Why Is Riba Haram? Sharia-Compliant Saving & Loan FAQs
More than 3.3 million Muslims are currently living in the UK. And while multiculturalism is thriving in the UK, as a traditionally Christian country, our banking and finance systems aren’t always set up to adapt to Islamic values around interest and loans.
So how can you navigate the world of Sharia-compliant banking in the UK? In these FAQs, you’ll learn:
- Why riba is haram in Islam, and what that means for finding a Sharia-compliant savings scheme
- What kind of savings accounts are allowed by Islamic law
- How to get a Sharia-compliant loan, including student loans and mortgages.
What is riba?
Riba is an Arabic word that is usually translated as usury. Usury is the practice of lending money at extremely high interest rates, so you make a significant profit from your loanees.
In the UK, there’s a difference between interest and usury. Usury is generally seen as unfair or exploitative, while interest is an accepted part of the UK banking system.
But in Islamic law, there’s no differentiation between the two practices. Any kind of interest or riba can be seen as exploitative, as it makes one person richer at the expense of the other.
Why is riba haram?
In Sharia law, riba is forbidden, or haram. Many passages from the Quran support this:
“And what you give in riba, that it may increase upon the people's wealth, increases not with God; but what you give in alms, desiring God's Face, those — they receive recompense manifold.” — Verse 30:39
“God has permitted [trade], and forbidden riba… God blots out usury, but freewill offerings He augments with interest.” — Verse 2:275-2:276
“O believers, devour not usury, doubled and redoubled, and fear you God; haply so you
will prosper.” — Verse 3:125
Essentially, riba benefits the rich while depriving those who are less well off. According to these quotes from the Quran, sharing wealth through sadaqah and other selfless, interest-free acts is more favourable in the eyes of Allah than profiting from others through riba.
Can Muslims use savings accounts in the UK?
Most UK savings accounts include interest as standard. But because riba is haram, many UK savings accounts aren’t suitable for observing Muslims. Instead, they must use specific Sharia-compliant savings accounts that don’t generate riba.
Sharia-compliant savings accounts are also usually considered to be ethical savings accounts. In the UK, there are 3 banks that offer Sharia-compliant savings accounts: Al Rayan Bank, BLME, and Gatehouse Bank.
How does Sharia-compliant saving work?
Sharia-compliant savings accounts comply with Islamic law in several ways:
- They don’t generate riba
- They don’t invest in haram or makruh companies, goods or activities
- Customers can still receive profit, but not through riba.
Sharia-compliant savings accounts offer expected profit rates (sometimes shown as AER) rather than interest rates. Profit comes from investments in halal companies. These investment profits are then shared among the bank and its customers.
This complies with murabaha — a permitted “cost plus” agreement that allows Muslims to buy or sell a product for a price which equates to the cost plus an agreed markup.
Can you get a Sharia-compliant loan?
Loans are commonplace in the UK. Most adults have some kind of loan, whether it’s a student loan, a mortgage, or a payday loan. But most loans incur some kind of interest, which the loanee must pay back to the lender.
Like savings accounts, most UK loan lenders aren’t set up to provide Sharia-compliant loans. Charging interest (sometimes at extremely high rates) is how they make their profit.
But there are some companies that offer Sharia-compliant loans. Whether you need money to fund your startup, get married, or buy a house, you can find Sharia-compliant loan companies in the UK.
Are mortgages Sharia-compliant?
Most standard mortgages aren’t Sharia-compliant. Lenders charge interest, which allows them to profit from your house loan.
But some lenders offer ijara mortgages, which are a type of Islamic mortgage. These mortgages essentially work on a rent-to-buy model, and are allowed in Islamic law. Here’s how it works:
- You agree a purchase price for the house with the seller
- Your Islamic mortgage lender buys the house outright
- You set up an agreement with your lender to pay back the purchase price of the house in fixed monthly instalments, and pay rent to live in the house each month
- The rent decreases year-on-year as you pay back more of the purchase price
- When you’ve paid the purchase price in full, ownership of the house transfers to you.
This enables the lender to make a profit without charging you riba. It also means you can buy a house while remaining compliant with UK Islamic finance principles.
Are student loans Sharia-compliant?
In the UK, most student loans are provided by the Student Loans Company — a government-owned non-profit organisation. Students are charged interest on the loans they take out, and the SLC may invest its money in haram or makruh companies. So standard UK student loans aren’t usually Sharia-compliant.
With a growing Muslim population in the UK, student loans have been under the microscope for a long time. It can be a barrier to education, so the government has been debating how to make the student loan system more inclusive since 2014.
Unfortunately, the government hasn’t yet found a solution to the problem. In 2021, Muslim students renewed calls for a Sharia-compliant education financing system, as many people are forced to self-fund their education due to a lack of alternative options.
Are credit cards haram?
Whether credit cards are considered haram or halal is up for debate. Some believe that credit cards are inherently against Islamic law, because the bank intends to charge interest on your balance — and you’re signing a contract agreeing to pay it.
Others believe that if you pay your balance before the interest is charged, you can take advantage of credit cards without compromising your beliefs.
According to the Quran, it comes down to necessity:
“Yet who so is constrained, not desiring nor transgressing, no sin shall be on him; God is All-forgiving, All-compassionate.” — Verse 167
While some may consider it haram, if you need to borrow money for essentials, a credit card may be the most acceptable type of loan, as it’s possible to pay off your debts without incurring interest.
What other types of Sharia-compliant savings schemes are there?
Credit cards and loans aren’t the only way to get money quickly if you’re in a fix. Rotating savings clubs like visi, committees, hagbad and gameeya are Sharia-compliant. By joining a ROSCA, you can save money alongside the rest of your community without paying riba, or worrying about haram investments.
Some committee organisers will allow you to ask for money sooner in the rotation, so you can pay for urgent expenses.
Learn more about why ROSCAs are so popular within UK Muslim communities, and how ROSCAs build generational wealth for you and your family.