5 reasons Islam forbids interest

“God has permitted trade and forbidden ribā.”^[2] The verse separates the two on purpose. The Quran also records that those who defended interest said “trade is just like riba,” and answers them with a single clause: God has made one lawful and the other not. That reply is the objection a modern reader raises, that interest is only the price of money, and the Quran gives it no further argument.

The same passage limits what a creditor may take: those who repent keep their principal, wronging no one and wronged by none.^[1] The Prophet’s words go with it. He cursed the one who takes interest, the one who pays it, the one who records it and the two witnesses, and said they are the same in sin.^[3] In his farewell sermon at the pilgrimage he declared the interest of the pre-Islamic period void, beginning with the debts owed to his own uncle al-Abbas.^[4]

The Quran’s idea of lending is the qarḍ ḥasan, the good loan: “Who will lend to God a good loan, that He may multiply it for him many times?”^[5] And for a debtor in difficulty: “If he is in hardship, then let there be postponement until a time of ease. But that you remit it as charity is better for you.”^[6]

Seen this way, a loan is help given in a hard hour, and charging for it turns the helper into the creditor of the helped.

The strongest objection is that this describes a loan between neighbours, and that a bank loan to a company is a business deal between equals. Scholars answer that the verses fix the nature of the contract and do not depend on the size of the parties. A loan transfers ownership of a sum to be repaid in the same amount. If the lender wants a return, the Quran points him to trade and partnership, which carry a risk that a loan with a fixed charge does not.

A principle of Islamic commercial law says that gain is the counterpart of liability. The Prophet ruled in a case that “the profit goes with the responsibility.”^[7] The case concerned a man who bought a slave, used him, and later found a defect, and the ruling let the buyer keep the benefit he had enjoyed as the owner who bore the risk. A lender who takes a fixed return whatever happens to the borrower’s business has the gain without the risk.

That is the heart of the prohibition. The lender who wants a share must share in the loss, which is what partnership is.

Some hadith scholars have discussed the chain of this report, and the jurists nonetheless apply the maxim widely, because the same logic runs through the rules on sales and partnerships. An economist might say that lenders do bear risk, since borrowers default. The legal answer is that a lender who is repaid his principal with a fixed addition has arranged to be paid whatever the venture does, and the risk of default is a risk to the principal alone.

Ismail al Faruqi frames the objection in the same terms. Interest, he argues, gathers profit while the borrower carries the risk; the lender’s risk is chiefly whether collection will be easy or difficult, since he has taken every collateral and guarantee he can.^[8] The aim, on his reading, is to move the lender into investing in production directly.^[8]

The Quran addresses the case that people most fear: “Do not consume ribā, doubled and redoubled.”^[9] A loan that grows on its own turns a hard month into a lasting burden, and the history of debt, from ancient peasants to modern payday borrowers, is a history of this growth.

The aim of the ban is to keep a person’s need from becoming another’s income. Its first concern is the borrower.

Other traditions reached the same view. The Torah forbids exacting interest from a poor person among the lender’s own people,^[10] and Aristotle called the making of money from money the most unnatural way of getting wealth.^[11]

A minority of modern scholars argue that the phrase “doubled and redoubled” limits the ban to exploitative lending, and that regulated bank interest is outside it. The majority reply that the phrase describes the pre-Islamic practice and does not set a condition, since the Quran forbids what remains of ribā without that qualification and allows the lender only his principal.

The Quran does not forbid profit. It points to trade and partnership. Islamic finance rests on contracts such as muḍāraba, in which one party gives capital and the other works, and the two share profit by agreed ratio and the capital owner bears loss; and on sale contracts with a disclosed profit margin.^[12]

Most scholars hold that fixed bank interest is riba, a view stated by the Islamic Fiqh Academy in the 1980s.^[13] Some modern scholars dispute the application to modern banking, but they are a minority.

The alternative has its own critics, Muslim economists among them. They point out that some Islamic products copy the cash flows of a conventional loan under another name, and that profit-sharing is rarer in practice than the theory suggests. The fair reading is that the law sets an aim, which is to tie profit to risk and to real assets, and that institutions meet it to different degrees.

Al Faruqi links the ban to zakāh (the obligatory alms). A yearly levy of 2.5 percent on idle wealth would, he observes, consume a hoard within a generation, which pushes capital into productive use.^[14] He commends cooperative credit and thrift societies that pool members’ savings and lend to those in need without interest.^[15]