Engaging in interest-based lending or borrowing, also known as usury or riba, is expressly forbidden several times in the Quran.
For example, in Surah Al-Baqarah 2:275, it states that “Allah has permitted trade and forbidden usury.”
Therefore, Muslims cannot engage with traditional Western financing without sinning against Allah, which poses a challenge for Muslims living in Western countries such as Australia.
Thankfully, you can still get an Islamic home loan in Australia through Ijarah Finance, which helps Muslims finance their homes and grow their wealth through interest-free leasing, thereby remaining Sharia-compliant.
Here are some reasons why usury is forbidden in Islam:
Exploitation and Inequality
The key problem with usury is that it involves charging excessive interest on loans, which, more often than not, results in financial exploitation. This ends up deepening socio-economic divides by preying on the poor to benefit the rich.
Islam prohibits usury to prevent this exploitation and unify society, thereby creating greater equality and less division. The aim of the usury prohibition is to ensure that wealth does not accumulate in the hands of the minority while the majority remains poor. This helps maintain social justice and promotes economic fairness.
Broader Economic Harm
Another reason why usury is prohibited in Islam is that it can create overall instability within the broader economy by incentivising debt accumulation, which can lead to economic collapse. This was seen in the subprime mortgage crisis in the United States, where excessive lending led to a global financial crisis in 2008.
These kinds of unsustainable financial practices are harmful to society as a whole and can damage not only individual finances but also the financial stability of entire nations.
The idea behind banning usury in Islam is to ensure that profit and loss are shared among all to promote better economic activity that benefits all parties involved, thereby ensuring a more stable and balanced economic system.
Ethical and Moral Principles
At the end of the day, Islam is a spiritual belief system that emphasises moral and ethical responsibility in adherence to the standards of Allah.
By charging interest on loans, one contravenes the moral principles set out in the Quran, as usury focuses on gaining from someone else’s hardship rather than lifting them out of poverty and contributing to their well-being.
The principle behind usury is that it is essentially unjust and unfair, which is why it is forbidden in Islam. Rather, ethical financial practices, such as leasing (ijarah), are viewed as more fair.
If you’re a devout Muslim looking for a way to purchase property and grow your wealth in an ethical, Sharia-compliant manner, apply for an Islamic home loan through Ijarah Finance in Australia.
FREQUENTLY ASKED QUESTIONS
Why is interest (Riba) such a serious issue in Islam?
At its core, the reason why Riba is Haram is about fairness. It’s a system where money is made from debt, which can create social and economic imbalance. Islam promotes a financial system built on social justice and shared prosperity. Read more about our approach to see how our model is different.
Isn’t interest just a normal part of finance?
Traditionally, yes. The reason why interest is Haram (forbidden) is that it’s a charge on a loan, not a profit from a real-world transaction. Islamic finance, on the other hand, is always tied to a physical asset. So, instead of lending you money for a house, we buy the house with you as a partner. It’s a completely different foundation. Learn more about our home Ijarah.
What does “usury” mean? Is it the same as Riba or interest?
When people ask about usury, oftentimes they’re talking about lending money at excessive interest rates. In Islam, ‘Riba’ is a broader term that covers any interest, not just high rates. The idea is to avoid exploitative lending altogether. Check out our glossary to better understand the distinctions.
If Muslims don’t use interest, how does the financial system work?
Whether or not Muslims believe in interest is answered clearly in the Quran: it’s forbidden. So, instead of an interest-based system, Islamic finance is built on shared risk and partnership. For example, instead of lending money for a business, an Islamic financier might invest in it, sharing in the actual profits or losses. It’s a system based on trade and real economic activity, not debt.
How can I be sure a product is actually free from Riba?
Riba has no role in Islamic finance. The entire system is built to provide a complete alternative to interest. Every product is structured from the ground up to be Riba-free, from our home finance plans to our superannuation options. It’s about giving you a true Halal alternative. Feel free to ask us anything about it.
What are the spiritual consequences of dealing with Riba?
The Quran speaks very seriously about Riba, and the punishment for paying interest in Islam is a significant spiritual matter. It is considered one of the major sins. This is why we are so dedicated to providing a genuinely Halal way for Muslims in Australia to buy a home or car without having to compromise their beliefs.