18-Ram-1446
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18-Mar-2025
The Forex market doesn’t sleep - it's the only financial market in the world to operate 24 hours a day.
The foreign exchange market (more widely known as “Forex”), is where currencies are exchanged. It’s an astronomical force in the global economy, with a colossal total value of $1.93 quadrillion as of 2023. To put this into perspective, it's about 30 times the size of the US stock and bond markets combined.
The market's daily turnover, a measure of its liquidity, soared to $7.5 trillion in April 2022, a significant increase from $6.6 trillion recorded in 2019. This sheer scale provides traders with numerous opportunities, making it a magnet for investors around the globe.1
Forex trading, with its global reach and 24/7 market operations, has drawn participants from all walks of life, all corners of the globe, and all cultural backgrounds, including Muslims. While Forex offers intriguing opportunities, it also presents unique questions for Muslim traders…
Is Forex trading compatible with the Shari’ah? How does Forex trading align with the economic ethics envisioned by the Shari’ah?
These are important questions given the profound emphasis that is placed on ensuring we have a Halal* income gained from permissible transactions.
In this exploration, where faith and finance converge, we will journey through and dissect the structure of Forex trading, ultimately aiming to discern whether this form of trading can be compliant with Allah SWT’s laws.
Forex trading revolves around currency pairs, wherein one currency is traded against another. The most commonly traded currency pairs include EUR/USD, GBP/USD and USD/JPY, among others.
Each currency pair has a base currency and a quote currency. Take the EUR/USD currency pair, where EUR is the base currency and USD is the quote currency. The rate states how many USD you’d get for 1 EUR. If the exchange rate is 1.10, then 1 EUR can be exchanged for 1.10 USD.
The exchange rate represents the value of one currency relative to another. Forex traders speculate on whether a currency will appreciate or depreciate in value against another, and they take positions accordingly.2
The movement in these currency pairs is measured in ‘Pips’. ‘Pip’ is an acronym for percentage in point or price interest point. A pip is the smallest whole unit price move that an exchange rate can make, based on forex market convention. Most currency pairs are priced out to four decimal places, and a single pip is in the last (fourth) decimal place. A pip is thus equivalent to 1/100 of 1%, or one basis point. 3If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is one pip.
The Forex market is influenced by a wide range of factors that impact currency values. These factors include economic indicators (such as GDP, inflation, and employment data), central bank policies, geopolitical events, and market sentiment. Traders analyse these factors to make speculative trading decisions and anticipate potential currency movements.
There are various participants in the forex market who play different roles.
This encompasses:
The subsequent sections will thoroughly explore the dissimilarities among these entities.
Forex trading offers several key features for participants.
First, it provides opportunities for both buying (going long) and selling (going short) currencies, allowing traders to profit in rising and falling markets. Additionally, the Forex market operates 24 hours a day, five days a week, enabling traders from different time zones to participate at their convenience.
Furthermore, Forex trading offers leverage (more on this later), allowing traders to control larger positions with smaller amounts of capital, potentially amplifying profits (but also increasing risk).
However, it's important to note that Forex trading carries risks.
The high volatility of currency markets can lead to significant price fluctuations, resulting in both potential profits and losses. Research conducted by the French financial markets regulator shows that nearly 90% of retail forex traders lose money.4
Retail Forex trading and institutional Forex trading are two distinct categories within the Forex market that many misunderstand. Here are the key differences between the two:
Retail Forex trading involves individual traders, small investors, and retail brokerage firms speculating on market movements.5
Institutional Forex trading, on the other hand, involves large financial institutions, such as banks, hedge funds, and multinational corporations, where the primary driver of these trades is necessity rather than speculation.
Although, there is usually a specific division for speculative trading, to make this clearer, we will refer to the former as execution traders, as they only execute trades on the basis of need rather than speculation and the latter as institutional forex traders.
Execution traders may require converting a substantial amount, such as £100 million, into Dollars or Euros to facilitate a transaction. To accomplish this, they engage in institutional Forex trading, utilising the services of the institutional market to execute the currency exchange.
Institutional traders, both execution and speculative, often have direct access to the interbank market, where they can trade with other financial institutions and access competitive pricing and liquidity.
Trading in the actual spot forex market is NOT where retail traders trade though. Retail traders, on the other hand, access the Forex market through retail brokerage platforms, which act as intermediaries between the retail traders and the liquidity providers.
In reality, we can think of the brokerage platforms themselves as the counterparties, as they will always accept retail trade amounts, whereas with institutional trades, a viable counterparty will need to be sought out.6
Institutional forex traders often employ sophisticated trading strategies, including algorithmic trading, high-frequency trading, and other advanced techniques, execution traders do not employ any of these techniques as they trade based on the activity of their customers and make money through commission. They have access to research and analysis teams, proprietary trading systems, and sophisticated trading tools.
Retail traders, on the other hand, may rely on manual trading strategies, technical and fundamental analysis, and may use trading platforms provided by retail brokers.
Institutions typically enjoy lower transaction costs and spreads compared to retail traders. Institutions often negotiate better trading terms and have access to lower commissions and fees due to their larger trading volumes.
Retail traders, on the other hand, may face higher transaction costs and spreads offered by retail brokerage firms and have to front a margin for their trades.
Institutional Forex trading is subject to specific regulations and oversight, often governed by financial regulatory bodies. Institutional traders may need to meet certain requirements, such as capital adequacy, compliance, and risk management standards.
Retail Forex trading also falls under regulatory frameworks but may have different requirements tailored to individual investors.
Institutional Forex trades can have a significant impact on the market due to the larger trading volumes involved. Their trades can influence currency prices and market trends. Retail Forex trades, on the other hand, typically have a smaller impact on the overall market due to the individual nature of retail trading.7
It's important to note that these differences are not absolute and that there can be some overlap. For example, some retail traders may use advanced trading strategies and have access to institutional-grade platforms. Additionally, there are professional retail traders who trade larger volumes and have a more institutional approach to trading.
Understanding the differences between retail and institutional Forex trading can help traders and investors align their strategies and expectations with their respective trading environments.
The landscape Islam paints with its view on trade and money is one of principled financial dealings and ethical transactions. Rooted in a comprehensive economic vision, it encourages wealth generation through legitimate means and upholds the prohibition of certain financial practices, a key one being Riba (Usury), that compromise moral and ethical integrity.8
In this landscape, contrary to how money is treated in forex trading, money is not seen as a commodity to be traded, but as a medium of exchange to facilitate trade of products other than currency.
The Islamic financial ethos promotes the creation of wealth through production, sales, and the trading of goods and services. The emphasis is on real economic activity—producing goods and providing services—as a means to earn profit and foster economic growth and societal development.
In this terrain, a person cannot expect to earn a profit in business without assuming loss or risk in whatever undertakings they undertake. It is a way of life that business is associated with rewards, profits, risk, and uncertainties. To sum up, there shall be no reward by hoarding money without risk-taking.9
Guided by the principle of "everything is permissible unless proven otherwise"10, permissibility is the natural state of all matters and will prevail until there is evidence to warrant a departure from that position.
The principle posits that all forms of trade are considered halal, or permissible unless explicitly declared haram, or forbidden. A learned Islamic scholar would need to substantiate through comprehensive reasoning that a particular form of trade is prohibited by establishing the presence of one or more of the following components:
From this perspective, even if devoid of elements such as riba, gharar, and any oppressive practices, Forex trading might still not be encouraged under the Shariah. This is due to its basis not being in line with value generation but rather treating money as a tradable commodity, which is inconsistent with Islamic economic principles.
Now, this leads us to the question: Can it be substantiated that Forex Trading is Haram?
When we look at retail Forex trading, we can see many impermissible factors from an Islamic perspective associated with it, such as:
Leverage is essentially a loan that is provided to an investor by the broker allowing them to take positions they couldn’t with their own money. For example, a trader could be offered 1:100 leverage which means they can open a £100,000 position with only £1000 of their own capital.
The Brokerage will allow you to borrow the money to trade, and if you lose more than £1000, the brokerage will attempt to close out your position, maximising your loss to £1000. However, in the case where they could not close the position out quickly enough, you would be liable for any loss over your £1000 initial capital, resulting in you being on the hook for returning more money than you initially had in your account.
Without the use of leverage, small Forex traders cannot make sufficient money.
For example, if you bought £1000 worth of American Dollars and held it for one month from 30th May 2023 until 30th Jun 2023, you would see a movement in the value of your money of £30, which in the grand scheme of things is not enough value to have been worth the effort if you are investing for 2 months, taking into account all the research time and resources required.
Many traders adopt a 2% rule, which means they do not use more than 2% of the money in their trading account for a trade, limiting their loss in the event that the market moves against them. Under this rule, you would need a capital of £50,000 to take that £1000 trade with a movement of £30.
One other problem with leveraging is the cost. You can pay borrowing costs on positions that you keep open overnight in addition to paying to open and close each leveraged position. The broker will always make money as you do this and is willing to ‘lend’ you the money for doing so.11 In that sense, overnight financing is essentially an interest payment to cover the cost of your leverage.
A contract for difference (CFD) is a financial derivative. Derivative products track the market price of an underlying asset so that traders can speculate on whether the price will rise or fall. The price of a CFD is “derived” from the underlying asset’s price.
A CFD is a contract, typically between a CFD provider, in our case the retail broker, and a trader, where one party agrees to pay the other the difference in the value of a security, between the opening and closing of the trade.
In other words, a CFD is basically a bet on a particular asset going up or down in value, with the CFD provider and you agree that whoever wins the bet will pay the other the difference between the asset’s price when you enter the trade and its price when you exit the trade.
