Halal Money: Interest & How to Avoid it

In Islam, the concept of avoiding interest is deeply rooted in the teachings of the Quran and Hadith. The prohibition of riba, which refers to any kind of interest, is an essential aspect of Islamic finance. Understanding how to steer clear of interest and ensuring that our financial dealings are in line with Islamic principles is crucial for all Muslims. Unfortunately, it's almost impossible to avoid interest completely, but we can at least try to reduce it and avoid it where we can. Let's delve into the details of interest in Islam, explore what riba entails, and discover how to ensure our money is halal.

What is Riba?

Riba, often translated as usury or excessive interest, is strictly forbidden in Islam. It is considered an exploitative practice that leads to inequalities and financial injustices. The Quran explicitly prohibits riba in multiple verses, emphasizing the importance of engaging in fair and just financial transactions. By understanding the detrimental effects of interest, Muslims are encouraged to seek halal (permissible) alternatives to grow their wealth ethically.

اَلَّذِيۡنَ يَاۡكُلُوۡنَ الرِّبٰوا لَا يَقُوۡمُوۡنَ اِلَّا كَمَا يَقُوۡمُ الَّذِىۡ يَتَخَبَّطُهُ الشَّيۡطٰنُ مِنَ الۡمَسِّ​ؕ ذٰ لِكَ بِاَنَّهُمۡ قَالُوۡۤا اِنَّمَا الۡبَيۡعُ مِثۡلُ الرِّبٰوا​ ۘ​ وَاَحَلَّ اللّٰهُ الۡبَيۡعَ وَحَرَّمَ الرِّبٰوا​ ؕ فَمَنۡ جَآءَهٗ مَوۡعِظَةٌ مِّنۡ رَّبِّهٖ فَانۡتَهٰى فَلَهٗ مَا سَلَفَؕ وَاَمۡرُهٗۤ اِلَى اللّٰهِ​ؕ وَمَنۡ عَادَ فَاُولٰٓٮِٕكَ اَصۡحٰبُ النَّارِ​ۚ هُمۡ فِيۡهَا خٰلِدُوۡنَ‏  (٢٧٥)

"Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. That is because they say, “Trade is no different than interest.” But Allah has permitted trading and forbidden interest. 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." -Surah Baqarah 2:275

Forms of Riba to Avoid

• Riba Al-Fadl: This type of riba involves trading goods of the same kind but in unequal amounts. It leads to an unjust exchange and is deemed unfair in Islamic finance.

• Riba Al-Nasi'ah: Known as interest on loans, this form of riba occurs when a lender charges extra for the time allowed to repay a loan. It perpetuates debt cycles and financial hardships.

The four main schools of thought (Hanafi, Maliki, Hanbali & Shafi) will have different definitions and technicalities about what kind of transactions qualify as Riba.

How to Avoid Interest

• Pay off your credit card each month: Use only one or two credit cards for all of your expenses. This will help you keep track of your spending and know how much you are actually paying to the bank every month. Try to pay it off in full every month, instead of just the minimum payments.

• Make multiple small payments on your card each month: According to NerdWallet, the interest you’ll pay is actually based on your average daily credit card balance, not the total balance at the end of a billing cycle. Making a few smaller payments each month helps keep that average daily balance lower = lowering your interest.

• Stay away from savings and other accounts that earn you interest: It might be hard to avoid paying interest in the west, but it's even worse to earn it. Avoid accounts that earn interest and focus on keeping your money in interest-free debit accounts instead.

  • If you made money in interest via a bank account, you can see how much you made on your account statements. Donate that money so it is not part of your income. Assign one regular debit account to put your savings in and don't take anything out of it.

• Consider a balance transfer: If you have a large amount of debt, many credit card companies offer 0% APR balance transfer cards that can help you avoid interest from 12+ months while you pay down your card.

• Renting is okay: One of the biggest pitfalls people fall into is the idea that you need to buy a home right away. You don't actually own your home until your mortgage is paid off 25+ years after you decided to purchase it. Unless you have the cash, renting is a smarter option to avoid long term interest until you can plan on a larger down payment and reduce the amount of time on your home loan.

• Utilize Islamic Banking: Islamic banking in the west is hard to find, but if you do find it, use it. Islamic banks operate based on Sharia principles that prohibit interest.
  

• Opt for Halal Investments: Invest in businesses and ventures that align with Islamic ethics and principles. Explore ethical investment opportunities in sectors such as real estate, technology, and ethical funds. I will post about some options in another post.

• Avoid Conventional Loans: Instead of taking out traditional loans that entail interest payments, consider options like Qard Hasan (benevolent loans) or approaching Islamic credit unions for financial assistance, if available in your area.

Ensuring Your Money is Halal

• Seek Knowledge: Educate yourself on Islamic finance principles to make informed decisions about your financial transactions. Consult scholars and experts in the field for guidance on halal money management. Some great resources:

  • Al Maghrib Institute has an online platform call Faith Essentials that has virtual courses with reliable sheikhs about all the Fiqh in Islam. You can check out their Financial Course here

  • Yaqeen Institute's paper on the Psychology of Wealth in Islam

• Regular Charity: Giving in charity purifies wealth and ensures that your money is earned and spent in a halal manner. Make a habit of regular charitable donations to cleanse your financial resources.
  

By adhering to the teachings of Islam and avoiding interest, Muslims can safeguard their financial well-being while upholding ethical values. Remember, the path to halal money involves conscious choices, seeking knowledge, and making informed financial decisions.

Let's strive to purify our wealth, grow ethically, and lead a financially sound life in accordance with Islamic teachings.