May 4, 2014 By Interactive scholars

Bank Interest Contested

Interest is a category Islam strongly denies. But, is bank interest as objectionable, either? I doubt. Because the money-lending practice of banks is not so unbridled and unregulated as the money-lenders in primitive societies including the Pre-Islamic Arabia. I think Muslims can accept bank loan and vehicle loan, since bank is a system of money transaction which can only exist if it’s backed by that margin of profit, which we call interest. I want your position on this.

Team Interactive: There are three stages in which the Quran prohibited the practice of riba.

Stage one: Moral inhibition

In this stage, moral impropriety of the practice was brought into the focus in the verse (Rum 30:39)

That which ye give in riba in order that it may increase on (other) people’s property hath no increase with Allah; but that which ye give in charity, seeking Allah’s Countenance, hath increase manifold.

The Chapter Surat al-Rum was revealed in Makkah and the injunction of the Quran was specially, if universally, addressed to the mercantile society in Mekkah whose commercial practice was based on riba and hence, was highly exploitative. It was in Medina where the emerging believers formed a community which needed legal safeguards and promulgations that the moral denouncement of riba took on legal characteristics.

Stage two: Legal promulgation

The Verse (Alu Imran 3: 130) was revealed with the order that riba should not be accepted.

O ye who believe! Devour not usury, doubling and quadrupling (the sum lent). Observe your duty to Allah, that ye may be successful.

Stage three: Strong objection

May be because some hypocrites kept on the practice, a number of verses were reveled which strongly objected to the practice. This time the proclamation had a strong undercurrent of threat

Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permitteth trading and forbiddeth usury. He unto whom an admonition from his Lord cometh, and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him who returneth (to usury) – Such are rightful owners of the Fire. They will abide therein. (Al Baqara 2:275)

Along with these injunctions there were ahadith (traditions) which morally, legally, and administratively proscribed the practice.

Based on this religious stance against riba there have been three approaches among the succeeding Muslim communities the world over vis-à-vis bank interest, which was quite a modern economic phenomena:

  1. Total abstinence
  2. Partial or Conditional acceptance
  3. Total acceptance
  1. The first approach, especially among people who lived in rural economy and whose religious attitude was irjaism (quietism) with strong association to the doctrine of mysticism (Sufism), was a reaction to the capitalist and urban-oriented mode of economy. When we imagine an ideal commonwealth where there is equitable division of wealth and there is focus on real productivity, this approach will have a major role to play. That there are people who still keep away from the wealth of shubath (mixed wealth; wealth in which what is lawful and what is unlawful are mixed) of which, they think, bank interest is part is a welcome sign.
  1. The second approach is adopted by scholars who consider bank interest is riba in actuality, but a downright prohibition of the latter is contextually unrealistic. The stand of these scholars has been summarized below:

‘It is wrong to consider banks on par with money-lending institutions like the ones organizing chit or mutual funds. In today’s economy, banks play many significant roles. They mediate transactions between people and nations. Those who make a living abroad send their earnings to their people at home through banks. Banks are the media via which governments and big industries distribute salary and other benefits. It is the central bank in particular like the Federal Reserve in the US and the Reserve Bank of India that issue currency notes we use every day and fix their value. It is almost impossible for a civilized man to live without any connection-direct or indirect-to banks.

If bank in itself is not lawful, the term Islamic banking would have been an anomaly. Traditional banks rely for profit on the difference between the interest they receive on loans and the interest they give out on deposit.  Though the fee the banks impose on services other than loan transactions accounts for their revenue, the principle source of their income is interest. This is what is commonly held as the un-Islamic part of banking. But to emphasize this factor with scant regard to the lawful and useful factors does not seem to be a good approach. That is why Muslim countries where the conventional view of religion has a leading edge do business via banks.

This is not to give a clean Islamic chit to the way banks function, but to lay stress on the fact that one should make use of the useful and lawful  aspects of banking and try to change the unlawful for the better. Modern Islamic thought on economics and baking reform has moved in this direction. Islamic banks that have ubiquitous in many parts of the world can be seen as one of the outcomes of this change of direction. Islamic banks do play almost all roles that traditional banks play. But they have a long way to travel to catch up with traditional banks.  There is not such a situation even in Muslim countries as to entirely rely on Islamic banks for their financial transactions, a task not easily possible. In certain countries like India, Islamic banks have not yet been brought under the purview of law.  So people can’t help but doing business with traditional banks

Vigilance of a bank employee

To be employed at a bank is similar to getting employed at a government service in a country which is not Islamic in characteristics. Bank employees will have to deal with transactions, including interests in  the same way a top official in a secular government service will have to deal with policies that Islam does not authenticate like liquor policies. But financial institutions that solely deal with interests are interest-based financial institutions. We don’t think it would be a good option to be employed in such institutions.