A forex CFD is an agreement (“contract”) to exchange the difference in the price of a currency pair from when you open your position versus when you close it. A currency pair’s CFD price is “derived” from the currency pair’s price on the spot FX market (or at least it should be. If not, what is the CFD provider basing its price on?).
Trading forex CFDs gives you the opportunity to trade a currency pair in both directions. You can take both long (speculating that the price of the base currency will increase) and short (speculating that the price of the base currency will decrease) positions.
If the price moves in your chosen direction, you would make a profit, and if it moves against you, you would make a loss.
In the EU and UK, regulators decided that “rolling spot FX contracts” are different from the traditional spot FX contract. The main reason is that with rolling spot FX contracts, there is no intention to ever take actual physical delivery (“take ownership”) of a currency, its purpose is to simply speculate on the price movement in the underlying currency.
The objective of trading a rolling spot FX contract is to gain exposure to price fluctuations related to the underlying currency pair without actually owning it. So, to make this differentiation clear, a rolling spot FX contract is ruled as a CFD. (In the US, CFDs are illegal so it’s known as a “retail forex transaction”). Outside the US, retail forex trading is usually done with CFDs or spread bets.
This means that there is no real exchange or ownership of any money taking place, as virtually all retail forex platforms have CFD accounts. For example, if I had bought £1000 worth of dollars and the price moved, I would still have the dollars in hand and could change them back to GBP. However, in retail forex trading, essentially a ‘bet’ is made on the value of a currency pair; if successful, I would make money, and I would lose if I were not. I do not tangibly own any assets in either currency.
In summary, when trading forex, you’re speculating on the value of one currency against another—for example, EUR vs USD, because with Forex, currencies are always traded in pairs. You’re always buying one currency and selling the other in the pair, based on which currency you think is going to appreciate against the other.
This type of speculation would be classified under Islamic Law as ‘gharar, ' representing an unacceptable level of uncertainty in a transaction from a Shariah perspective, as it essentially involves wagering on market fluctuations without possessing any tangible ownership in either of the assets being traded.
There is a false understanding regarding retail forex brokers, in which they are seen as an intermediary who will find two parties who want to trade a certain currency pair at a certain price and will ‘pair’ these two parties together and execute a trade on behalf of its clients. This is not the reality in terms of the topic at hand, because a retail forex broker is more of a giant market counterparty as far as a client with an account is concerned.12
As such, we need to think of the term ‘Forex Broker’ as more of a marketing phrase. This is because a ‘Forex Broker’ is actually a ‘Forex Dealer’ who buys and sells goods on their own portfolio. Accordingly, all retail forex brokers regulated in the U.S. are formally referred to as “Retail Foreign Exchange Dealers” or RFEDs.13
There are 3 main types of forex brokers: ECN brokers, Market Makers, and No Dealing Desks (NDD):
Often known as "A-book brokers," ECN is an acronym for Electronic Communication Network. ECN brokers technically take orders from clients and send them directly to a pool of liquidity providers. Regrettably, this perspective reveals a pervasive misunderstanding of the inner workings of the forex market.
Many traders are under the mistaken impression that ECN brokers hold superiority because they consistently pair buy orders with corresponding sell orders. However, this belief doesn't align with the actual mechanics of the forex market. In contrast to the stock market, the forex market operates without a centralised exchange. Consequently, achieving a perfect match between all EURUSD buy trades and EURUSD sell trades, for instance, is an unattainable feat.
This misconception, which is widely held within the forex trading community, is fundamentally flawed. Consider a scenario where 80% of traders maintain long positions on EURUSD. In such circumstances, how would these trades be efficiently matched up?
Forex brokers understand that traders prefer brokers with the acronym ECN affixed to their brand name. Therefore, they do whatever it takes to be addressed as a “True ECN” broker, even if it means seeking regulation in less reputable jurisdictions. The brokers regulated in stricter jurisdictions try to navigate the red-tape by using terms like Straight Through Processing (STP) or Direct Market Access (DMA) to suggest that they are ECN brokers.
2. Market Makers
Market Makers, Also known as B-book brokers, do not send your orders to a larger liquidity provider. Rather, they internalise the risk for all opened positions, meaning they pay for all positive trades themselves, and take the opposite side of every trade accordingly.
3. No Dealing Desk
No Dealing Desk (NDD) are the same as most ECN brokers. The acronym NDD is sometimes used by brokers that do not want to fall short of regulatory requirements by claiming ECN status. The bottom line is that such brokers will send all your orders to a pool of liquidity providers instead of internalising them.
It is worth noting that many NDD brokers still run a market-maker model where they keep smaller orders in-house but send larger orders directly to the liquidity providers.14
When you choose ECN/NDD brokers (or similar), your order goes to the liquidity pool created by mostly market makers, unless the combined order from many customers is large enough to warrant forwarding it to the liquidity pool of banks and other institutions, which is very rare. In reality, when you trade, you are still trading with the market makers, albeit through an additional intermediary.
The main point is that if we wanted to be technically accurate, we should be using the phrase ‘Forex dealers’. “Client” and “customer” are words that are often used interchangeably by brokers; however, the implications are different as the broker is not marrying your trades to another party every time you transact a trade.
All orders and trades entered through your broker’s trading platform are NOT executed on an external trading venue but are executed by the broker itself. Your “broker” is taking the opposite side of your trade. This is known as being the counterparty, with you as their customer.
The only way to close out your position is by taking an equal and opposite position with the same broker as you do not own any physical assets and your only exposure is with a specific brokerage. This results in a money-for-money transaction with no ability to have any underlying currency physically delivered. This is the essence of a ribawi transaction.
Each trader trades directly (“bilaterally”) with the broker and only the retail broker, every trade is a bet with this broker. Retail forex traders do not trade with each other. A broker’s trading book will be constantly changing, and their risk will be managed through offsetting risks by trading out their positions in the institutional FX Market, where there are actual counterparties wanting to trade for various reasons. Despite their management of their own risk, it does not impact the origin of their risk which is each trade (or bet) the trader is making with them.
In Islamic contracts, attention is given to the objectives and operational reality of transactions and not to the descriptive words and forms associated with them. The truth of the matter is that every time you speculate on a currency pair and execute a trade on a retail brokerage platform, you are placing a bet against the broker on the price of a CFD. The broker can see market sentiment from all its own clients and can choose to hedge that risk in the institutional FX market if they need to.
This toxic combination of riba, gharar, and a structure that embodies gambling would act as compounded impermissible factors.
As mentioned previously, the reasons Forex is impermissible are as follows:
Therefore, when we refer to retail forex trading of currency pairs, we can see that this form of trading fails to qualify as 'Shariah compliant' and, as such, is an impermissible (forbidden) form of trade or wealth generation according to the Shari’ah.
Islamic forex trading accounts aim to provide a ‘solution’ to the impermissibility of trading in forex by focusing on the riba on overnight leveraged positions. Their solution would be to create ‘swap-free’ accounts where there is no payment or receipt of any interest rates on currency pairs held overnight.
This is implemented in various methods. One of these methods may be to close out all positions before the interest deadline in the evening, for example 10pm, and reopen these positions in the morning, to avoid any interest and subject you to the price change during the night. The brokerage would then take a management fee for this activity. Despite the improvement, this does not eliminate speculation on price fluctuations by using CFDs, which is the fundamental element that makes Forex trading itself impermissible.
Accordingly, even if all the money used to trade was earned in a halal manner and there was no leverage, and therefore no borrowing of money or any margin on positions held overnight, the act of betting on the price of a CFD contract will be impermissible due to the impermissibility of gambling in Islam. This would be akin to someone convincing a Muslim that they will let them borrow money without interest to gamble on a football match while allowing the Muslim to stay true to his faith by not engaging in a riba-bearing transaction.
The exclusion of paying riba on the leverage would only exempt the account from the first point above and it would still be impermissible as points 2 and 3 would still remain true.
Many people equate retail Forex trading with buying currency to use abroad on vacation. When looking at exchanging currencies to use abroad, whether physically at a money exchange or online with a card such as Monzo or Revolut, this is a very different kind of transaction that fulfils the requirements for exchanging money according to the Shari’ah.
The ‘spot’ element of the transaction and the instantaneous transaction from one currency to another currency that you can physically use, whether by debit card or cash, is quite different from taking a speculative trade on a currency pair. Currency exchangers trade underlying physical currencies (even if digital) as a spot transaction, one of the requirements of trading currencies in the Shari’ah. They do not offer futures or derivatives and would for example exchange £1000 for $1280.
Engaging in currency exchanges through platforms like Monzo and Revolut to utilise multi-currency wallets or cards and subsequently using the converted funds to send money internationally is permissible due to it being a spot transaction where ownership of an underlying currency is exchanged without leverage.15
This practice resembles the institutional Forex marketplace, where multinational corporations may need to transfer significant amounts between currencies to fulfil orders or make payments in other countries. These transactions arise from genuine operational needs and are not driven by speculative motives. Furthermore, these transactions involve the physical delivery of currency, as they are not financially settled in the same currency in which they were initiated.
A note should be taken about using platforms like Monzo and Revolut to invest in precious metals. When buying Gold or Silver, these are classified as currencies in the Shari’ah and would need to be able to be either physically delivered with the delivery being spot or instantly without delay.
Or a regulated certificate from the platform will need to be given at the time of the transaction, proving the liability of the gold that is to be transferred to you has actually been transferred. It is not sufficient to have representational value in a digital wallet for these commodities without actual spot delivery or a transfer of liability having taken place.
There is a prolific rise in Muslims taking an interest in and asking about the permissibility of Forex Trading. Forex trading’s appeal to a broad spectrum of investors, including Muslims, can be attributed to a multitude of factors.
