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

In this day and age, it’s virtually impossible to function without a bank account. Meanwhile, modern bank accounts tend to come with interest, in which the bank pays you a percentage of what’s in your account for saving money with them. As a result, Muslims are required to find ways to avoid receiving this interest, which is explored in further detail below.

Is Paying Interest Haram?

Paying interest is otherwise known as Riba, and this is considered a major sin. The principle of paying or charging interest goes against Islamic law, which forbids Muslims from lending or receiving money with the expectation of benefiting. So, if you were wondering, “Is compound interest Haram?” the answer is yes.

Why is Interest Haram?

If you’re wondering why interest is Haram in Islam, then here’s why. Quite simply, interest is considered illegal, unethical, and usurious. This is because Muslims believe that wealth should be generated through legitimate trade and that money should be used in a productive way.

The Punishment for Paying Interest in Islam

Should a Muslim consume interest, they will not be permitted to stand on Judgment Day except in cases such as someone who has been beaten by Satan leading to insanity. Similarly, the Qur’an states that Allah (SWT) will remove all blessings that have come from 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?

In Islam, Riba is interest gained or paid on transactions or savings. This includes the following: 

• Any interest earned from savings accounts, individual savings accounts (ISAs) and other savings investments. 
• Interest earned by lending money, property or goods. 
• Payments of interest for credit card fees, loans or mortgages. 

Islamic Alternatives to Conventional Banking

There are many Islamic banking alternatives to avoid interest. These services are interest-free, meaning they cater to the ethics of Muslims. Some of the following alternatives are great options for Muslims: 

• Profit-sharing accounts (Mudarabah) – Mudarabah is a partnership in which one party provides the capital and the other manages the investment. Rather than earning interest, the profits generated from the investment are shared between the bank and the account holder in a pre-agreed ratio. In the instance that the investment encounters a loss, the capital provider must carry this loss, and the manager loses effort and time. This ensures that both parties share in the risk and reward, which is in line with Islamic teachings on fairness and justice.
• Interest-free loans (Qard Hasan) – Qard Hasan is a goodwill loan that’s given without the expectation of profit or interest. As a result, the borrower is only required to repay the principal amount. These loans can normally be obtained from Islamic banks or charities with a mission to help those in need, support small businesses, and fund community projects. Qard Hasan reflects the Islamic emphasis on charity and mutual assistance, in which Muslims are able to get financial help without incurring interest.
• Lease-to-own (Ijara) – Ijara is a leasing agreement in which the bank buys an asset and leases it to the customer for a fixed period. The customer makes rental payments, which can include an amount towards the eventual purchase of the asset. At the end of the lease term, the ownership of the asset is transferred to the customer. Ijara is typically used in Islamic mortgages and car financing, providing a Shariah-compliant alternative to conventional interest-based loans.
• Cost-plus financing (Murabaha) – Murabaha is commonly used in the finance world, wherein the bank purchases an asset on behalf of the customer and sells it to them at a higher price. This requires the customer to pay the bank for instalments over a fixed period without encountering any additional charges or interest. Murabaha is often used for home purchases, car financing and trade finance, resulting in a transparent and ethical alternative to interest-based credit.

Can You Donate Interest Money in Islam?

So, can you give interest money to charity? Yes, you may dispose of interest money by donating it to charity. When it comes to banking, accumulating interest is often unavoidable, and giving it away is a good way of avoiding the repercussions of receiving interest.

Naturally, there’s no religious reward for donating interest money, as it’s not something that Muslims should have in the first place. Despite this, donation allows you to get rid of any interest you’ve unintentionally acquired in a Shariah-compliant way. You can use this money to purchase essential supplies for those who need it most, including food, water, or medical aid kits. That said, interest money shouldn’t be used for religion-specific projects like building mosques or printing the Qur’an.

Give Interest Money with Muslim Aid

Here at Muslim Aid, we have a number of appeals to which you can donate your acquired interest. So long as you donate to one of our religion-specific appeals, we’ll be able to make sure your interest money reaches those who need it most.