Is bank interest allowed in Islam?

What about the interest on Provident Fund? That is the ultimate saving of a salaried class. Monthly contributions are made to this out of salary on which the government credits interest at 8-10%. Limited withdrawal is conditionally allowed.

And what about taking loan from banks for the purpose of purchasing a house (when there is no other way left)?

This issue has been in debate for quite sometime and is not really settled. The reason it is complicated is because it is not quite similar to the definition of Riba (usury) as agreed about in Islamic literature. Forbidden Riba is defined this way: A lender asks the borrower for the principal at the time of repayment. The borrower says he can’t pay and asks for a reprieve. The lender gives him a reprieve but adds an arbitrary amount to the loan.

Such arrangement does not exist today, not even among loan sharks! Even they tell the borrower before they lend him the money how much the interest will be.

So, does that mean that interest on bank deposits is OK? The scholars who do not see a similarity between interest and the formal definition of Riba, do not see a reason to forbid bank interest. Those who equate bank interest with Riba forbid it.

What complicates matters more is the fact that the monetary systems of today differ sharply from the old days. Back then gold and silver were the only money. Their value does not decrease with time. In today’s economy (since 1971), money is fiat currency not backed by gold. With the massive debts of just about every country, paper money is almost worthless, and decreases in value with time. A lender who gets back his principal only is losing money!

The reason Riba is prohibited in Islam is to prevent rich lenders from taking advantage of the needy. We’ve seen in human history many examples of entire countries enslaved because of their debts.

If you now understand the complexity of the issue and the fact that scholars are not in agreement on it, you can decide for yourself whether to apply for an interest-bearing loan. IMHO, a financial transaction whose conditions are transparently spelled out in a legal document signed by both parties without duress, and where no injustice is suffered by either party, cannot reasonably be wrong. I suggest, however, that you consult your Imaam and make your decision afterward and after much contemplation, because Riba is a severe sin.

I didn’t understand why buying a house is a necessity. You can always rent.

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