The primary allure comes from clever marketing strategies that frame it as an avenue for easy wealth accumulation. Advertisements and promotional content (especially through a vast majority of social media influencers) often paint an enticing picture of quick, substantial returns that inevitably attract aspiring traders.
Another significant factor is the promise of getting rich quickly. Forex trading, with its volatile market fluctuations, appears to offer a path to significant financial gains in a relatively short time. This potential for rapid profit, though often overstated, can be a powerful motivator.
Moreover, the concept of trading on margin, or leverage, which allows people to trade large amounts of currency with relatively little of their own money, is another key feature that attracts individuals. It gives the perception that trading is accessible to everyone, regardless of their initial capital.
However, it's crucial to remember that from an Islamic perspective, there are more genuine and acceptable routes to trading. Instead of speculating on CFD currency fluctuations, Muslims should invest directly in non-controversial assets like commodities and halal stocks.
This kind of investment should be undertaken without the use of leverage, which is essentially borrowing money to trade and can lead to debt. This is a concept frowned upon in Islam as debt is an instrument of necessity as per the collective guidance of the Qur’an and Sunnah. It should also steer clear of futures or options, which are considered forms of gambling under the directives of the Shari’ah due to their speculative nature.
Investors are advised to adopt a 'long-only' strategy, meaning they invest strategically with a view to holding onto their investments for a longer term. This kind of investment is more in line with the Islamic principles of patience, risk-sharing, and promoting real economic activity.
And Allah knows best.
References:
12023 Forex Trading Statistics + Industry Guide [Fact Checked]
2What Is Forex Trading? – Forbes Advisor UK
3What Are Pips in Forex Trading and What Is Their Value?
4 https://www.forex.academy/what-percentage-of-retail-forex-traders-make-money/
5What is Retail foreign exchange trading | Capital.com
6Institutional Trading |Finance Magnates
7What is Institutional Trading? The all you need to know guide
8Read more about riba in our article surrounding it. Does modern day interest still qualify as Riba? Part I
9based on the The legal maxim Al-ghurm bi al-ghunm, meaning “Reward begets Risk”.
10The legal maxim Al-Asl fil-ashya’ al-ibahah, meaning "Everything is permissible unless proven otherwise".
11What Is Leverage? | How Leverage Works | FOREX.com
12How Forex Brokers Manage Their Risk and Make Money - BabyPips.com
13Retail Foreign Exchange Dealer (RFED) Registration | NFA
14There is often the argument that the nature of the trade is research-backed, trend-based, calculated, or strategic and not a speculation or a gamble. This does not change make the act of betting on the price movements of a contract permissible despite the calculations.Read more about riba in our article surrounding it. Does modern day interest still qualify as Riba? Part I
15Read more about riba in our article surrounding it. Does modern day interest still qualify as Riba? Part I
*The term 'Halal' denotes that it is permitted and follows Islamic law
The UK insurance market is one of the largest in the world, with London being a global hub for insurance and reinsurance business. This industry not only contributes significantly to the UK economy but also plays a role in managing risks, thus providing stability and security to other sectors. As of 2020, it led Europe in terms of total domestic insurance premiums, making it the largest insurance market on the continent. Globally, the UK ranked fourth in terms of life and non-life direct premiums, railing only behind the U.S., China, and Japan. 1
In terms of structure, the UK's insurance industry bifurcates into life and non-life insurance segments. Life insurance in the UK covers a range of significant life events, extending beyond death to include scenarios like disability or terminal illness. The expenditure on life insurance by UK households reached its highest in 2006, maintaining a steady level from 2019 to 2021. On the other hand, non-life insurance encompasses protection against property damage, business-related risks,
and, in most cases, private health insurance. The UK recorded non-life insurance premiums of 116 billion euros, positioning it second in Europe for the highest value of premiums written. 2
Focusing on market leadership within the UK, the country boasts several key players in Europe's insurance landscape. Prominently, three of the top ten life and health insurance companies in Europe, as of May 2023, are based in the UK. Aon, Prudential, and Willis Tower Watson stand out in this group, with a combined market valuation surpassing 130 billion U.S. dollars. These leaders are accompanied by other major European insurers from countries such as Germany, Switzerland,
France, Italy, and Belgium, based on gross written premiums. 3
The origins of the UK insurance industry can be traced back to the Elizabethan era. During the 16th century, as British maritime trade expanded, the need for marine insurance grew. Merchants and shipowners sought ways to mitigate the financial risk of sea voyages. This period marked the preliminary stages of formalized insurance practices in the UK, primarily focused on maritime risks. 4
One of the most significant developments in the history of UK insurance was the establishment of Lloyd's of London in the late 17th century. Originally a coffee house owned by Edward Lloyd, it became a meeting place for merchants, shipowners, and those willing to underwrite (insure) ships and cargo. This informal gathering laid the groundwork for what would become one of the world's leading insurance markets. 5
By the 18th century, the scope of insurance in the UK began to expand beyond marine risks. This period saw the emergence of fire and life insurance. The infamous Great Fire of London in 1666, which resulted in massive property damage, highlighted the need for fire insurance. This led to the formation of the first fire insurance companies. 6
In the 20th century the two World Wars had a significant impact on the UK insurance industry. The wars brought about unprecedented levels of destruction, death, and injury, leading to huge insurance claims. These events evaluated the resilience of the industry and led to the development of new forms of insurance, including various liability and war risk covers. 7
In the post-World War II era, the UK insurance industry underwent significant expansion and diversification. The economic boom and the rise in consumerism led to an increased demand for various types of insurance, including motor, travel, and health insurance. This period also saw the growth of reinsurance.
The late 20th and early 21st centuries have been characterized by technological advancements and globalization. The UK insurance market has not only grown domestically but has also expanded its global footprint, dealing with international insurance and reinsurance. The advent of the internet and digital technology has transformed the way insurance products are marketed, sold, and managed.
This traditional form of insurance, evolving through centuries, became a cornerstone in managing financial risks associated with life, property, and businesses. The concept revolved around pooling resources to protect against losses, a principle that resonated across various cultures and economies evolved into the conventional insurance we have today based on the transfer of risk from the insured to the insurer for a premium.
However, as this traditional insurance model spread globally, it encountered diverse cultural and religious perspectives, leading to unique adaptations and alternatives.
A modern conventional insurance contract consists of the following noticeable elements:
As stated earlier, conventional insurance contracts as they exist today are a modern phenomenon from the perspective of Islamic Jurisprudence. Accordingly, there is no specific evidence from the era of revelation dealing with it specifically. That said, Islam's legal framework which includes controlled Scholarly Legal Reasoning (Ijtihaad) is inherently capable of providing adequate rulings to suffice all occasions until the Day of Judgement. With Ijtihaad, the differences between the jurists in aligning the insurance contract and its conditioning from an Islamic jurisprudence perspective will naturally lead to a difference in ruling. Those who view insurance as
akin to contracts connected to cooperation for good deeds have issued fatwas permitting it. In contrast, those equating it to a contract of exchange have flagged key necessary factors, such as gambling, usury (interest), or an ambiguity regarding it, and accordingly have issued fatwas declaring it prohibited. Additionally, some jurists have explored a middle ground, treating insurance as a conventional contract of exchange while ensuring the counter-value is concluded to be something tangible in order to negate or reduce the contracts associations with gambling, usury, and ambiguity.
Islamic Scholarship has predominantly differed on the topic of conventional insurance based on two views:
The First View: conventional Insurance is Forbidden in Islam from the outset 8 : This view is shared by the vast majority of contemporary Islamic Scholarship across the
spectrum of the four major schools of Islamic Jurisprudence (Mathaahib). 9 The foundations for their collective verdicts are encapsulated as follows:
Using the framework for impermissibility in the Shari’ah that we discussed earlier, we can now see that the default ruling entails conventional insurance being forbidden from the outset.
However, if the prohibition stems from the presence of excessive Gharar (uncertainty), and if a person is forced to take out insurance, for example someone who needs to drive in the UK and is unable to lawfully without a valid car insurance, as an exception due to the law of the land and not having a choice in the matter and no permissible alternative, insurance in this scenario would become permissible as an exception, due to the legal requirements of the country and a person not having a choice in the matter, as there are no permissible alternatives. This is supported by the rule regarding that which the Shariah makes prohibited ‘as a means’, such as the prohibition of ambiguity in contracts which is classified by Islamic Jurisprudence as 'impermissible as a means to an end' 12 , rather than being 'inherently impermissible'. 13 Consequently, the criterion set by the law of the country invokes the principle of 'need', rather than 'necessity' coming into scholarly consideration by virtue of Islamic Law, and Islamic Jurisprudence permits as an exception matters that are impermissible 'as a means' but not 'as an end' due to ‘need’ being realized. 14 Should a situation arise where the aforementioned 'need' is resolved, either through a modification in legal regulations, changes in conventional insurance practices, or, more feasibly, via the introduction of a Shari’ah-compliant alternative, then the provisional allowance granted by Islamic jurisprudence would accordingly come to an end, and default ruling of prohibition will be defaulted to.
