Quora Answer: Why is Borrowing Money with Interest Considered Forbidden in Islam, Even If It is from a Bank?

The following is my answer to a Quora question: “Why is borrowing money with interest considered forbidden in Islam, even if it is from a big bank and not an individual lender?”

The overwhelming majority position across all four Sunni madzahib treats any predetermined increase on a loan, riba an-nasi’ah, as categorically prohibited, regardless of the lender’s size, sophistication, or regulatory status.  What follows is the case a serious minority of modern scholars has built against collapsing “riba’” and “interest” into a single, interchangeable concept.

The Qur’an Prohibits riba’ in the strongest possible terms, in Surah al-Baqarah, 2:279. 

فَإِن لَّمْ تَفْعَلُوا۟ فَأْذَنُوا۟ بِحَرْبٍ مِّنَ ٱللَّهِ وَرَسُولِهِۦ ۖ وَإِن تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَٰلِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ

If ye do it not, take notice of war from Allah and His Messenger; but if ye turn back, ye shall have your capital sums; deal not unjustly, and ye shall not be dealt with unjustly.

What the Qur’an does not do is provide a technical, closed definition of the term.  Pre-Islamic Arabian riba’, as documented extensively in classical tafsir, operated as a specific exploitative practice: a debtor unable to repay on time would have his debt doubled, then doubled again on subsequent default, an escalating punitive structure targeting people with no leverage to negotiate and no alternative source of credit.  This is riba’ al-jahiliyyah, and its defining feature was not the mere existence of a return on capital.  It was the compounding, punitive escalation extracted from a vulnerable borrower who had no meaningful choice.

Shaykh Fadhl ar-Rahman Malik, the Pakistani Islamic modernist scholar who served as director of Pakistan’s Central Institute of Islamic Research, argued precisely this distinction in his 1964 paper Riba and Interest, published in Islamic Studies.  Shaykh Fadhl ar-Rahman contended that interest used in modern finance is substantively different from riba’ and functions, structurally, like any other economic price, one component of a functioning credit market rather than an act of predatory exploitation against the powerless.  Shaykh Muhammad Asad Leopold Weiss, the Austrian-born Islamic scholar and translator of the Qur’an, reached comparable conclusions in his own commentary, arguing the prohibition targeted exploitative, compounding usury rather than the fixed, transparent, and regulated interest a modern bank charges under statutory consumer protection law.  Neither man was a fringe figure.  Shaykh Fadhl ar-Rahman held one of the most senior Islamic scholarly posts in Pakistan before political pressure from traditionalist clerics forced his resignation in 1968, itself a data point about how contested this territory has always been within Islam, not merely between Islam and the West.

The Collapse of the “Wahhabi Only” Narrative

Sayyid Muhammad Thanthawy, Grand Shaykh of Al-Azhar, the most prestigious seat of Sunni religious authority in the world, from 1996 until he died in 2010, issued rulings distinguishing between the fixed, pre-agreed returns on certain regulated financial certificates and the exploitative riba’ the Qur’an targets.  This came from the head of the institution every Sunni scholar, Hanafi, Shafi’i, Maliki, and Hanbali alike, treats as a central reference point for mainstream orthodoxy.  A reformist position on riba’ is not, and has never been, the exclusive property of secular modernists or reformist outliers.  It has had backing at the very summit of Sunni institutional authority.

The economic argument underneath this theological one is straightforward, and it is the argument classical riba’ scholarship, working centuries before formal economics existed as a discipline, had no vocabulary to fully engage.  Money available today is worth more than the identical sum promised a year from now, because today’s money can be invested, deployed, or protected against inflation, while tomorrow’s promise carries default risk, opportunity cost, and currency depreciation.  Interest, in this framing, is not an exploitative extraction.  It is the price of time and risk, priced transparently, disclosed in advance, and subject to competitive market pressure between lenders, none of which describes the compounding punitive debt-doubling the Qur’an’s language was responding to.

Why the Shari’ah-Compliant Alternative Frequently Fails to Escape This Logic Anyway

Murabahah, the industry’s dominant Islamic financing structure, has historically priced its profit rate against the London Interbank Offered Rate, and continues pricing against successor benchmarks such as the Karachi Interbank Offered Rate today.  Academic reviews describe Islamic banks as replicating conventional instruments by making them more complicated, while remaining exposed to the same underlying risks as the system they claim to replace.  A murabahah markup and a conventional interest charge, benchmarked to the same index, financing the same asset, are not two different economic realities.  They are the same number, wearing a different Arabic label, and frequently sold at a premium for the privilege.  In June 2017, Dana Gas PJSC unilaterally declared its own US$700 million swukuk non-shari’ah-compliant during a liquidity crunch, a claim the English High Court rejected outright, in a case that exposed how negotiable “shari’ah compliance” has proven to be for the very institutions selling it.  If the shari’ah-compliant alternative to a conventional loan is structurally identical to that loan, priced off the identical benchmark, and occasionally repudiated by its own issuer when convenient, the Muslim borrower has not avoided riba’.  He has paid a premium for the theatre of avoiding it.

While this remains a minority position against the overwhelming traditionalist consensus, Islamic finance will be stuck in the past and never actually address the issue the Qur’an Prohibited.  Modern Islamic scholars cannot even agree on the definition of riba’.  We are left with preachers who never understood how banking and finance work taking a literalist, simplistic position.  Anyone treating this debate as settled, in either direction, is treating a live, decades-old scholarly disagreement as though it were already closed.  It is not, and pretending otherwise serves nobody’s honest understanding of the text.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code