He’s a good Muslim. He prays, he fasts, he pays zakat. He regularly performs voluntary acts of obedience. He’s a caring family man and a respected member of the community. By every outward measure, he appears to be leading the life of an exemplary Muslim.
But, somewhere along the line, he reconciled his views on interest-based finance, particularly in relation to conventional mortgages, with his religious beliefs. He became convinced, like countless other Muslims, that Islam permits one to take a conventional mortgage to finance the purchase of a home.
The question is not whether riba is impermissible; the verses in the Quran are clear enough. The question for many is: “Is the riba in the Quran the same as the interest on my home loan?”
We spoke to bankers, both Islamic and conventional, and laymen, both sincere and skeptical, and compiled twenty-one of the most commonly asked questions related to conventional mortgages. We confirmed the answers with qualified scholars who referred back to the Quran; sunna of the Prophet (Allah bless him and give him peace); the scholarly consensus of the traditional schools of jurisprudence; and the Shariah standards of the world’s largest regulatory body governing Islamic banks, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
The following are actual questions posed by genuine Muslim homebuyers and industry practitioners:
1. How is the riba Allah has forbidden the same as ordinary interest? I thought riba refers only to usury.
The Quranic verses and hadith are clear on the prohibition of riba. What is not clear to some is the meaning of the word “riba.”
Understanding this is particularly relevant to understanding the permissibility of conventional mortgages.
The present answer seeks to show that differences in interpretation do not originate from a substantive change in the nature of the circumstances since the time of the Prophet (Allah bless him and give him peace), as some claim, but rather from a change in the common usages of the words “usury” and “interest.” So while the original meaning of the word “usury” referred to any charge over the principal according to Old English Law, the modern meaning of the word underwent a process of evolution.
Essentially, a change in language, not a change in commerce.
Allah deems only two sins worthy of a war from Him: enmity with His friends and dealing in riba. Few Muslims doubt the enormity of dealing in riba, clear in Allah’s words in the following verse:
“Those who eat of riba shall not rise (on Judgment Day) except as those arise who are smitten by the Devil with madness—which is because they say that trade is but like riba, though Allah has made trade lawful and has forbidden riba. So whoever is reached by a warning from his Lord and desists may keep what was before (Allah forbade it), and his affair is with his Lord. But whosoever returns, those are the denizens of hell, abiding therein forever.
“Allah extirpates (all benefit from) riba, but makes charity bounteous, and Allah loves no sinful ingrate.
“Verily, those who believe and do righteous works, who perform the prayer and give zakat, they possess their wage with their Lord: no fear shall be upon them, nor shall they grieve.
“O you who believe, fear Allah, and give up whatever remains of riba, if you be believers.
“But if they do not, then be apprised of war from Allah and His messenger, though if you repent, you may keep your principal, neither wronging nor being wronged” (Quran 2:275-79)
And the words of the Prophet (Allah bless him and give him peace) found in this and other rigorously authenticated (sahih) hadith:
“The Messenger of Allah (Allah bless him and give him peace) cursed whoever eats of riba, feeds another with it, writes an agreement involving it, or acts as a witness to it.” (Muslim)
And the expert legal opinion (fatwa) of one of the world’s leading Islamic finance scholars, Justice Mufti Muhammad Taqi Usmani, defining riba:
“The concept of riba was widely recognized among the addressees of the Holy Quran, and it is that concept which is reflected in the legal definition provided for riba either in the hadith or in the later literature of Islamic jurisprudence. According to this definition, any transaction of loan where the payment of an additional amount on the principal is made conditional to the advance of such a loan is called riba.”
Confusion, spread primarily by the more modernist readings of the Islamic Sacred Law in the first half of the 20th century, arose on whether riba refers to usurious levels of interest alone, or refers to commercial interest as well, the kind found in conventional mortgages.
Two issues are involved here: 1) the incorrect and widely-held belief that interest was, in previous times, only usuriously excessive by nature; and, 2) the popular notion that pre-modern forms of finance served primarily consumptive, not commercial, needs.
A brief look at history is instructive.
Commercial interest, as practiced today even at single digit rates, was well-known and widely-practiced among Abrahamic societies, even over four thousand years ago, mostly as a form of institutionalized agricultural finance, not just as a form of usurious consumption finance, borne out by substantial historical proof. Later, even the concept of credit risk became well understood, with Byzantine traders contemporary to the Prophet (Allah bless him and give him peace) borrowing on standardized rates of interest, rates that varied by profession.
The Prophet (Allah bless him and give him peace), his Companions, among whom many were previously moneylenders, and all those trading in the Arabian peninsula during the 7th century were thoroughly familiar with the widespread practice of commercial interest-based lending: charging for the use of money with an additional sum over the principal amount.
