When it comes to modern money management, you’ll struggle to function without a bank account. Despite this, modern bank accounts typically come with interest, wherein the bank gives you a percentage of what’s in your account for saving money with them. Therefore, Muslims need to find a way to avoid this interest, which you can learn more about in the following blog post.
Paying interest, otherwise referred to as Riba, is a major sin in Islam. Whether it’s paying or charging interest, this is against Islamic law, in which Muslims are forbidden from lending or receiving money with the prospect of gaining something. So, if you find yourself asking, “Is compound interest Haram?” we can confidently tell you that it is.
Why is Interest Haram?
If you’re unsure why interest is Haram in Islam, we can tell you why. In short, interest is deemed illegal, unethical, and usurious. This is down to the fact that in Islam, wealth should be earned via genuine trade, and the money generated should be used productively.
The Punishment for Paying Interest in Islam
If Muslims consume interest, they’re not allowed to stand on Judgment Day except like someone who has been beaten by Satan and led to insanity. What’s more, the Qur’an says that Allah (SWT) will remove all blessings that have come from interest.
What is Riba?
Riba is the term that’s used to describe interest gained on transactions or savings. This includes the following:
Any interest earned from savings accounts, individual savings accounts (ISAs) and other savings investments.
Interest earned by lending money, property or goods.
Payments of interest for credit card fees, loans or mortgages.
Halal Alternatives to Traditional Banking
In order to avoid interest, Muslims can opt for Islamic banking alternatives. Since these services are free from interest, they cater to the ethics of the Islamic faith. Muslims may consider one or more of the following options:
Profit-sharing accounts (Mudarabah) – Mudarabah is a partnership that requires one party to provide the capital and the other to manage the investment. Instead of generating interest, the profits made from the investment get shared between the bank and the account holder in a pre-arranged ratio. Should the investment encounter losses, the capital provider has to carry these, and the manager loses effort and time. As a result, both parties share in the risk and reward, which aligns with Islamic teachings on fairness and justice.
Interest-free loans (Qard Hasan) - Qard Hasan is a goodwill loan that someone gives without anticipating profit or interest. Islamic banks and charities tend to give out these loans to help those in need, support small businesses, and fund community projects. Qard Hasan is all about charity and mutual assistance, which are core principles of Islam. As a result, Muslims can get the financial help they need without dealing with interest.
Lease-to-own (Ijara) – Ijara requires the bank to buy an asset and lease it to a customer for a set time. The customer makes rental payments that include an amount towards the eventual purchase of the asset. Once the lease term comes to an end, the customer becomes the owner of the asset. Ijara is commonly used in Islamic mortgages and car financing to provide an alternative to traditional interest-based loans. Cost-plus financing (Murabaha) – Murabaha involves the bank buying an asset on behalf of the customer and selling it back to them at a higher price. In this arrangement, the customer pays the bank in instalments over a set time without additional charges or interest. Home purchasing, car financing, and trade finance are just some of the instances in which Muslims might opt for Murabaha. After all, it promises a transparent and ethical alternative to interest-based credit.
Can You Donate Interest Money in Islam?
Can you give interest money to charity? Yes, you absolutely can. With standard banks, it’s often impossible to avoid interest. So, should you unintentionally gain interest, you can dispose of this by giving it to charity.
Since Muslims aren’t technically permitted to have interest money in the first place, they gain no religious rewards for donating this. That said, donation is a convenient method of getting rid of interest that you’ve unintentionally accumulated. This money can be used to buy essential supplies for people in need, like food, water, and medical aid kits. Despite this, you shouldn’t donate to religion-specific projects, like building mosques or printing the Qur’an, using interest money.
Donate Your Interest Money with Charity Meals
Charity Meals has a number of appeals to which you can donate your interest money. We operate across the UK and internationally, so we’ll be sure to distribute your interest money among those who need it most, no matter where they may be based.
