Bank interest has long been a topic of debate among Muslims, with many questioning whether it constitutes riba, or usury. Riba is a term used to describe the practice of charging or paying interest on loans, which is considered haram, or forbidden, in Islam. This article will explore the concept of bank interest in Islam and whether it is considered riba.
|📌 Riba is the practice of charging or paying interest on loans, which is considered haram in Islam.|
|📌 The permissibility of bank interest in Islam remains a topic of debate among Islamic Scholars.|
Bank Interest: An Overview
Concept of Bank Interest
Bank interest refers to the amount of money a bank pays a depositor for holding their money in an account such as a saving account. Banks use the deposited funds to lend to other customers and earn interest on those loans. The interest paid to depositors is a way for banks to compensate them for the use of their money.
The concept of bank interest is based on the time value of money. Money today is worth more than the same amount of money in the future due to inflation and other factors. Therefore, banks pay interest to depositors to account for the time value of money and to encourage them to deposit their money in the bank.
Types of Bank Interest
There are two main types of bank interest: simple interest and compound interest.
Simple interest is calculated as a percentage of the principal amount and paid out periodically, such as monthly or annually. The interest earned is based solely on the principal amount and does not include any interest earned on previous interest payments.
Compound interest, on the other hand, is calculated on the principal amount plus any interest earned on previous interest payments. This means that the interest earned on the account grows over time, leading to higher returns for the depositor.
In conventional banking, there are two types of interest: deposit interest, which banks offer as an incentive to customers who keep their money with them, and loan interest, charged to borrowers as a fee for borrowing money such as through credit cards.
For banks, deposit interest represents a cost, and loan interest serves as income. The difference between loan interest and deposit interest constitutes the bank’s profit.
Riba, linguistically, means growth and addition. In Islamic finance, it refers to an increase in a financial transaction without any legitimate compensation for the added amount. For instance, exchanging 10 kilograms of rice for 12 kilograms or lending money with the condition of receiving more in return.
According to the Fatwa of the Indonesian Ulema Council Number 1 of 2004, usury is the increment (ziyadah) without legitimate cause (bila ‘iwadh) that arises due to a delay in payment (ziyadah al-ajal) as previously stipulated (riba nasi’ah).
Scholars, both from the early generations (Salaf) and contemporary times, unanimously agree on the prohibition of riba (usury). Even among those who allow for bank interest, they still consider usury as forbidden.
The difference of opinion among scholars lies not in the prohibition of usury but rather in the permissibility of bank interest. Scholars who forbid bank interest view it as a form of usury, while those who permit it argue that it does not fall under the same category.
Is Bank Interest Riba?
Contemporary scholars hold differing opinions on the legality of bank interest. Some, like Yusuf Qaradawi, Mutawalli Sya’rawi, Abu Zahrah, and Muhammad al-Ghazali, consider bank interest as haram due to its association with usury.
This viewpoint is supported by prominent Islamic institutions, including Majma’ al-Fiqh al-Islamy, Majma’ Fiqh Rabithah al-‘Alam al-Islamy, and the Indonesian Ulema Council (MUI). The argument against usury is based on Surat al-Baqarah verse 275, where Allah explicitly prohibits engaging in usurious transactions.
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 riba will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. That is because they say, “Trade is no different than riba.” But Allah has permitted trading and forbidden riba. Whoever refrains—after having received warning from their Lord—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.
And the hadith of the Prophet Muhammad ﷺ. Narrated Abdullah ibn Mas’ud:
عَنْ عَبْدِ اللَّهِ بْنِ مَسْعُودٍ عَنْ النَّبِيِّ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ قَالَ لَعَنَ اللَّهُ آكِلَ الرِّبَا وَمُوكِلَهُ وَشَاهِدَيْهِ وَكَاتِبَهُ مَا ظَهَرَ فِي قَوْمٍ الرِّبَا وَالزِّنَا إِلَّا أَحَلُّوا بِأَنْفُسِهِمْ عِقَابَ اللَّهِ عَزَّ وَجَلَّ
Abdullah ibn Mas’ud reported: The Prophet, peace and blessings be upon him, said, “Allah has cursed the one who consumes usury, its client, its witness, and its recorder. Usury and adultery do not become widespread among people but they will become vulnerable to the punishment of Allah Almighty.”