We can accept loans from banks in difficult circumstances. This is a situation in which we can achieve a desirable, lawful and most-needed outcome by dint of what is deemed unlawful. For example, to be alive by having food is a premise that the shareeat establishes, sanctions and sort of prescribes. And the situation in which we will have to endanger our life by not having pork is the exigency which allows us to eat pork. To have home is our fundamental need. If there is such a situation that we can’t own home without accepting loan from a bank, the situation entitles us to avail the same. Likewise, if a business man can’t help taking loan to move ahead, he can do so. Difficult circumstances make the unlawful lawful (adhaaroorathu thubhilul margha dhuradh, so says the jurisprudence in this respect). But this sanction is established on the condition that it should be maintained without a desire for violation of law and beyond the certain limit of necessity. To get drunk when one is forced to take recourse to wine out of the paucity of water is stepping beyond the limit. If he had not searched for water before drinking wine, that would have been tantamount to the desire for violation. Similarly, exigency does not allow a person to accept loan at will or beyond the level at which it fulfills his need for a moderate residence without adornment. Also, exigency exists so that a person can avail loan; s/he can’t demand the same.’

  1. The third approach is the position taken by modernist scholars like Fazlur Rahman who consider that riba which the Quran has prohibited can’t be considered on par with bank interest. Fazlur Rahman’s text ‘Riba and Interest’ which he has prepared for the policy initiatives for the fledgling Islamic Research Society in Pakistan formed under the initiative of General Ayub Khan, Pakistan, is an important work in this respect. The text is available for download…/frahman_riba.doc

The scholars who come under this category think that interest plays the role of stabilizing price mechanism in an economy, the absence of which may lead to anarchy in credit transactions. To quote Fazlur Rahman: ‘In the modern science of Economics the rate of interest occupies the same place as price and performs the all-important function that any price-mechanism performs, viz., of regulating the supply and demand of credit and rationing it among the customers.  If the rate of interest, i.e., the price of loaning money, is reduced to zero, then we are faced with a limited supply and an infinite demand.  It would become impossible to control the rationing of credit available, so to say, and to assign priorities.  Especially in a society like ours where there is a great danger of nepotism and corruption, it is well-nigh impossible to conceive that correct priorities and correct amounts will be the order of the day with the optimum use of the available funds for development.  At present, however, the rate of interest functions as the objective standard of allocating the credit principle and the real need for a loan is expressed by readiness to pay the proper price, i.e. the interest-rate is arbitrary is absolutely groundless, simply because it is genuinely a price any other price. (Page 30).

The difference they attribute to the interest to riba is built on the fact that in interest was in force in Makkah which was stipulated as to be paid along with the repayment of loan. Riba signifies the many-fold increase of the capital, which come about after a stipulated time.

  1. the riba of the pre-Islamic days was a system whereby the principle sum was doubled and redoubled  (Arabic Quote TBA) through a usurious process;
  2. because of this process of doubling and redoubling the principal, the Qur’an refused to admit that riba was a kind of fair business transaction; and
  3. While permitting the commercial profit the Qur’an encouraged the spirit of co-operation are opposed to that of profiteering.

The historical evidence that we possess also corroborates the above conclusion.

The Muwatta of Imam Malik records on the authority of Zayd b. Aslam as follows:

(Arabic Quote TBA)

(In the pre-Islamic days riba operated in this manner; if the man owed another debt, at the time of its maturity the creditor would ask the debtor: will you pay up or will you increase? If the latter paid up the creditor received back the sum; otherwise the principle was increased on the stipulation of the further term.)

Abu’l A’la Mawdudi the chief of the Jamaat-i Islami assume that for the first term the credit was granted free for interest but one fails to understand how this is intelligible in a social set-up such as the commercial Meccan society or the Jewish Medinese society, where the riba system was quit normal. How could the usurers, who were keen on doubling and redoubling their capital, forgo the initial interest by way of charity so to say?

Mufti Muhammad Shafi expresses an opinion contrary to that of Mawdudi. He says, “The prevailing practice in Arabia was that a certain amount of money was advanced for a fixed period at a fixed rate of interest. If the debtor paid the loan within the prescribed time the matter was settled on the payments of interest otherwise he had to pay more interest.”5

However, the above-quoted statement of Zayd b Aslam, which is recorded not only by Malik but also by al-Bayhaqi, Razi and other Muhaddithun and fuqaha, shows that the initial interest itself was not usurious and was, therefore, not considered riba.

It is to be noted in conclusion that none of the scholars in this category, including Fazlur Rahman, doesn’t think that bank interest is the only alternative. Rahman says:‘In the Welfare Co-Operative Commonwealth of Islam, based on the true spirit of sadaqah, bank-interest will certainly be eliminated, because in his ideal Commonwealth, there will be competition among men, but only for virtue and mutual help.’ (Page 30)

We have presented three mutually exclusive, but significant, positions of scholars and the questioner can adopt one of these. God knows the best.

[1] From the translation of Pickthall

Posted in: Q&A