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Does the Qur'an Forbid Interest-Based Finance?

The Qur'an does not prohibit all types of interest on financial transactions. The only prohibition is that of 'usury', a specific form of interest in which an excessive, unfair and exorbitant rate of interest is charged, especially when the borrower is in financial difficulty. The fact that usury involves an excessively high rate of interest can be seen in verse 3:130, where usury is shown to involve doubling or multiplying of the principle amount owed to the lender:

Oh you who believe, do not take usury - doubled and multiplied, and fear God so that you may be successful. 

يَا أَيُّهَا الَّذِينَ آمَنُوا لا تَأْكُلُوا الرِّبَا أَضْعَافًا مُضَاعَفَةً وَاتَّقُوا اللَّهَ لَعَلَّكُمْ تُفْلِحُونَ

The key to understanding the prohibition of usury in the Qur'an is to realise the element of injustice God wants us to avoid. For example, verse 4:161 refers to usury as a way of 'unjustly' devouring other people's wealth:

They take usury even though they were forbidden from taking it and they devour other people's wealth
unjustly. We have prepared for disbelievers among them a painful punishment. (4:161)

وَأَخْذِهِمُ الرِّبَا وَقَدْ نُهُوا عَنْهُ وَأَكْلِهِمْ أَمْوَالَ النَّاسِ بِالْبَاطِلِ وَأَعْتَدْنَا لِلْكَافِرِينَ مِنْهُمْ عَذَابًا أَلِيمًا

Similarly, verses 2:278-279 make clear that prohibition of usury is to ensure injustice is not committed by the lender against the borrower. Interesting to note is that the same verse mentions the lender must too have a fair and just outcome from the transaction:

Oh you who believe, be conscious of God and give up what remains of usury, if you are truly believers. If you 
do not, beware of war from God and His Messenger. But if you repent, you may have your principle amount, such 
that you do not commit injustice and you are not dealt with unjustly. (2:278-279)

فَإِنْ لَمْ تَفْعَلُوا فَأْذَنُوا بِحَرْبٍ مِنَ اللَّهِ وَرَسُولِهِ وَإِنْ تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَالِكُمْ لا تَظْلِمُونَ وَلا تُظْلَمُونَ
يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَذَرُوا مَا بَقِيَ مِنَ الرِّبَا إِنْ كُنْتُمْ مُؤْمِنِينَ

At this point, we should ask the question: 'What can constitute injustice to a lender in any lending arrangement?' Firstly, the obvious loss to the lender will be the assets they are lending, something which they will necessarily be deprived of during the course of the loan term. This 'disadvantage' to the lender, in the principle of justice, makes it reasonable for the lender to receive at least something in return for the sustained loss. In addition, by lending their assets, the lender is taking risks with the borrower, as there is no guarantee they will be able to get back the lent assets in full and on time. There is also the question of inflation rates over time, which would warrant charging of interest in order to ensure the lender receives a fair and equal principle value to what they initially lent.

Under the principle of justice as explained above, it is important to understand that the same concept applies to cases where purchases are made with price increased for deferred payment for a specified term. For example, a hire purchase of a car or a house bought on mortgage are essentially agreed purchases made with payment deferred or distributed over a number of years, with 'price increased' / interest charged accordingly. In such cases, the 'principle amount' in the above verses would refer to the amount due to the lender at the end of the term, including interest for making the arrangement fair to both lender and borrower. Note that this principle amount is agreed by both parties at the outset of the agreement, so there is no element of injustice involved. In fact, far from being an injustice, these lending arrangements with interest are often beneficial to the borrower, as they help relieve financial burden at a time when making large purchases become difficult or taking a loan becomes necessary.

Relevant to this discussion of purchases / sale is the following verse, which makes a distinction between a sale and usury, stating that all sales are permitted by God whereas usury is forbidden and influenced by Satan. There is no reason why a 'sale' in this verse cannot include purchases which are made with the price increased for deferred payment as discussed above:

Those who take usury do not rise except as one who is driven by influence of Satan. That is because they say: 
"Selling is like usury", whereas God has permitted sale but forbidden usury. Whoever receives admonition from his
Lord and stops taking usury shall not be punished for the past; his case is for God. But whoever returns to it, 
such are the dwellers of Hellfire, they will abide therein forever. (2:275)

الَّذِينَ يَأْكُلُونَ الرِّبَا لا يَقُومُونَ إِلا كَمَا يَقُومُ الَّذِي يَتَخَبَّطُهُ الشَّيْطَانُ مِنَ الْمَسِّ ذَلِكَ بِأَنَّهُمْ قَالُوا إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا 
وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا فَمَنْ جَاءَهُ مَوْعِظَةٌ مِنْ رَبِّهِ فَانْتَهَى فَلَهُ مَا سَلَفَ وَأَمْرُهُ إِلَى اللَّهِ وَمَنْ عَادَ فَأُولَئِكَ أَصْحَابُ النَّارِ
هُمْ فِيهَا خَالِدُونَ

The following verse introduces the concept that usury, being an act of injustice against those who are in financial difficulty, is opposite to and unlike the act of charity, which seeks to benefit those in financial difficulty:

God will destroy usury and give gain for charity. God dislikes the disbelieving sinners. (2:276)

يَمْحَقُ اللَّهُ الرِّبَا وَيُرْبِي الصَّدَقَاتِ وَاللَّهُ لا يُحِبُّ كُلَّ كَفَّارٍ أَثِيمٍ

Similarly, the verse below makes a clear contrast between usury and charity:

That which you lend in usury, so that you may gain from other people's wealth, has no gain with God. But that 
which you give in charity, seeking God's pleasure, these are the ones who will have manifold gain. (30:39)

وَمَا آتَيْتُمْ مِنْ رِبًا لِيَرْبُوَ فِي أَمْوَالِ النَّاسِ فَلا يَرْبُو عِنْدَ اللَّهِ وَمَا آتَيْتُمْ مِنْ زَكَاةٍ تُرِيدُونَ وَجْهَ اللَّهِ فَأُولَئِكَ هُمُ الْمُضْعِفُونَ

These verses may be understood when we consider that usury is an act of injustice against those who are in financial difficulty. Therefore, usury cannot possibly be referring to solvent individuals who can afford to comfortably make monthly repayments on mortgage, loans, or car purchase agreements. The verse below highlights this point by adding that if the borrower falls into insolvency or faces financial difficulty, they may either be granted more time to repay or they may become eligible for charity:

If the borrower is in difficulty, grant them time until it becomes easier for them to repay. But if you waive 
it by way of charity, that is better for you if only you knew. (2:280)

وَإِنْ كَانَ ذُو عُسْرَةٍ فَنَظِرَةٌ إِلَى مَيْسَرَةٍ وَأَنْ تَصَدَّقُوا خَيْرٌ لَكُمْ إِنْ كُنْتُمْ تَعْلَمُونَ

The Qur'an does not prohibit every form of interest in financial transactions without considering the impact of lending on the borrower and lender. The prohibition is only for usury constituting injustice after taking into account the borrower's financial circumstances. The lender should also get a fair return on their lending, taking into account loss, risks and changes to monetary value over time. This applies to both personal and business loans, as well as purchases on credit, mortgages and car finance agreements. Worth noting is that usury can only occur when interest is demanded or charged, hence it cannot occur when one party voluntarily gives interest as a bonus or gift, as is common with personal savings accounts with banks.

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