot go up indefinitely like they are now, and it would be really difficult to reach the catastrophic levels that we experience today, even if there is default of payment.
If a country defaults on its debt, it is part of the risk of lending money, and the debt will automatically be frozen once the interest rates will be double the sum borrowed. Besides, if a country or state hasn’t paid back its debts or does not respect the payment schedule, there should be some international Muslim legislation that would make it illegal to borrow more money. Living beyond your means is not only irresponsible, it also becomes a form of theft beyond a certain point, when it is obvious that default will occur; for example if a national debt reaches more than a reasonable percentage of the country’s revenues, which economists can easily determine.
If a country is too much in debts, it is time to reduce its expenses and budgets, for instance by laying off some government workers and lowering wages and pensions, by increasing the retirement age in the nation (etc…), in order to go back to a viable situation. Raising taxes is never a long term solution as it paralyzes societies and discourages free enterprise, like we see it in Europe and so many countries today. It is better to default on a debt and face the problem today than kicking the can further down the road and make the problem even worse.
If a government wants to continue to be able to borrow to finance a country’s development, one has to bear in mind that defaulting on the national debt will destroy its reputation internationally, and will prevent from borrowing in advantageous conditions in the future, if at all. Any Muslim government must pay its debts because it is God’s law, and has therefore to borrow only in a responsible and conservative manner.
The national debt of countries like the US, France, Italy, Spain, etc… is in the process of destroying the world’s economy as no legal limitations have been set regarding national debts and interest rates.
Usury and the resulting endless compounding of national debts has become a threat for world peace, and can easily lead to a catastrophic world war or even the end of the world.
A system based on the Quran that freezes debts when they have doubled, and international laws that would forbid borrowing more than a reasonably low percentage of a country’s revenues would solve the problem and prevent future major disasters.
Interest rate loans are not strictly forbidden in Islam.
Paying an interest rate over a predetermined period of time is exactly the same as paying a fixed sum.
In accordance with 3:130, the Quranic definition of usury is a loan which interest rate exceeds 100% of the sum borrowed. Committing such a sin is so grave that it leads to hell (4:161). Furthermore, borrowing in usury conditions is also illegal for a Muslim (30:39).
God knows perfectly that borrowing conservatively is sometimes necessary and can favor economic development and the well being of the human race. Consequently, the Quran established a simple limit that no one should ever go over (double the amount borrowed). We saw that it is still possible to take advantage of people by lending money on a short term. It is up to Muslim societies to follow the spirit of the Quran to establish rules that prevent greed and dishonesty.
The Quran is meant to establish peace and happiness on earth, and it is critical to design economic systems that allow people to save as much money as possible so they can pay the highest amount of zakât to eradicate poverty in the world. It also means that people must be responsible financially and make more than they spend. Saving a “surplus” every year (7:199, see article on zakât for more details) is an obligation for any Muslim or household. Usury increases poverty and limits the ability of a population to save, while it enriches a minority of corrupt people.
This said, it is obvious that everyone should live within his means and only borrow when it makes sense or cannot be avoided, which is also valid for states and countries.