The Second View: Conventional Insurance is a permissible contract:
The foundations for their collective verdicts are encapsulated as follows:
d. Niẓām al-aʿwāqil - This is the framework of those who are ‘Aqilah and their responsibilities. This phenomenon entails that in instances of involuntary
manslaughter resulting in a financial obligation like diyah (blood money), this liability is distributed among the 'Aqilah of the offender. These 'Aqilah are typically the male family members and relatives who are bāliġh (mature). 18 The aim of this system is to prevent bankruptcy from inflicting the offender, while ensuring the victim's party receives compensation, as the financial load is more manageable when dispersed. 19
Some scholars note the resemblance between the legal responsibility shouldered by mature male family members, as per the principles of 'Aqilah, and the liability an insurer assumes when providing coverage for particular risks. They point out that just as the insurer manages a pool of insured individuals and disperses costs across this collective group, the 'Aqilah distribute the financial burden among themselves to mitigate the impact on any single member.
e. Security Services Contract - This is a contract in which an individual would hire a guard for one’s premises., in order for the presence of the guard to serve as a deterrent and provide security. Some scholars argue that this is akin to an insurance contract as a person is paying for a contract to safeguard themself in the event of certain risks being realized.. 20
c. The response to the “Al-waʿd al-Mulzim” analogy: This analogy is not precise, as the motivations behind the actions are fundamentally different. An insurer's objective is once again profit-making, whereas a binding promise stems from a desire to benefit someone else. Consider examples like offering to pay for someone's dowry in marriage or saying “Sell your broken car and I will help you with what you are less in buying another one for your family”. These are acts of kindness, motivated by benevolence, without any expectation of personal financial gain. The legal obligation assumed in these cases is born out of altruism, aiming to help one another, unlike an insurance contract where the underlying intent is financial gain.
d. The response to the “Niẓām al-aʿwāqil” analogy: The idea of family and relatives coming to your aid is part of is based on the principle of maintaining bonds of kinship and Silat ar-rahim, meaning the idea of caring for kin, visiting them, and helping them in any way possible, with the intention of seeking reward and recompense from Allah. This is emphasized by the Qur’an itself:
وَٱتَّقُواْ ٱللَّهَ ٱلَّذِي تَسَآءَلُونَ بِهِۦ وَٱلۡأَرۡحَامَۚ
(And be mindful of Allah—in Whose Name you appeal to one another—and ˹honour˺ family ties.)
An-Nisa 1
وَبِٱلۡوَٰلِدَيۡنِ إِحۡسَٰنٗا وَبِذِي ٱلۡقُرۡبَىٰ وَٱلۡيَتَٰمَىٰ
(And to parents do good, and to relatives, orphans,)
An-Nisa 36
In stark contrast, an insurance company is not connected to the insured through blood relations or a bond of brotherhood. Nor does the insurer provide assistance out of a desire to obey Allah or from a place of mercy. This is evident in the fact that the insurer requires payment upfront, before the occurrence of the event against which the insured seeks protection, as a precondition for their support when needed. This analogy is fundamentally flawed because relatives assisting family members do so without any expectation of personal gain. They don't require upfront payment for their support, offering assistance only if and when it's needed. If they were to demand advance payment as a condition for help in the future if it was required, it would also be considered a form of gambling, much like the scenario with insurance. This starkly contrasts with the nature of familial assistance, which is typically unconditional and not driven by profit motives.
e. The response to the “Security Services Contract” analogy: The contract with a security company significantly differs from a conventional insurance contract, as it is essentially a contract of Ijarah, which involves hiring the services of a person or a company. In this arrangement, the security company is tasked with providing a guard whose duty is to watch over the property, effectively acting as a deterrent. The payment made in this scenario is specifically for the service of guarding, not for compensation in case of any incident. In contrast, an insurance contract operates on a different premise. Here, the payment is not for a service rendered, like guarding, as the fundamental nature of this contract is not service-based (as in Ijarah) but rather financial protection-based. If, despite the presence of security, the premises were to be broken into, the responsibility for the damages does not typically fall on the security company. Instead, they are only accountable for providing the agreed-upon guarding services.
Drawing an analogy between these two types of contracts, simply because both offer a form of "peace of mind," is not accurate and goes against the framework of Jurisprudence methodology for Qiyās. In addition, even if it could successfully be argued that ‘peace of mind’ is an acceptable counter-product for this transaction, The nature of the peace of mind offered in each case is fundamentally different: one is service-based, focusing on prevention, while the other is protection-based, focusing on financial compensation after an event has occurred. This distinction makes it misleading to equate the two under the same premise of providing reassurance or security.
The International Islamic Fiqh Academy (IIFA) which is a universal scholarly organization recognised worldwide studied the topic of conventional insurance in the 1980s and concluded as per an almost unanimous the impermissibility of conventional insurance as a default rule. 22
The following text is a translation from their resulting bulletin:
International Islamic Fiqh Academy: Decision no. 9 regarding insurance and reinsurance:
To proceed, the International Islamic Fiqh Academy, as an entity of the Organization of the Islamic Conference, in its second council held in Jeddah from 10-16 of Rabī` al-Thānī 1406 AH, 22-28
December 1985 CE, states:
Having analyzed the proposals made by the scholars contributing to the council regarding insurance and reinsurance insurance, and having rigorously examined its various types and forms, as well the principles upon which it is founded and the goals it aims to realize, apropos other fiqh councils ' and scholarly bodies ' discussion thereto--the council has decided:
The Islamic Finance Advisory is Shura based non-profit community orientated program based in London offering a range of services dedicated to Islamic finance and Economics to an International audience.
The Panel of Scholars at the IFA have concluded the same view as that of the International Fiqh Council, and recognizes that at a fatwa level, exceptions are applicable as per the mandates of Islamic Jurisprudence, and the IFA scholarly panel is dedicated to being a reference for the study of an individual's specific circumstances and generating the necessary Islamic guidance. 23
Contrary to common belief, the Shari’ah is not opposed to mitigating risk, rather one of its objectives is to protect the wealth of the people. For example, it is not uncommon to request collateral when giving a loan and this is substantiated by the Qur’an itself:
وَإِن كُنتُمْ عَلَىٰ سَفَرٍ وَلَمْ تَجِدُوا كَاتِبًا فَرِهَانٌ مَّقْبُوضَةٌ
(If you are on a journey and a scribe cannot be found, then a security can be taken.) Al-Baqarah 283
One such adaptation from the traditional form of insurance mentioned earlier emerged in the Islamic world with the development of Takaful, an insurance model adhering to the principles of Shari’ah. The concept of Takaful presents a stark contrast to conventional insurance in several key aspects, particularly in its approach to risk sharing and investment. Takaful operates on a cooperative model where participants mutually ‘guarantee’ each other against loss or damage. This fundamental difference from conventional insurance stems from the need to align financial practices with Islamic values, which emphasize mutual assistance, shared responsibility, and ethical investing without delving into transactions involving Ribā (interest), Gharar (Uncertainty), and Maysir (Gambling). These are prohibited components that we will delve into shortly.
The globally recognised and vibrant insurance market of Takaful, compliant with Islamic principles, has a rich history that dates back till before the advent of Islam. After Islam, the Messenger (pbuh) recognised this practice in a praiseworthy light captured by the following authentic narration:
Abu Mūsa al-Ash‘ari (may Allah be pleased with him) reported that the Messenger of Allah (may Allah's peace and blessings be upon him) said: "The Ash‘aris, if they ran short of provisions while on a military expedition, or if their children were short of food in Madīnah, they would gather everything they had in one piece of cloth then they would divide them evenly among themselves. Thus they are from me and I am from them." 24
Takaful, which means 'shared responsibility' in Arabic, roots itself in the concept of cooperative risk-sharing. This foundational principle of Takaful highlights its long-standing tradition of mutual support and collective risk management. 25
Accordingly, Takaful is a system based on mutual assistance which originates from ancient Arab tribes as a source of pooled liability which allowed compensation to be paid for any offences committed to another tribe. This principle later extended to many fields and is present in many modern Islamic countries in the form of car and home insurance.
In terms of this article, it is notable to note that It wasn't until 1979 in Sudan that the first modern takaful company was established. Then, in 1985, the Grand Council of Islamic Scholars within the Organization of the Islamic Conference officially sanctioned takaful as an Islamically acceptable alternative to conventional insurance, given that conventional insurance practices were considered to be in conflict with the Shari’ah. Takaful is commonly referred to as Islamic insurance; this is due to the apparent similarity between the contract of kafalah (guarantee) and that of insurance. Unlike conventional insurance, members in a takaful contract are both the insurers and the insured. Each member of the takaful group agrees to make regular contributions or premiums. This takaful can be pooled into a fund and managed and distributed on behalf of the participants by an operator who acts as a mudarib – a manager or an entrepreneurial agent for the policy holders, who charges a fee to cover costs such as claims management and underwriting.
Any claims made by members are paid out of the takaful fund and any remaining surpluses, after making provisions for the likely cost of future claims and other reserves, belong to the participants in the fund—not the mudarib. Those funds may be distributed to the participants as cash dividends or otherwise.
In terms of modern implementation, a takaful operator, the mudarib, would be able to invest the pooled money and the policyholders would become joint investors in order to not diminish the value of their money over time. A positive return on policies is not legally guaranteed, as any fixed profit guarantee would be akin to receiving interest and contradict the prohibition against Ribā.
For a more comprehensive exploration of takaful, including its various applications, we plan to delve deeper into this topic in a forthcoming article inShaAllah.
1 https://www.statista.com/topics/4511/insurance-industry-uk/#topicOverview
2 ibid.
3 ibid.
4 KINGSTON, C. (2014). Governance and institutional change in marine insurance, 1350-1850.
5 https://www.lloyds.com/about-lloyds/history/coffee-and-commerce#:~:text=Lloyd's%20coffee%20house%20specialised%20in,their%20ship%20did%20not%20return.
6 https://www.museumoflondon.org.uk/discover/how-great-fire-london-created-insurance
7 https://www.atlas-mag.net/en/article/history-of-war-risks-insurance
8 The added phrase “from the outset” is mentioned to denote that Islamic Jurisprudence allows for exceptions to the rule of prohibitions in exceptional circumstances.
