Is Compound Interest Haram In Islam? (Yes/No)
Compound interest is a popular form of investment that has been around for centuries. It’s an attractive option because it has the potential to generate more money than simple interest.
The concept of compound interest has been a source of debate in the Islamic finance world, with some saying that it is haram (forbidden) and others arguing that it is halal (permissible).
In this article, we’ll explore the Islamic perspective on this and clearly answer the query is compound interest haram or halal in Islam.
Is Compound Interest Haram In Islam?
According to several verses of the Quran, any type of Riba (interest-oriented) transaction is haram. Therefore, compound interest is also haram in Islam since it involves taking extra money (interest) in exchange for the money invested.
However, there is also a permissible type of investment known as Murabahah (cost plus sale) which allows an investor to make a profit without charging any interest. According to scholars, the concept of Murabahah is similar to compound interest and should be considered halal.
You can get such investment from Islamic banks offering Murabahah-based investment options.
In Quran, Multiple times, Allah had directed us to avoid taking or giving Riba. Below is one of the verses mentioned in the Quran:
“O ye who believe! Devour not usury, doubled and multiplied; But fear Allah; that may (really) prosper.” (Quran – Surah Al ‘Imran 13:132).
According to this verse, it is clear that compound interest is haram in Islam.
If you’re into crypto, you can also read is crypto staking halal.
What Is The Islamic Perspective On Compound Interest?
The Islamic perspective of compound interest is similar to that of other forms of Riba (interest). This is because compound interest involves taking extra money in exchange for your money investment. This is a form of Riba, so it should be avoided.
For example, let’s say you invest $100 for a fixed period at a 10% interest rate. This means that after the end of that period, you will receive $110. However, with compound interest, you would receive more than that due to the additional interest earned on the interest already earned.
Such as, in compound interest, you’ve 5% interest each year, you’ll receive $105 at the end of the first year, and at the end of the second year, you’ll get around $110.25.
So if we look at both cases, you’ll receive extra money in simple and compound interest, but in compound interest, it’s more than a little bit. However, both are considered haram in Islam due to the involvement of interest.
However, scholars argue that Murabahah, which allows an investor to make a profit without charging any interest, is similar to compound interest and should be considered halal.
In conventional banking, simple interest is used to generate profits. In Islamic banking, Murabahah is used to generate profits without charging any interest.
The main difference between compound interest and Murabahah is that with Murabahah, the investor pays an agreed-upon price for a product or service and is then allowed to sell it at a higher price. This way, the investor can profit without charging interest or taking additional money from the lender.
Whereas, with compound interest, the bank pays a fixed amount of interest rate and then adds it to the principal.
Alternate Investment Option
The alternative to compound interest is investing through Murabahah. According to scholars, it is a permissible form of investment and follows Islamic banking principles.
In Islamic banking, Murabahah is used to generate profits without charging any interest. It allows an investor to pay a certain price for a product or service and then resell it at a higher price.
This way, the investor can profit without charging interest or taking additional money from the lender.
Murabahah is considered to be a more ethical form of investment as it does not involve any interest or additional money taken from the party.
It is a beneficial form of investment as it provides higher returns with lesser risk without charging interest. Therefore, it is a viable option for those who want to earn profits without participating in any form of Riba (interest).
If you want even more halal investment options, below are a few:
- Share Market
- Real Estate Investment
- Gold and Silver Investing
- Business Investment
- Commodities Trading
These are just some of the halal investment options that you can explore.
No matter what business you do, you must read are credit cards haram if you’re using a credit card.
FAQs
Q. Is compounding interest haram?
A. Yes, compounding interest is haram as it involves taking extra money in exchange for your money investment. This is a form of Riba (interest), so it should be avoided.
Q. Is compound interest in stocks haram?
A. No, compound interest in stocks is not haram as long as the company is not engaged in any activities that are prohibited by Islamic law. In stock compounding interest, you earn according to the company’s earnings and don’t receive fixed extra money in exchange for your investment.
Q. Is simple interest halal in Islam?
A. Simple interest is haram in Islam as it involves taking extra money in exchange for your investment of money.
Q. Can you pay interest with interest in Islam?
A. No, paying or taking interest is haram in Islam, as it involves taking extra money in exchange for money or goods. This is a form of Riba (interest), so it should be avoided.
Q. Can a Muslim take interest from the bank?
A. No, a Muslim cannot take interest from the bank as it involves taking extra money in exchange for money or goods. Even if you take an interest, you should give it to charity as it is haram.
Conclusion
Compound interest is haram in Islam due to the involvement of taking extra money in exchange for money or goods.
Therefore, it should be avoided, and Muslims should look into other halal investment options such as Murabahah, share market, real estate investment, gold and silver investing, business investment, or commodities trading.
These halal investment options are beneficial as they provide higher returns with lesser risk and without charging any interest. Additionally, it also follows the principles of Islamic banking, which is an added benefit.
Therefore, Muslims must research and understand these investment options to make an informed decision. I hope you got the answer to your query is compound interest haram in Islam.