Modernist Islamic discourse on the inadequacies of an interest-free economy is highly reminiscent of the arguments favoring interest given by medieval Christian theologians. Three centuries before pro-interest Calvinism reached its full stride, the slippery-slope justifications that marked the beginning of the end of the Church’s interest prohibitions began, most openly, in the 13th century with the introduction of a time-based penalty charge on an interest-free loan.
The charge was called “interesse.”
About a hundred years later, this charge evolved into one that could be incorporated into the contract itself as part of the loan, not just as a penalty for late payment, but as a charge just for the use of the funds.
The last stage of this recidivism came in 1920 when the Church itself issued the following statement: “…in lending a fungible thing, it is not itself illicit to contract for the payment of the profit allocated by law, unless it is clear that this is excessive, or even for a higher profit, if a just and adequate title be present…”
Even the modern dictionary attests to the true origins of the word “usury”: “1. the practice of lending `money at an exorbitant interest rate. 2. an exorbitant amount or rate of interest. 3. Obs. Interest paid for the use of money…” The first two definitions are the norm, the third, the point. That it became obsolete (“Obs.”) is testament to the fact that usury was once regarded as none other than non-exorbitant interest.
From the beginning of Islam to the present day, the overwhelming majority of Muslims, both scholars and laymen, have regarded riba, usury, and interest as but one in meaning. To follow this is to follow the words of the Prophet (Allah bless him and give him peace) to “adhere to the jama’a (overwhelming majority of Muslims).” (Ahmad)
2. How does interest harm society? Isn’t it a necessary part of every economy.
Muslim societies are a living example of the debilitating effects of interest-based finance. Most sadly reflected in just about every Muslim country in the world, with daily-ballooning interest payments to the World Bank, International Monetary Fund, and other industrialized nations’ agencies; notably, at low rates of interest. Interest payments that, quite unproductively, draw valuable funds away from healthcare, education, sanitation, infrastructure, and any number of other governmental responsibilities.
Debt creates dependence, and dependence provides the opportunity for control.
The following two passages are particularly relevant for those who claim that interest-based development actually works:
“According to UNICEF, over 500,000 children under the age of five died each year in Africa and Latin America in the late 1980s as a direct result of the debt crisis and its management under the International Monetary Fund’s structural adjustment programs. These programs required the abolition of price supports on essential food-stuffs, steep reductions in spending on health, education, and other social services, and increases in taxes. The debt crisis has never been resolved for much of sub-Saharan Africa. Extrapolating from the UNICEF data, as many as 5,000,000 children and vulnerable adults may have lost their lives in this blighted continent as a result of the debt crunch.”
“Debt is an efficient tool. It ensures access to other peoples' raw materials and infrastructure on the cheapest possible terms. Dozens of countries must compete for shrinking export markets and can export only a limited range of products because of Northern protectionism and their lack of cash to invest in diversification. Market saturation ensues, reducing exporters’ income to a bare minimum while the North enjoys huge savings.
The IMF cannot seem to understand that investing in…(a) healthy, well-fed, literate population…is the most intelligent economic choice a country can make.”
Further, price inflation and increased market volatility, the usual concomitants of a highly leveraged economy, affect poor and rich countries alike. To add to this, poorer, debtor countries typically find their currencies devaluing as they struggle to repay loans in their creditor’s currency.
The realistic alternative to debt is the one already employed to good use in successful Western economies: equity, upon which most Islamic finance products are based. In comparison to debt, equity provides the most resilient and least damaging source of capital for individuals, businesses, and economies.
Besides the ravaging macroeconomic effects of debt, problems also appear at the level of the individual. A 2001 study at Bath and Exeter reveals that students who fear they may fall into debt are four times more likely to suffer from depression. For those students who are actually in debt, the numbers may be worse.
The correlation between indebtedness and illness is particularly alarming given the widespread use and social acceptability of interest-based consumer finance, including home financing, which also offers the all too convenient option of multiple mortgages.
Debt finance expands the range of possibilities available to us, and for some, to unsustainable levels, making it possible to own things one cannot afford with money one may never have. Allah’s command, after all, is not intended for His benefit, but for our own.
Islam recognizes that the choices we make as individuals affect all society, and that to support an interest-based institution, even with a seemingly benign conventional home loan, is to support the broader framework of banking institutions largely responsible for today’s widespread global poverty.
3. Does Islam permit conventional mortgages?
A conventional mortgage is a loan of money on which interest is charged. It constitutes a cash loan advanced by a bank or mortgage agency to finance the purchase of a property. The homebuyer agrees to repay the principal in addition to making an interest payment, while nonpayment of either entitles the bank to seize title. Some money today for more money tomorrow.
The lender takes no equity position in the property. The lender provides no service. There is no usufruct of the lender’s assets. The lender provides only some cash today for more cash tomorrow. Riba, no less, and forbidden.