9 Dr. Issa Abdo: التأمين بين الحلِّ والحُرمة(ص: 166)1 [Insurance Between Solution And Prohibition] Professor Mustafa Al-Zarqa: نظام التأمين: حقيقته والرأي الشرعي فيه (ص: 25)1l [The insurance system: its reality and the legal opinion] Dr. Wahba al-Zuhayli:(4/442) الفقه الإسلامي وأدلته [Islamic jurisprudence and its evidence].
10 Sunan Ibn Majah 2195.
11 https://www.wahed.com/mme/is-the-riba-of-today-the-same-riba-that-was-prohibited-2
12 i.e Impermissible due to it being a means to an end which is inherently impermissible in Islamic Law.
13 For example, Ribā (usury) is considered forbidden 'in and of itself' in Islamic law, illustrating a prohibition that is inherent rather than due to being a means to something else.
14 Ibn Taymiyyah - https://www.islamweb.net/ar/library/content/22/2435/%D8%AF%D9%84%D8%A7%D8%A6%D9%84-%D8%AA%D8%AD%D8%B1%D9%8A%D9%85-%D8%A7%D9%84%D8%AD%D9%8A%D9%84?idfrom=3786&idto=3792&start=0
15 The legal maxim, الأصل في الأشياء الإباحة (Al-Asl fil-ashya’ al-ibahah), meaning “The origin of things is permissibility”
16 The word ‘Aqilah’ is the plural of ‘Aqil’, which is the one who pays blood money, or compensation in the event of an offence that carries financial consequences.
17 نظام التأمين للشيخ مصطفى الزرقا p29
18 Radd al-Muhtaar ala as-dur al-Mukhtaar, ibn Aabideen (3/345)
19 نظام التأمين للشيخ مصطفى الزرقا p60
عقد التأمين ومدى مشروعيته في الفقه الإسلامي p279 onwards
20 نظام التأمين للشيخ مصطفى الزرقا p51
21 https://www.theguardian.com/business/2022/dec/02/insurers-breaking-fca-rules-by-undervaluing-written-
off-vehicles
https://www.insurancetimes.co.uk/news/insurers-must-work-together-to-improve-consumer-trust-if-they-are-to-avoid-outside-regulation-acso/1443813.article
22 https://iifa-aifi.org/ar/1596.html
23 More on the Islamic Finance Advisory and its services can be queried here: [email protected]
24 Bukahri and Muslim
25 https://www.pwc.com/bm/en/services/assets/takaful_growth_opportunities.pdf
It’s our pleasure to announce that the Islamic Finance Advisory (IFA), a division of the Islamic Council, have certified ‘Waseeya’ services as Shariah Compliant.
Based on the official documentation covering the projects processes and procedures; a complete peer-to-peer review was conducted by the Islamic Finance Advisory, concluding the following articles of Waseeya to conform with the general related principles of the Shari’ah regarding the Laws of Inheritance and Transactions.
1. Waseeya’s Inheritance Calculator.
2. Waseeya’s Islamic Will.
3. Waseeya’s Gift Deed.
4. Waseeya’s peer-to-peer interest-free loan agreement.
Waseeya is also working with the Islamic Finance Advisory to ensure all the Islamic products offered on Waseeya platform are in compliance with Islamic Laws.
The importance of wills in Islam:
An Islamic will (called Waseeya in Arabic) is a document that sets out how the deceased’s assets should be distributed in accordance with Islamic principles after they pass away. Our beloved Prophet Muhammad (PBUH) has stated: “It is the duty of a Muslim who has something which is to be given as a bequest not to have it for two nights without having his will written down regarding it.” (Muslim)
The Prophet Muhammad (PBUH) also stated: “A man may do good deeds for seventy years but if he acts unjustly when he leaves his last testament, the wickedness of his deed will be sealed upon him, and he will enter the Fire. If, (on the other hand), a man acts wickedly for seventy years but is just in his last will and testament, the goodness of his deed will be sealed upon him, and he will enter the Garden.” (Ahmad and Ibn Majah)
An Islamic will is key for Muslims as it handles your inheritance and final wishes, whilst keeping your Islamic religious beliefs in mind. Such a will allows you to distribute your inheritance to your family using the correct calculations under Shari’ah law, and as instructed by Allah (SWT) in the Holy Qur’an in the verses of Surah An-Nisa.
Waseeya is an exciting new, online Islamic inheritance planning platform. It helps Muslims organise, plan, secure their assets, and store and share their cherished memories. The platform is available on iOS, Android, and the web.
Waseeya offers 256 bit encryption, hosts an easy-to-use interface where you can create Islamic wills, securely store important documents, and share recorded naseehah (advice) or memories with your loved ones.
With Waseeya’s user-friendly step-by-step format, you can create your Islamic will quickly and efficiently, and revise or amend without solicitorial visits.
Waseeya uniquely boasts the ability of users choosing between different schools of Jurisprudence (Madha’hib) when using the platform. They also boast a Time Capsule feature that can be shared with your loved ones at a time of your choosing, determining what is shared, with whom and when.
The IFA encourages Muslim communities to explore Waseeya and the important possibilities with their platform which helps us take care of an important aspect of our deen.
All praise belongs to Allah and may Allah’s peace and blessings be upon His messenger, his family, companions and followers until the last day.
It’s our pleasure to announce that The Islamic Finance Advisory (IFA), a department of the Islamic Council, have certified ‘Little Hearts & Eye Cataracts’, ‘Feed The Forgotten’ and ‘Livelihood Program’ delivered by ‘Muntada Aid (Charity Number: 1157117)’ as Zakah-compliant, based on their conformance to the general Zakah-related principles of the Shari’ah and the mandates of the widely accepted Islamic Zakah Standards released by the IFA.
As you may be aware the IFA’s scholarly board had published its Zakah Policy in March 2022. The policy was welcomed across the UK Islamic charity sector, setting a precedence as being encompassing and accommodating of modern Islamic legal practice.
We welcome all charities to connect with the IFA and book a consultation with one of our Shari’ah advisers:
All praise belongs to Allah and may Allah’s peace and blessings be upon His messenger, his family, companions and followers until the last day.
It’s our pleasure to announce that The Islamic Finance Advisory (IFA), a department of the Islamic Council, have certified ‘Food Packs, Baby Milk, Orphans Sponsorship, Clothing and Heating’, ‘Cash Distribution’, ‘Home Construction’ and ‘Provision of Cows’ delivered by ‘Human Aid & Advocacy (Charity Number: 1138111)’ as Zakah-compliant, based on their conformance to the general Zakah-related principles of the Shari’ah and the mandates of the widely accepted Islamic Zakah Standards released by the IFA.
As you may be aware the IFA’s scholarly board had published its Zakah Policy in March 2022. The policy was welcomed across the UK Islamic charity sector, setting a precedence as being encompassing and accommodating of modern Islamic legal practice.
We welcome all charities to connect with the IFA and book a consultation with one of our Shari’ah advisers:
All praise belongs to Allah and may Allah’s peace and blessings be upon His messenger, his family, companions and followers until the last day.
It’s our pleasure to announce that The Islamic Finance Advisory (IFA), a department of the Islamic Council, have certified ‘The Gaza Zakat Fund’ delivered by ‘Save One Life (Charity Number: 1187075)’ as Zakah-compliant, based on their conformance to the general Zakah-related principles of the Shari’ah and the mandates of the widely accepted Islamic Zakah Standards released by the IFA.
As you may be aware the IFA’s scholarly board had published its Zakah Policy in March 2022. The policy was welcomed across the UK Islamic charity sector, setting a precedence as being encompassing and accommodating of modern Islamic legal practice.
The IFA was extremely appreciative of its inaugural client ‘Save One Life’ requesting a review and certification of their project ‘The Gaza Zakat Fund’. The assessment began in October 2022, and with great effort and collaboration between the IFA and Save One Life, certification was achieved and granted in January 2023.
We welcome all charities to connect with the IFA and book a consultation with one of our Shari’ah advisers:
A team of experienced scholars and qualified professionals at hand to provide comprehensive advisory services on all matters related to Islamic Finance, impacting personal finance, businesses, charities, and fintech & DeFi in an ethical and transformative manner.
Our expertise spans across various domains including Shariah compliance, IF product design & development, IF liquidity management, IF financial risk management strategies, Zakah, Awqaaf (Endowments) and financial dispute resolutions & adjudications.
Welcome to Part II of this series, where we uncover the wisdom of Islamic Wills. We dive deep into the financial distribution of a Will, obstacles that may restrict some inheritors, and the process of going about writing a Will.
Upon the passing of an individual, there are primarily three priorities to be considered and settled regarding the estate, before its distribution to the heirs:
1. Funeral
Expenses related to the funeral and burial, including costs associated with the burial plot and even the shroud, ought to be covered by the estate. By default, these costs are deducted from the estate, unless family members express a desire to handle them independently.
2. Debts
Following the funeral costs, all debts and money owed to others need to be paid from the estate. The Prophet (ﷺ) said,
“All the sins of a Shahid (martyr) are forgiven except debt." and "The believer's soul is suspended by his debt until it is settled for him." The heavy weight placed on the repayment of debts underscores the essential role it plays in preserving the rights of others.
3. Bequests
After the first two priorities are taken care of, we can move on to distributing the wealth. The distribution happens upon two stages - dispensation of any cited bequests, and then the distribution of the remaining estate among the heirs.
Regarding bequests, up to a third of the entire estate is allowed to be ring-fenced by the testator (deceased) for bespoke distribution.
In addition, the beneficiary from a bequest must exist at the time of the passing of the testator in order for a bequest to be considered regulatory, with the exception of general and continuous beneficiaries. For example, bequests confined to causes such as a Qur'an school, or a person/s defined by a description such as students of knowledge, or the needy and orphans, etc.