Some other contemporary scholars, including Syekh Ali Jum’ah, Muhammad Abduh, Muhammad Sayyid Thanthawi, Abdul Wahab Khalaf, and Mahmud Syaltut, hold the view that legal bank interest is permissible and does not fall under the category of usury. This perspective is in line with the fatwa issued by Majma’ al-Buhus al-Islamiyyah on 28 November 2002.
إِنَّ اسْتِثْمَارَ الْأَمْوَالِ لَدَى الْبُنُوْكِ الَّتِيْ تُحَدِّدُ الرِّبْحَ أَوِ العَائِدَ مُقَدَّمًا حَلَالٌ شَرْعًا وَلَا بَأْسَ بِهِ
Indeed, investing in banks that determine profit or interest at the start is considered lawful according to Shariah (Islamic law), and this practice is deemed permissible.
Their argument is based on the verse of Surah An-Nisa’ (29) in the Quran, where Allah forbids the consumption of people’s wealth through wrongful means such as stealing, extortion, and usury. On the other hand, Allah permits lawful business transactions conducted with mutual consent.
Therefore, they assert that the willingness of both parties to engage in a transaction, which determines the amount of profit from the beginning, as seen in banking operations, is considered acceptable in Islam.
Furthermore, these scholars argued that if bank interest is considered haram, then the addition to the loan principal would also be deemed haram, even if it was not initially stipulated in the contract.
However, the permissible nature of the addition mentioned in Islamic law makes bank interest also permissible, as there is no fundamental difference between bank interest and the addition to the loan principal.
The matter of bank interest is a topic of khilafiyah (debate), meaning there are differing opinions among scholars. Some forbid it due to its association with usury, while others permit it, considering it not to be usury. However, all scholars unanimously agree that usury is forbidden in Islam.
In matters of khilafiyah, the principles of mutual tolerance and mutual respect are emphasized. Each group of scholars has diligently conducted ijtihad (independent legal reasoning) to determine the law on this issue, resulting in differing opinions.
As a result, Muslims are granted the freedom to choose the opinion that aligns with the stability of their hearts. If one’s heart is convinced that bank interest is permissible, one can follow the scholars who allow it. On the other hand, if there is doubt, they can follow the scholars who forbid it.
Allahu A’lam (Allah knows best)
What are some examples of riba in modern banking?
Riba is a key concept that separates Islamic finance from conventional banking. In modern banking, examples of Riba include:
- Savings Accounts: Interest paid on deposits.
- Loans and Mortgages: Interest charged on money borrowed.
- Credit Cards: Interest applied on outstanding balances.
- Bonds and Securities: Interest earned from these financial instruments.
All these transactions involve paying or receiving a fixed return, which is considered Riba and is prohibited in Islamic finance.
What does the Quran say about riba?
The Quran explicitly forbids Riba, or interest, in several verses. For example, in Surah Al-Baqarah (2:275), it says: “Those who consume interest cannot stand except as one stand who is being beaten by Satan into insanity. That is because they say, ‘Trade is like interest.’ But Allah has permitted trade and has forbidden interest.”
In another verse, Surah Al-Baqarah (2:278), it states:
يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ ٱتَّقُوا۟ ٱللَّهَ وَذَرُوا۟ مَا بَقِىَ مِنَ ٱلرِّبَوٰٓا۟ إِن كُنتُم مُّؤْمِنِينَ
“O believers! Fear Allah, and give up outstanding riba if you are ˹true˺ believers.”
These verses emphasize the Islamic principle against earning or paying interest, viewing it as exploitative and unjust.
What is the difference between riba and interest?
Riba and interest are often used interchangeably, but they have different connotations in Islamic finance. Interest is a broader term used globally across multiple finance systems, referring to the cost of borrowing money or the return earned on an investment.
Riba, on the other hand, is an Arabic term specific to Islamic finance and refers to the ‘unjustified increment’ in borrowing or lending money, i.e., interest. While interest is a standard practice in conventional banking, Riba is strictly prohibited in Islamic finance based on Quranic principles.