Is compound interest Haram? Alternative ways of interest

Interest is the most deadly of the most tempting things in the world. Allah has forbidden usury. And he insisted on obeying Allah. In the Qur’an, it is not permitted to multiply usury. So – Is compound interest haram?

May the interest be low or high, whether from an individual, company, or institution? It is forbidden in all circumstances.

Compounding is not a condition for usury to be haram. No amount of interest can be consumed in any way.

Allah Ta’ala forbids usury in the Qur’an and tells us to fear the fire of Hell.

The Concept of Compound Interest

Compound interest is the interest calculated on the principal amount and the accumulated interest. In other words, it is the interest earned on the interest.

For example, if you deposit $100 in a savings account with a 10% annual interest rate, the balance at the end of the first year would be $110.

In the second year, the interest would be calculated on the new balance of $110, resulting in a balance of $121.

Compound interest is a powerful tool for growing wealth. However, it can also lead to exponential growth in debt.

If the interest rate is high, the interest owed can quickly surpass the principal amount, making it difficult for the borrower to repay the loan.

Is compound interest haram?

Yes, of course, compound interest is Haram. This is the unanimous opinion of Muslim scholars based on verses of the Holy Quran and hadiths. Even in the Holy Qur’an, it is said that those who do not desist from usury even after it is declared haram should prepare themselves for war with Allah Ta’ala and His Messenger.

Allah Ta’ala says in the Holy Qur’an that compound interest is forbidden

 یٰۤاَیُّهَا الَّذِیۡنَ اٰمَنُوۡا لَا تَاۡکُلُوا الرِّبٰۤوا اَضۡعَافًا مُّضٰعَفَۃً ۪ وَ اتَّقُوا اللّٰهَ لَعَلَّکُمۡ تُفۡلِحُوۡنَ

Translation: O believers! Do not take compound interest and fear Allah so that you may be successful. (Surah Al Imran, verse 130)

In verse in question, several times higher, i.e. compounding rate, is not mentioned as a condition for usury to be haram and prohibited. In other poems, it is strictly stated that usury is forbidden in all circumstances.

The prohibition of usury “at the rate of compound interest” may also imply that if the usurer survives compound interest, the interest earnings, when re-interested, must be double-doubled—though in terms of usurers, it would be called compound interest. No, In essence, all interest is ultimately double interest on double.

So all kinds of usury are prohibited and haram in verse. The Messenger of Allah, may God bless him and grant him peace, said: “You will be saved from the seven things that destroy.” The Companions asked, “O Messenger of Allah! What are those things?

He said, “Shirking with Allah, practicing magic, killing whom Allah has forbidden to kill without a valid reason, taking usury, unjustly eating the wealth of orphans, running away from the field of Jihad in war, and falsely accusing a chaste Muslim woman of adultery. ” (Bukhari: 2766)

The various disadvantages of compound interest

• Taqwa, or fear of God, becomes weak.
• The effect of usury creates miserliness in people’s hearts.
• The usurer is cursed
• The usurer is far from the mercy of Allah.
• Interest is the cause of pride.
• A poor person feels helpless due to usury
• Interest increases the tendency of poor people to sin.
• There is no fear in the heart to commit sin
• Because of interest, the wealth of the rich is acquired effortlessly.
• Allah does not accept the prayers of the usurer because of haram Rizq.
• Playing usury leaves a black spot in the heart.
• Usury is a cause of the deprivation of sacred things.
• Interest is the cause of descent into heavenly punishment.
• Interest closes the door to welfare.
• The interest reduces wealth.
• Commodity prices increase. Because the borrower also adds the interest rate to the product.
• All the world’s wealth is concentrated in a few’s hands.
• People’s wages go up, and transport fares go up.
• Interest leads people to waste.

Why is compound interest Haram?

For several reasons, compound interest is considered the most heinous crime and the primary tool of economic exploitation in Islamic economics. Some of the reasons are mentioned below:

One. Usury is the most powerful means of exploitation in society. A group of people share the hard-earned earnings of others with the help of interest.

The borrower has to pay interest whether he makes a profit or not because he borrows money. As a result, the borrower often has to sell his last surviving asset to pay the interest.

Two. Economic inequality is created due to cyclical interest rates. The rich get richer; the poor go from poor to destitution. As a result, many people get involved in suicide or various anti-social activities and crimes.

Three. In the interest-based financial system, interest is added on top of the product’s regular price, i.e. production cost, transportation cost, duty and expected profit. As a result, the product’s price is increasing daily.

Four. An important principle of Islamic economics is that capital cannot be confined to a handful of people. Because of this, economic stability is severely disrupted.

That is why Allah says in the Holy Qur’an, “Let wealth not be accumulated only among your rich people.” (Surah Hashar: 7) But as a result of interest, capital continues to circulate and increase among a handful of people.

Islamic Alternatives to Compound Interest

Islamic finance offers several alternatives to conventional compound interest-based financial products.

These alternatives are based on profit and loss-sharing principles and aim to provide financial services that are both ethical and beneficial to society.

Murabaha

Murabaha is a type of sale in which the seller discloses the cost of the commodity to the buyer and adds a markup to it.

The buyer agrees to purchase the commodity on a deferred payment basis, with the markup as the seller’s profit.

For example, if a person wants to buy a car, they can approach an Islamic bank that offers a Murabaha-based car financing product.

The bank purchases the car on behalf of the customer and then sells it to them at a higher price.

The customer agrees to pay back the bank in installments, including the car cost and markup.

Musharakah

Musharakah is a partnership-based financing arrangement in which two or more parties contribute capital to a business venture.

The profits are shared according to the agreed-upon ratio, while the losses are shared according to the capital contribution.

For example, if two people want to start a business, they can form a Musharakah partnership.

One person provides the capital, while the other provides the expertise. The profits are shared according to the agreed-upon ratio, while the losses are shared according to the capital contribution.

Ijarah

Ijarah is a lease-based financing arrangement in which the lessor (the asset owner) leases the asset to the lessee (the asset user) for a specific period. The lessee pays rent to the lessor for the use of the purchase.

For example, if a person wants to buy a house, they can approach an Islamic bank that offers an Ijarah-based home financing product.

The bank purchases the house on behalf of the customer and then leases it to them for a specific period. The customer pays rent to the bank, including the house cost plus the profit.