Also, and importantly, any bequest made towards an individual already inheriting by right of the rules of Islamic inheritance, will be considered invalid by Islamic Law unless the other legal heirs to the estate forgo their rights and agree to the wishes of the deceased.
This is not obligatory, rather it is recommended if they wanted to give something from their wealth to his relatives, the poor and the righteous as an ongoing Sadaqah Jariyah.
Finally, the estate can be distributed to the heirs according to their pre-ordained shares. It is important to note that in some Muslim countries, there may be additional legalities before this can be distributed.
There are a number of obstacles that prevent a person who usually qualifies, falls under the waratha, from inheriting from the estate of the deceased. While there are a few potential obstacles, the ones most relevant to our contemporary discussion include the following:
1. Homicide
The one who murders another deliberately cannot inherit from the deceased. This is a point on which there is scholarly consensus, because of the hadeeth of Abu Hurayrah RA who said: The Messenger of Allah ﷺ said:
"The murderer will not inherit."
This hadith is what the scholars follow: the murderer does not inherit, whether the killing was deliberate or accidental. Some of them said that if the killing was accidental, then he will inherit, and this is the view of Al-Maalik.
A person can also be barred from inheriting if they played a part in the murder, even if they didn't directly commit the act. This stems from a widely accepted legal principle among jurists that the one orchestrating a scenario specifically to obtain something prematurely is punished by being denied access to it.
2. Difference in Religion
Differences in religion can preclude individuals from inheriting from each other. The Muslim does not inherit from the disbeliever nor the disbeliever from the Muslim, despite any familial relationship between the two individuals.
ءَابَآؤُكُمْ وَأَبْنَآؤُكُمْ لَا تَدْرُونَ أَيُّهُمْ أَقْرَبُ لَكُمْ نَفْعًۭا
You cannot know which of your parents or your children is more beneficial to you. [An-Nisa:11]
Allah SWT has pre-ordained the shares of their heirs from the wealth of the deceased. There are usually contentions or misunderstandings surrounding why the deceased cannot divide their wealth as they please or why there can be difference between the wealth given to different heirs.
A straightforward way to grasp this concept is to first understand that all wealth belongs to Allah SWT and is given to us by Him as a trust, over which we have considerable discretion to utilise as we please.
The trust and discretion to use Allah SWT’s wealth as we please are given to us until the time of our death. At that point, our right to use and benefit from this wealth ceases, and it returns to Allah SWT to be distributed according to His will.
It is a profound act of mercy from Allah SWT that once our ownership of this wealth ceases and Allah distributes it according to His will, we continue to reap the blessings and rewards when our heirs use the wealth virtuously. At the same time, we do not accumulate any sin if the wealth is used unlawfully. All these benefits are bestowed upon us, even though the apportioning of wealth isn't influenced by our own actions.
Primary or Fixed Heirs (Ashab-ul-Furud)
The Qur'an explicitly identifies the individuals who are consistently eligible to inherit. These beneficiaries include:
Residual heirs by reason of blood-relationships inherit in the instance that there are no primary six heirs. These include aunts and uncles, nieces and nephews and other distant relatives.
Distant Relatives (Dhawul-Arham)
Dhawul-Arham or extended family, may receive inheritance, only in the instance that there are no primary or residual heirs.
Before we delve further into how to write a Will, it's important to highlight that, as per Islamic jurisprudence, daughters usually receive an inheritance amount that is half of their brothers'.
This is due to several reasons and is to be understood under a wider macro framework of financial responsibility of males in Islam. While it may seem that sons receive a greater ‘gross inheritance’, Muslim men usually have financial obligations, and it's possible that their 'net inheritance'—the amount remaining after meeting these obligations—may be less.
From a jurisprudence perspective, a Muslim should be in a mentally competent state when drafting a Will and should have the capacity to draft the Will freely and without any coercion.
A trustworthy executor should be appointed to enact the distribution of the wealth. After this, the individual should ensure that their Will is attested by two impartial witnesses, and it should be documented by a legal expert. We would recommend the final draft to be checked with a scholar for any inaccuracies according to the Shari’ah, alleviating any burden from incorrect understanding.
Many Islamic centres and local scholars often provide templates for Islamic Wills that are tailored to suit the specific legal and cultural context of the individual. We encourage everyone to explore these resources to ensure they have an Islamic Will that is recognised legally and enforceable.
In addition to the legal validity, there are many considerations when making a Will that you can include. For example, it can be used to instruct how the deceased would like to be buried, such as confirming a burial over cremation, in the rare circumstance that the deceased may fear their burial rights being contested by the heirs.
Also, the will can be used to highlight an immediate burial as the dying wish of the deceased, which is closer to the mandates of the Messenger ﷺ's guidance, over a severely-delayed burial in order to accommodate certain relatives arriving from afar, and recommend a particular individual to wash their body, or specify a certain location for burial, for example.
Furthermore, If one adheres to a particular Islamic legal view, such as Surah Fatiha being recited as a part of their janazah prayer; or wants the bereaving family to avoid committing violations of the Shari’ah at the funeral, such as or mourning excessively (Wailing), or wishes to appoint or confirm a guardian over their younger children and give any instructions for the guardian including raising the children as Muslims according to the mandates of Islam; then this too can be included in the Will.
As can be seen, the Will extends beyond the mere reallocation of financial assets. It represents an important opportunity for individuals to impart invaluable wisdom, guidance, and moral teachings to their family members, children and those who have a right over you or that you are connected with in the community.
It is a personal testament - an instrument through which you can communicate your deepest reflections, hopes, and intentions for your loved ones.
I recommend to include as a reminder to everyone “There is no true God except Allah, the One, Who has no partner. His is the sovereignty and His is the praise, and He is Omnipotent. And that Muhammad ﷺ is His servant and His Messenger, and that Eesa (Jesus) AS is the servant of God and His Messenger and Paradise is true, and Hell is true, and the Hour is coming, there is no doubt about it, and that God will resurrect those in the graves.”
As Muslims, we wish to leave behind a positive, lasting impact on our families and would not want our passing to be a reason for disputes and discord between anyone, let alone the ones we hold closest to us.
Any preventative action we can take in doing so would be in our favour on Qiyamah. Recommend to those whom you left among your family, offspring, and all your relatives to fear Allah, to reconcile relations, to obey Allah SWT and His Messenger ﷺ, to exhort one another to the truth, and to be patient with it.
In crafting your Islamic Will, take the opportunity to address your family directly. A point that is usually overlooked is the inclusion of a heartfelt message to your parents in your Will, if they are alive, as the timing of our departure from this world is uncertain. It is paramount to articulate your appreciation for their unwavering support, their care in nurturing you, and their dedication in providing for your needs such as food and clothing. Their love and support have been instrumental in your life, and expressing this gratitude in your Will can serve as a lasting testament to their efforts.
Consider discussing your spouse's strengths and relay your appreciation for them and areas for growth, and do the same for your children. Express your vision, dreams, and aspirations for your children and grandchildren, and perhaps even provide them with wisdom you wish you had known at their age.
Advise your sons to become self-sufficient honourable men of the Ummah, to guard their chastity in an oversexualised era, to stand with humility regardless of the success Allah has given them, to become strong physically and mentally to endure the trials that await them, to be unyielding in their commitment to their prayers, to stand for justice and with the oppressed, to avoid oppressing others and find solace from this world in their prayers.
Advise your daughters to understand their self-worth lies with Allah SWT and to be noble women of the Ummah.
“Indeed, the most noble of you in the sight of Allah is the most righteous of you.”
Inspire them to be compassionate and caring with those around them and to honour their families. Remind them of the virtues of motherhood and to enjoin each other in good, to guard their chastity, to be generous in what Allah SWT has given them, to increase in worship and decrease time spent preparing dishes during Ramadan and always remember their roles as a slave of Allah SWT.
This can be a platform to impart life lessons you believe will fortify their relationship with Allah SWT when the world challenges it. Impart to them your vision of their progression of Imaan, the depth of relation with Allah SWT you desire for them to attain, and the character traits you wish for them to embody. Such sincere guidance becomes crucial during a period when they will be in mourning and missing your presence. In these vulnerable moments, they are likely to be more receptive to your wisdom and advice.
If you employed a parenting style or methodology that they might have been averse to, use this as a chance to provide insight into your reasons and intentions. Explain that it was driven by your profound love for them and your desire to equip them with the grit and maturity they need to navigate the complexities of life.
It's a space where you can discuss the trials of life you've faced and the resilience you've developed as a result - a resilience you aimed to instil in them through your parental methods. Similarly if you made some difficult decisions for your family or spouse as a leader, give yourself an opportunity to clarify that you had their best interests in mind.
Your Will should function as a heartfelt charter and letter to your family - a powerful and impactful way of expressing your affection and your ambitions for their futures. It's your opportunity to leave a legacy encapsulating the love, wisdom, and guidance that will endure long after you.
In conclusion, the importance of writing an Islamic Will cannot be overstated. As Muslims, we are tasked with fulfilling our obligations in this life, not only to Allah but also to those around us. An Islamic Will is a pivotal tool in ensuring that these responsibilities are met even after our departure from this world.
The process of writing a Will encourages self-reflection and foresight. It reminds us of inevitable death and compels us to consider our worldly possessions and worries in the context of our broader, spiritual journey in obeying Allah SWT, to whom we will return. By thoughtfully deciding where our assets will go, we are reminded of the temporary nature of worldly wealth and our ultimate accountability in front of Allah SWT.
Writing a Will is not merely a legal or financial exercise for Muslims, but a deeply multifaceted spiritual one. It is an act of faith, a commitment to justice, and a testament to our belief in the hereafter. Therefore, every Muslim should endeavour to prepare an Islamic Will and regularly update it, to ensure the just and beneficial distribution of their wealth, to ensure their loved ones receive their guidance and to ultimately continue their spiritual journey even after they have left this world.
