Sharia law forbids usury, which is the act of making a profit through lending money. Therefore, Muslims are not permitted to engage in traditional financing processes commonly used in the West. As such, Islamic finance in Australia needs to use a different model so Muslims can still purchase property and other large-ticket items without contravening the law.
Let’s take a look at what the Quran and Hadith say about usury and how it affects modern-day financing for Muslims:
The Three Golden Rules
When it comes to finance and investments, Islam emphasises three key principles.
- Usury, also referred to as riba, is forbidden. Therefore, any lending/borrowing of money with interest is not allowed. The reason for this is that it can easily be abused as a way of taking advantage of the vulnerable in society.
- Instead of charging interest, risk sharing is encouraged. In Islam, it is better for the lender and the borrower to share the potential risks and rewards of investments. This makes it less likely that one of the parties will be taken advantage of, and a more equitable arrangement can be ensured.
- Islamic investments must be ethical. This means Islamic investors cannot invest in anything forbidden, such as alcohol or gambling ventures, for example. All investments need to be morally acceptable and socially beneficial.
Financial Solutions Within Islamic Law
Through Islamic financing institutions like Ijarah Finance, muslims can invest in property without engaging in usury.
Instead of charging interest, the financing model is based on a rent-to-own principle. This means the “lender” purchases the property outright, then allows the “borrower” to take possession of the property on the condition that they pay rent.
The “borrower” acts as an agent of the “lender,” taking on the responsibility of maintaining the property, with each rental installment being put towards eventual repayment of the investment until eventually full ownership is transferred.
In this way, Muslims can take out a form of mortgage on a morally acceptable investment, wherein the risk and reward are shared and no interest is charged. This form of lending is socially uplifting and sidesteps usury altogether.
Contact Ijarah Finance to start your Sharia-compliant financial journey—ethical Islamic finance in Australia you can trust.