Is Only a High Interest Rate Forbidden While a Lower Rate Is Acceptable?

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This blog is adapted from an article by Muhammad Rizwan-ul Haque, Founding Chairman of Dawood Family Takaful, CEO of an Investment Bank, and Director of a Trust. The original article was published on August 5, 2015.

Introduction

One of the most common questions in discussions on Islamic finance is whether only excessive interest rates are prohibited while lower rates are acceptable.

Some argue that charging a small percentage of interest is reasonable and economically necessary, while only exploitative or excessively high rates should be considered forbidden. However, according to the principles of Islamic finance, this distinction does not exist.

The article by Muhammad Rizwan-ul Haque explores this important issue by examining the concept of Riba in light of the Qur'an, Sunnah, and the broader objectives of Islamic economics.

Does Islam Differentiate Between High and Low Interest?

According to the article, there is no evidence in the Qur'an or Hadith suggesting that one level of interest is permissible while another is prohibited.

The prohibition of Riba is absolute and is not linked to a specific percentage. Whether the rate is high or low, charging a price for money remains inconsistent with the principles of Islamic finance.

The idea that only excessive interest should be prohibited is viewed as a relatively modern interpretation rather than one rooted in classical Islamic teachings.

The Islamic Concept of Lending

Islam encourages financial support based on compassion, fairness, and social responsibility.

Instead of commercial lending for guaranteed financial gain, Shariah promotes arrangements such as Qarz-e-Hasna, an interest-free loan provided to those in genuine need, and Salam, which allows advance payment for future delivery of goods under clearly defined conditions.

These arrangements are intended to assist financially weaker members of society rather than enable wealth accumulation through lending.

Equality and Justice in Islamic Economics

A central objective of Islamic finance is to promote justice and reduce economic inequality.

Interest-based lending generally benefits those who already possess financial resources, while borrowers bear the burden of repayment regardless of business performance or financial hardship.

By prohibiting Riba, Islam seeks to establish a financial system based on shared risk, productive investment, and equitable distribution of wealth rather than guaranteed returns on capital alone.

The Opportunity Cost Argument

Modern finance often justifies interest by referring to opportunity cost. Investors compare the expected return of a business project with the guaranteed return available through interest-bearing instruments.

According to Muhammad Rizwan-ul Haque, this comparison discourages investment in real economic activity. Entrepreneurs may reject productive projects simply because they do not outperform interest-based alternatives.

When guaranteed returns dominate financial decision-making, fewer investments are made in businesses that create employment, goods, and services.

Can Money Have a Price?

The article argues that assigning a price to money itself fundamentally changes its nature.

Money is intended to facilitate exchange, not become a commodity that generates guaranteed income merely through the passage of time.

Whether interest is charged to finance businesses or justified as a tool for controlling inflation, the principle remains the same: placing a price on money leads to Riba.

The Qur'anic Warning Against Riba

Before the Qur'an delivers its strongest warning against Riba in Surah Al-Baqarah (2:279), it repeatedly emphasizes charity, generosity, and helping those in need.

This sequence highlights an important lesson. Islam encourages believers to circulate wealth through Zakat, charity, and ethical financial dealings instead of seeking guaranteed gains through interest.

The prohibition of Riba is therefore not only a legal ruling but also part of a broader economic philosophy based on compassion, justice, and social welfare.

A Timeless Principle

The article concludes that the prohibition of Riba is not limited by changing economic theories or financial practices.

While modern concepts such as benchmarking and interest-based financial models continue to evolve, the ethical principles established in the Qur'an and Sunnah remain unchanged.

Islamic finance is built upon real economic activity, partnership, risk-sharing, and fairness rather than guaranteed returns from lending money.

Conclusion

The question is not whether an interest rate is high or low. From the perspective presented in this article, the issue is whether money itself is being used to generate a guaranteed return.

Islamic finance encourages investment in productive activities that create value for society while discouraging systems that increase wealth solely through debt.

Understanding this distinction is essential for anyone seeking to build a financial system that reflects the principles of justice, equality, and ethical responsibility taught by Islam.

Credit: This blog is adapted from the article by Muhammad Rizwan-ul Haque, Founding Chairman of Dawood Family Takaful, CEO of an Investment Bank, and Director of a Trust.