Sheikh Dr. Sajid Ahmed Umar holds a 3-year University Diploma in Arabic language and Islamic Studies, a Bachelors degree in Comparative Islamic Law and Jurisprudence Methodology. He also holds a Masters degree in Judiciary, and is a qualified Judge. Sheikh Dr. Sajid has also completed a PhD in Comparative Islamic Law with his postgraduate research focusing on the area of Liquidity Management and Financial Risk Management through an Islamic lens.
Write your Will today, get started here.
In this 2-part series, we explore the role an Islamic Will plays in the larger Islamic economy and its profound impact in our legacy as Muslims.
31 million people in the UK alone have no will. 84% of those under the age of 35 have no will; and 60% of these people overall lack an up to date will. These are truly alarming statistics.
The concept of death in Islam serves as a powerful reminder for believers that our time in this world is finite and uncertain. The indiscriminate inevitability of death transcends age, health, or status, arriving unexpectedly, swiftly and snatching away our loved ones or even ourselves. Its relationship with the son of Adam isn't personal, but rather an inevitable part of life.
Allah Almighty says:
هُوَ يُحْىِۦ وَيُمِيتُ وَإِلَيْهِ تُرْجَعُونَ
He is the One Who˺ gives life and causes death, and to Him you will ˹all˺ be returned. [Yunus:56]
And He says:
كُلُّ نَفْسٍۢ ذَآئِقَةُ ٱلْمَوْتِ ۖ ثُمَّ إِلَيْنَا تُرْجَعُونَ
Every soul will taste death, then it is to Us that you will be returned [Al-’Ankabut:57]
As Muslims, this reality compels us to reflect upon the transient nature of life and the importance of preparing for the hereafter. Islam urges us to be mindful of our actions, to seek forgiveness and repentance, and to lead a life of submission to Allah SWT, even in death.
Embracing the uncertainty of when death will approach, we should strive to please Allah SWT even in the impact we leave after returning to Him through the correct distribution of our inheritance as per His laws.
Being someone created to live and assigned to carry a portion of the legacy of the final Messenger (ﷺ), the manner in which we manage our legacy is the final significant influence we can exert on this world. It is therefore of utmost importance to ensure that it aligns with the teachings and pleasure of Allah SWT.
In this 2-part series, we explore the role an Islamic Will plays in the larger Islamic economy and its profound impact in our legacy as Muslims.
An Islamic will, also known as a ‘Wasiyyah’, is an Islamically legally binding document that Muslims use to ensure that upon their death, their rights, the rights of their heirs, and the rights of Allah Almighty are protected in accordance with Islamic law.
Regarding the protection and preservation of these rights, it is worth noting that without an Islamic will in the UK, after someone passes away, their wealth would be distributed by an ‘executor’ or ‘administrator’ in accordance with English law, not Islamic law. This would mean that, in the case of a surviving married partner, the married partner would inherit all the personal property and belongings of the person who has passed away.
If there are surviving children, grandchildren, or great grandchildren of the person who passed on, and the estate is valued at more than £270,000, the partner will inherit the following:
- All the personal property and belongings of the person who has died
- The first £270,000 of the estate
- Half of the remaining estate
In addition to this, there is a standard Inheritance Tax rate of 40%. This is only charged on the part of your estate that’s above the threshold of £325,000 which can be increased if you give away your home to your children or grandchildren.
There’s normally no Inheritance Tax to pay if either:
- The value of your estate is below the £325,000 threshold
- You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.
Unfortunately, unless a Muslim couple have gone through a separate civil ceremony despite having a valid Nikah (Islamic marriage), their marriage would not be recognised by English law unless the civil content and requirements are complied with as well.
So immediately we see that writing a will helps ensure your spouse will actually inherit from you correctly, as per the rules of Islam, and will not need to spend large sums of money and countless amounts of time and health in order to prove their relationship to a court to preserve the sanctity of the estate and be able to inherit a portion of the deceased’s wealth.
The importance of wills in Islam is derived from many considerations, such as:
"It is the duty of a Muslim who has anything to bequeath not to let two nights pass without writing a will about it." (Bukhari)
3. The immediate enactment of the companions of the Messenger (ﷺ) on the topic of wills after receiving its instruction.
There are many different wisdoms for establishing a will, some of which are as follows.
1. Completing an obligation
We just covered an instruction from the Messenger (ﷺ) regarding the status and ruling of wills in Islam. In addition to this, there is a famous maxim of Islamic Legal Theory that states that
‘An obligation that cannot be completed except through another action being completed, then the completion of that action too becomes an obligation’.
Regarding this, Allah Almighty reveals within the verses of succession the following:
فَرِيضَةًۭ مِّنَ ٱللَّهِ ۗ إِنَّ ٱللَّهَ كَانَ عَلِيمًا حَكِيمًۭا
This is an obligation from Allah. Surely Allah is All-Knowing, All-Wise [An-Nisa :11]
A will helps us ensure that the system of Allah SWT reigns after our passing, and as such, if the will helps preserve the integrity of Islam’s rules regarding the inheritance, the obligatory ruling pertaining to the shares of inheritance in Islam applies to the will as well.
2. Attaining God-consciousness
Essentially, Taqwa is the concern within one to refrain from what is displeasing to Allah SWT and preserve what is pleasing to Him. On the topic of Islamic inheritance, Allah Almighty says:
تِلْكَ حُدُودُ ٱللَّهِ ۚ وَمَن يُطِعِ ٱللَّهَ وَرَسُولَهُۥ يُدْخِلْهُ جَنَّـٰتٍۢ تَجْرِى مِن تَحْتِهَا ٱلْأَنْهَـٰرُ خَـٰلِدِينَ فِيهَا ۚ وَذَٰلِكَ ٱلْفَوْزُ ٱلْعَظِيمُ ١٣ وَمَن يَعْصِ ٱللَّهَ وَرَسُولَهُۥ وَيَتَعَدَّ حُدُودَهُۥ يُدْخِلْهُ نَارًا خَـٰلِدًۭا فِيهَا وَلَهُۥ عَذَابٌۭ مُّهِينٌۭ
These are the limits set by Allah. Whoever obeys Allah and His Messenger, He will admit him to gardens beneath which rivers flow, where he will live forever. That is a great success. Whoever disobeys Allah and His Messenger and transgresses the limits set by Him, He shall admit him to the Fire, where he will remain forever. For him there is a humiliating punishment. [An- Nisa:13-14]
Creating a will requires thoughtful planning and demonstrates a sense of responsibility and accountability for your actions and their consequences. This proactive behaviour is an embodiment of Taqwa.
3. Preservation of the Rights of the People
It is established within Islamic Jurisprudence that before the payment of bequests and the distribution of the estate, all monetary debts owed to others must be paid. In today’s day and age, and given the nature of how businesses, acquaintances, and investors interact and transact, numerous situations may arise where individuals have loans or other financial obligations that aren't officially documented or witnessed.
Given that we should avoid unjustly retaining the wealth that rightfully belongs to others, it becomes crucial to establish a will that provides real-time data to the heirs regarding any outstanding debts.
4. Preservation of the Rights of the Inheritors
Similarly, it's not uncommon for individuals to have money owed to them that might not be formally recorded or acknowledged. To ensure fairness and precision, it's crucial that the nature of these debts be made known to the resulting heirs so that an appointed representative can work towards ensuring that they are repaid to the estate.
An individual may possess Sukuk, ISAs, properties in different countries, any pensions, a variety of stocks, funds across different trusts, and in today’s age, maybe even cryptocurrencies.
While we should aim to diversify our wealth to maximise its benefits within the bounds of the law, this should not be done at the expense of making it difficult for the heirs to locate or acquire the wealth. Although there may be exceptions, it's crucial that families are informed about the assets they own.
We have seen many situations where a person passes away and their spouse or family does not know where their investments are or which properties or lands they own. In some cultures, for instance, husbands may not disclose their assets or their whereabouts to their wives. Searching for the answers often creates a sense of oppression, and puts undue emotional and financial stress on the family and, in some cases, are unattainable.
5. Appreciating the Holistic Nature of the Shariah
Consider this verse:
وَأَقِيمُوا۟ ٱلصَّلَوٰةَ وَءَاتُوا۟ ٱلزَّكَوٰةَ…
Establish Salāh and pay Zakāh… [An-Nur : 56]
In numerous verses of the Qur'an, Allah SWT pairs Salah and Zakah together, demonstrating that there's no dichotomy between these two aspects of worship. Instead, they are both integral intertwining aspects of our worship where Salah is the direct, bodily worship and Zakah is the financial worship.
In the same breath, so too are the laws surrounding inheritance in Islam, for they aid the development and preservation of the rights of our spouses and families, and support the parental process, which are, by the way, all different interweaving strands of worship that help us build the unassailable relationship we seek with Allah and the enormous unprecedented prize He promises the righteous.
For instance, a well-drafted and detailed will can play a crucial role in preventing potential disagreements among family members. In the absence of a will, family members might interpret your wishes differently, some preferring culture and non-Islamic practices over divinely pre-ordained laws, leading to disputes and strained relationships. This is very common in many cultures where large family disputes over inheritance are common.
A clear will leaves no room for ambiguity. It provides explicit instructions on how each part of your wealth will be distributed among your heirs. This can be particularly important if you want to bequeath a third or less of your wealth to a cause or individuals of your choice.
Additionally, a will should not only address the distribution of wealth, but also the management of the distribution. By appointing a reliable person to enact the division, you can ensure your wishes are carried out as you intended.
