Is Interest Haram, and Can it be Donated in Islam?

In the present day it’s nearly impossible to operate without an account with a bank. However, modern accounts usually come with interest.

In this case, the bank pays a portion of the money in your account to save funds with these accounts. In the end, Muslims must find ways to avoid paying this kind of interest. This will be discussed in more detail below.

Is Paying Interest Haram?

The practice of paying interest is referred to as Riba and is considered to be a grave offense.

The concept of charging interest or paying it is against Islamic laws and prohibits Muslims from accepting or lending money in the intention of gaining. If you’re thinking, “Is compound interest Haram?” The answer is yes.

Why is Interest Haram?

If you’re asking yourself why interest has become Haram in Islam and why, here’s the reason. Simply put it is believed that interest is illegal, unjust and even usury. This is due to the fact that

Muslims think that wealth must be created by legitimate trade, and money should be utilized effectively.

The Punishment for Paying Interest in Islam

If someone who is a Muslim consumes the benefits of interest and is unable to stand on the Day of Judgment, they will not be allowed to sit at Judgment Day unless it is in a case such as a person who was beaten by Satan which has led to insanity.

Similar to that in the Qur’an stipulates the following: Allah (SWT) is going to take away any blessings that resulted from the consumption of interest.

“Those who consume interest cannot stand [on the Day of Resurrection] except as one stand who is being beaten by Satan into insanity” (Qur’ān, 2:275). 

What is Considered Riba in Islam?

The term “Riba” is used in Islam, Riba is interest earned or repaid for savings or transactions. This is a reference to:

The interest earned from savings accounts Individual savings accounts (ISAs) and other savings investments.
The interest earned from the lending of funds, properties or even goods.
Interest payments for loan fees, credit card charges or mortgages.

Islamic Alternatives to Conventional Banking

There are a variety of Islamic banking options that can benefit you to avoid the cost of interest. They are not subject to interest which means they are geared towards the ethical values of Muslims.

The following options are excellent options for Muslims:

Accounts with profit-sharing (Mudarabah) Mudarabah – Mudarabah is a type of partnership where one party contributes the capital, while another manages the investment.

Instead of making interest, the profits made by the investment are split by the account owner and bank alike to an agreed-upon ratio. If the investment is unable to make a profit then the capital provider will bear the cost, while the manager is unable to exert efforts and also time.

This makes sure everyone shares the reward and risk that is in line with Islamic principles of the fairness of justice and equity.

The interest-free loan (Qard Hasan) – Qard Hasan is a loan for goodwill which is not accompanied by the promise of interest or profit. In the end, the borrower only has to pay just the principal amount.

The loans are typically taken out by Islamic banks or charitable organizations with the aim to benefit people who are in need, help small-scale businesses, and support projects for the community.

Qard Hasan represents the Islamic focus on generosity and mutual assistance where Muslims are able to receive financial benefit without the risk of incurring the cost of interest.

Lease-to-own (Ijara) The term Ijara is a lease arrangement that allows the bank to purchase the asset, and then leases it to a customer for a set period of time. The customer is responsible for rental payments that could include a payment towards an eventual sale of the asset.

When the lease term is over, the asset becomes the property of the customer. lease period, the title to the property will be transferred to the buyer. Ijara is commonly used in Islamic loans and vehicle finance, providing an alternative that is Shariah-compliant to traditional interest-based loans.

Cost-plus finance (Murabaha) is a type of financing. Murabaha is widely used in the world of finance where the bank purchases an asset for the customer and then sells it at a greater cost.

The customer is required to be able to repay the lender in monthly installments over a specified time without incurring any more costs or interest.

Murabaha is typically used for purchase of a home, financing of a car as well as trade financing, which results in an ethical and transparent alternative to credit based on interest.

Can You Donate Interest Money in Islam?

Do you have the opportunity of donating interest-free money to charity?

You can eliminate interest-paying money by giving it away to charities. In the case of banking, the accumulation of interest is often inevitable and donating it is a great method of avoiding the negative consequences of obtaining interest.

Naturally, there’s no spiritual incentive to donate interest money in the sense that it’s not something Muslims should be able to do initially. However, it allows you to eliminate the interest you’ve accumulated in a way that is Shariah-compliant.

The money you earn can be used to buy essential items for those who are in need such as water, food, and emergency medical kits.

However, interest funds should not be used to fund religious initiatives like the construction of mosques or printing the Qur’an.