Along with Riba (Interest), Loans & Leveraging Are Also Forbidden

By Muhammad Rizwan-ul Haque

Founding Chairman, Dawood Family Takaful, CEO of an Investment Bank and Director of a Trust

September 28, 2015

Introduction

Allah (SWT) has forbidden Riba (interest) while permitting trade and lawful economic activity. In the same verse, Allah (SWT) mentions that some people attempt to equate Riba with trade.

Surah Al-Baqarah (2:275)

“Allah has permitted trade and forbidden Riba.”

The verse further highlights how those who go astray argue that Riba is similar to trade, even though the two are fundamentally different.

Trading and Real Economic Activity

True trade and economic activity involve all sections of society. Without genuine participation in productive economic activity, financial transactions may continue in isolation within corporate offices while workers and laborers remain excluded from fair opportunities to earn a living.

Wealth Should Not Remain Concentrated

Based on the principles of equality and justice, wealth should not become concentrated in the hands of a small group of capitalists who dominate an economy.

Leveraging and Wrongful Appropriation

According to the author’s argument, capitalists often gain control over wealth through:

• Banking systems, and

• Loans and leveraging.

This concentration of financial power is viewed as harmful because it may lead to the wrongful appropriation of wealth and economic imbalance.

Surah An-Nisa (4:161)

“And for their taking of interest while they had been forbidden from it, and for consuming people’s wealth unjustly…”

The author argues that excessive leveraging contradicts the principles of fairness and justice emphasized in Islamic teachings.

Similarities Between Conventional and Islamic Banking

The article suggests that, in practice, many Islamic banking systems around the world operate in ways similar to conventional banks, with financing structures and portfolios that often resemble one another.

Advantage to Large Capital Holders

Large corporations and wealthy individuals are often able to access the majority of available liquidity from banks. This strengthens their financial position further, allowing wealth to become increasingly concentrated.

An Unfair Economic Structure

In simpler terms, the savings of ordinary people deposited in banks are often utilized primarily to benefit large borrowers. The author argues that a more equitable arrangement would involve giving depositors ownership participation or shares in projects financed through their funds.

Interest and Loans

According to the article, interest and loans are interconnected elements of an unequal financial system. Without interest, money itself would not be treated as a commodity to be bought, sold, or rented out for profit.

Laws Supporting Financial Exploitation

The article further argues that prevailing financial laws and regulations enable large corporations and entrepreneurs to continuously expand through leveraged financing, including loans, leases, Murabaha structures, and other banking arrangements.

Proposed Remedy

To create greater economic balance, the author proposes that contributions toward businesses and projects should be treated as equity participation or genuine Musharakah arrangements rather than debt-based financing.

The first step, according to this perspective, is to eliminate dependence on interest-based systems.

A Fairer Economic Model

The article concludes that a fully equity-based economic structure would create a fairer system by enabling broader ownership participation among the public.

It also suggests that funds could instead be managed under a Modaraba-style structure, where managers earn service fees rather than profits derived from interest spreads or interest-based benchmarks.

Author Credit:

This article is written by Muhammad Rizwan-ul Haque, Founding Chairman of Dawood Family Takaful and a researcher in Islamic finance.