Loans

Paying interest on your loans? In Islam, you shouldn’t have to

Islamic banks around the world are reinventing the way we borrow

When you borrow money, you pay it back. Simple.

Except it’s not actually that simple. Most places you borrow from will charge you for loaning money from them – called – meaning you end up paying back more than you borrowed. In the UK, people are predicted to pay on average £999 ($1250) in interest alone this year, and it’s pretty much a fact of life of most banking systems. It’s a fair price to pay for the bank offering you a service, right?

In Islam, the dominant belief is that it isn't actually that fair. The concept of charging interest – known as Riba in Islam – is against the religion's principle of ‘fair distribution’ because it increases inequality. When interest is charged, the lender ends up with more and the borrower with less than they both started with – the rich become richer while the poor become poorer.

This increase in inequality is considered particularly immoral because the extra money the lender walks away with is unearned income. Income from interest comes without effort – the rich only become richer because they had money in the first place, not because they worked for it.

Islam also sees interest as sinful because it is a charge for the use of money. While it's normal to pay charges to use things that you don’t own – like rent, say – most of the time you use money, you use it free of charge. Charging interest is the same as making people pay for something they have a legal right to and can find for free elsewhere.

Islamic finance

While not every Muslim believes that charging interest is wrong, it is part of Islamic (or Sharia) law and Islamic finance – where no interest is charged – is practised in a growing number of banks around the world. Sharia-compliant banks have been experiencing a period of rapid growth, especially in the non-Muslim-majority world. Sharia-compliant services are also offered by some conventional banks, and the Bank of England in the UK is currently consulting on the issue.

Dr Yahia Abdul-Rahman, Founder of Lariba, the Islamic American Finance House, opened the Bank of Whittier in California, a Sharia-compliant bank which doesn’t rent out money for a fee or reward interest to savers.

According to Dr Abdul-Rahman, the Bank of Whittier follows not only Islamic law, but a shared principle of Judaism, Christianity and Islam. “We put together the teachings of Jesus Christ and the Prophet Muhammad to produce riba-free banking, which people call interest-free. The difference between riba-free and charging interest is that the conventional approach looks at money as something you can rent. With riba-free, we don’t rent money, we invest with you.”

Interest and religion

Supporters of charging interest say that lenders need interest as a reward for taking the risk of renting out their money, as they might not get it back. Otherwise, they would keep it to themselves. But most lending happens through financial institutions like banks, not directly between people, and we tend to put our money in banks for convenience. And we can ask ourselves, do we naturally expect more in return when we lend to other people?

Other major religions have also critiqued interest. Christianity fiercely debated interest for thousands of years. Judaism had mixed feelings, thanks to contradictory guidelines in the Bible, and Hinduism and Buddhism flip flopped back and forth. Yet all of these religions eventually came to accept interest on one condition: that reasonable rates are charged, especially to the poor.

They believe that high interest rates exploit the needy. Poor people pay more to borrow money for necessities than rich people do for luxuries, but supporters of this approach argue that lenders need a bigger reward to be tempted to lend when they are less likely to get their money back. Religious texts are full of stories condemning loan sharks for taking advantage of another’s misfortune, and Archbishop Welby of the Church of England has spoken out against Wonga, a payday loan company charging interest at rates over 200x the norm.

For many, religion is a prominent authority on what is moral, right, acceptable and fair. And even for non-religious people, this guidance is still a prominent feature of laws around the world and the way we live our lives.

For followers of Islamic finance, turning to religion for guidance on what to do with what’s in our wallets isn’t just a way of saving money, but also of contributing to a more equal world.

As the Lariba bank says, “Individuals or organizations in the west with money to invest, especially those which like to consider themselves as being ethical, might have rather more to learn from Islam than is generally acknowledged.”

Liked this piece? Check out the rest of Economy Explores: Religion

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Reader Comments

  • RW

    Your right to a degree. You mentioned “the wandering Jew”.

    I elaborate that the Jewish people, historically have tended to migrate almost exclusively to locations that are economically and culturally vibrant already. I would speculate that Jews have thrived in these places and have often improved the bounds of their economies and knowledge base.

    You can also ask; how many massive entertainment conglomerates, Nobel winners or billionaires has Isreal developed? If Jews are so capable, why isn’t Tel Aviv the Rome of our time?

    Jews are successful because they value education, maintain a strong social cohesive, they actively monitor and have a good sense for Zeitgeist wherever they are and they carefully choose the places they settle and congregate themselves heavily in these choice locations.

    But most importantly (haulocaust increased the importance of this aspect), they actually designed their culture for success. They not only attend Harvard, they use what they learned to better the group as a whole. With as much, they studied intricate networking systems, adapted to it and in many cases improved upon them. (See how Japan acquired Aegis warships and made them better).

    Of course there is nothing wrong with any of this. It’s when you elaborately gain disproportionate power in any society where you would stand out, you must take care when attempting to make a society better (Civil Rights movement) and rewriting that society all together (mass immigration). Ask blacks in China, Mexico, Philippines or India how much opportunity they have? Go to businesses owned by their American diaspora and see how many blacks they hire. Go to Silicon Valley and see how many East or South Asian tech workers wish they could work with more black people. California might work as a state, but as a nation, I think your rolling the nuclear dice here. I hope we can succeed as a tolerant pluralistic superpower but at this stage in human societal development, it’s a pipe dream.

    And if Jews really are the icon for success, they would see that fundamental human successes happen over generations. Just look at the rest of the planet? Are we ready?