This can further reduce the potential for disagreements and misunderstandings among your family members, as there can be power struggles between varying family members over who has the right to distribute the wealth. For example, a father might feel he is best placed to distribute his late son’s assets, whereas his wife may disagree, causing avoidable turbulence within the family unit.
By discussing your will and your intentions with your family members while you are still alive, you can address any questions or concerns they might have. This openness can help prevent surprises after your death, further reducing the potential for disputes. This can be particularly helpful as estranged parents, children with ex-wives and sometimes even grandparents in different countries can have a share in the inheritance in Shariah.
Also, conversations about our wills can serve as a unifying factor for our families and contribute to the process of successfully parenting our children by encouraging us to consider their future and enabling them to become self-sufficient through our guidance.
The idea of a will pushes us to consider nurturing our children to a level of maturity whereby we can discuss our assets with them with ease and understanding, as opposed to constantly nurturing the idea that they lack maturity and trustworthiness to appropriately manage a conversation of this nature.
Before we can proceed with the distribution of assets and inheritance from an individual, there are certain conditions that have to be met. These are as follows:
1. Confirmed death
It is necessary to have an official affirmation of their death. In this day and age, this verification should come from a state-sanctioned authority, such as a Medical Doctor, a Coroner, or legal authorities. It's important to note that the specific entities and procedures involved may differ according to local laws and regulations.
At first glance, this requirement for proof might appear overly rigorous. However, inheritance is only considered as inheritance when someone actually passes away, and as such, the intervention of a recognized authority to confirm the life status of a person is extremely valuable. The Shariah offers comprehensive guidance for all scenarios, and this specific level of stringent proof can be particularly appreciated in cases of the heirs differing with regards to missing persons, for example.
2. Living heirs
In order to be eligible for inheritance, heirs must be alive at the time of the benefactor's death. If an heir passes away after the benefactor, but before the estate has been distributed, then their share is directly transferred to their own heirs, thus ensuring the preservation of their inheritance rights.
Occasionally, questions arise about the inheritance rights of an unborn child. Generally speaking, if the child is born alive, they are entitled to a share of the benefactor's estate. The distribution of the estate is usually deferred until the birth of the child, or if there is sufficient reason then the share of the child will be preserved until the birth.
3. Presence of an Estate
When an individual passes away, their estate devolves upon the waratha. Waratha refers to the inheritors or heirs of a deceased person. These are the individuals who are eligible to receive a portion of the deceased's estate according to the rules of inheritance outlined in the Qur'an and the Hadith.
In its most comprehensive sense, an estate, or tarikah, includes every possible type of asset that an individual legally owns at the time of their passing. It covers real estate such as houses, land and other types of real estate.
Personal property such as vehicles, clothing, jewellery, artwork, collectibles, books, electronics, appliances, furniture, and even animals are part of the estate.
Financial assets are a significant component of the estate and these include cash, gold, bank accounts, stocks, mutual funds, pensions, and even cryptocurrencies or NFTs. Business interests, whether they are in the form of ownership shares in a corporation, membership interests in a limited liability company, or partnership interests, are also included in the estate.
Intangible assets such as copyrights, trademarks, patents, and other intellectual property rights are part of the estate as well. The estate also comprises all types of debts and rights owed to the individual, whether from personal loans or other forms of contractual obligations.
Even items that might seem trivial or inconsequential, like the loose change in a moneybox or the balance on a prepaid card are part of the estate.
In essence, anything of value that can be owned or controlled by the individual, no matter how substantial or minute, tangible or intangible, physical or electronic, traditional or modern, falls within the comprehensive scope of the estate.
Often, families may divide financial assets while keeping items like clothes, jewellery, or watches for their sentimental value. However, these personal belongings are also part of the estate and cannot be exclusively claimed by an heir or anyone else without first including them in the estate and attaining agreement from all parties with a rightful claim to the estate.
If an heir wishes to specifically claim an item such as a watch, agreements can be made wherein the individual agrees to reimburse the estate with the agreed value of the item.
This concludes part I of this 2-part series exploring the deeper wisdom of Islamic wills and how they are conducted. In the next article, we explore the rules regarding the priority of the estate, who qualifies to receive inheritance, the barriers to eligibility and advice on how we can write our own will.
Sheikh Dr. Sajid Ahmed Umar holds a 3-year University Diploma in Arabic language and Islamic Studies, a Bachelors degree in Comparative Islamic Law and Jurisprudence Methodology. He also holds a Masters degree in Judiciary, and is a qualified Judge. Sheikh Dr. Sajid has also completed a PhD in Comparative Islamic Law with his postgraduate research focusing on the area of Liquidity Management and Financial Risk Management through an Islamic lens.
Sheikh Dr.Sajid Umar in part II outlines the economic pitfalls of Riba and explores where Riba exists around us today.
Riba's contribution to wealth inequality is a critical issue in modern financial systems, as it tends to disproportionately benefit lenders and wealthier individuals, whilst often disadvantaging borrowers, particularly those with lower incomes. This phenomenon can be explained in further detail through the following points:
Accumulation of wealth: Lenders and wealthier individuals who have the means to invest in interest-bearing assets, such as bonds, stocks, and real estate, can accumulate wealth over time by earning interest income. This income can be reinvested, further increasing their wealth in a compounding manner. On the other hand, low-income borrowers often lack access to these investment opportunities, limiting their ability to build wealth.
Debt burden: Borrowers, especially those with limited financial resources, may find themselves trapped in a cycle of debt when they take out interest-bearing loans. As interest accumulates on their debt, they may struggle to pay down the principal amount. In some cases, borrowers might need to take out additional loans to cover their interest payments, exacerbating their debt burden and making it even more challenging to break free from this cycle.
Predatory lending practices: Some lenders may engage in predatory lending practices, offering loans with high interest rates and unfavourable terms, as is the case with a surge in recent BNPL loans which we will look at in depth later, to vulnerable borrowers who may not fully understand the implications of their debt obligations. Such practices can lead to an even greater wealth disparity, as borrowers find themselves trapped in debt and unable to improve their financial situations.
Opportunity cost: Borrowers burdened with high-interest debt may be forced to allocate a significant portion of their income towards interest payments, leaving them with fewer resources to invest in education, healthcare, or other avenues for personal and financial growth. This lack of investment perpetuates the cycle of poverty and further exacerbates existing wealth inequality.
Increased crime rates: Importantly, debt and crime are strongly associated, with officially registered offending increasing during periods of debt enforcement. The unequal distribution of wealth and limited opportunities for social mobility can result in increased crime rates as individuals struggle to meet their basic needs or feel marginalized by society. Debt problems are ubiquitous among people with convictions, with most of the prison population being indebted. This increase in crime can lead to further social disintegration and a decline in overall community safety.
Overburdening debt: High interest rates can make it difficult for borrowers to repay their loans, leading to a cycle of debt. This is particularly true for short-term, high-interest loans such as payday loans, which can lead to long-term financial distress for borrowers.
Inflation: When central banks set low-interest rates to encourage borrowing and spending, it can lead to increased demand for goods and services, which in turn can result in higher prices and inflation. Inflation erodes the purchasing power of money, impacting people with fixed incomes or those who rely on savings.
Discourages Saving: Low-interest rates can discourage saving, as the returns on savings accounts and other interest-bearing assets may not keep pace with inflation. This can lead individuals to seek riskier investments in pursuit of higher returns, exposing them to potential financial losses.
Artificial Asset Bubbles: Low-interest rates can encourage excessive borrowing and lead to the creation of artificial asset bubbles, such as the housing bubble that contributed to the 2008 financial crisis. When interest rates are low, people may be more inclined to invest in assets like real estate, driving up prices and creating unsustainable market conditions.
Misallocation of Resources: Interest rates can influence investment decisions, potentially leading to a misallocation of resources. When interest rates are low, businesses and individuals may borrow more than they need, investing in unproductive projects or assets. This can result in wasted resources and an eventual economic slowdown.
Short-term Focus: High-interest rates can encourage short-term thinking, as businesses and individuals may prioritize immediate gains over long-term investments or projects. This short-term focus can hinder innovation, infrastructure development, and sustainable economic growth.
The Qur'an and Prophetic narrations frequently express Islam's strong opposition to interest, emphasising that both taking and giving interest are considered a grave sin. By prohibiting Riba, numerous far-reaching benefits are ensured, including:
1. Equity in exchange.
2. Safeguarding wealth by prohibiting unjust and unequal exchanges.
3. Encouraging charity, compassion, and financial responsibility.
4. Reducing selfishness and self-centeredness, which can lead to social animosity, mistrust, and resentment.
Shariah principles aim to create more equitable and just exchanges between individuals and encourages the distribution of wealth across all segments of society. One of the key components of the system is the practice of Zakah, which embodies the idea that wealth should be circulating and accessible to all members of the community. Here's an elaboration on this concept:
1. Wealth as a trust from Allah: In Islam, wealth is considered a trust from Allah, and those who possess it have a responsibility to use it in a manner that benefits society. The practice of Zakah serves as a reminder that wealth should not be hoarded or concentrated in the hands of a few but should be shared with those in need.
2. Discouraging hoarding of wealth: Zakah discourages the hoarding of wealth by requiring eligible Muslims to share a portion of their assets with those in need. This practice ensures that wealth is constantly circulating within the economy, stimulating growth and creating opportunities for all members of society.
3. Redistribution of wealth: Zakah mandates that Muslims give a fixed percentage of their qualifying wealth to the poor and needy annually. This practice helps redistribute wealth within society, ensuring that the basic needs of the less fortunate are met, and reducing wealth concentration among the affluent. This aim of the Shariah is made clear in Surah Hashr:
لَا يَكُونَ دُولَةًۢ بَيْنَ ٱلْأَغْنِيَآءِ مِنكُمْ…
...so that wealth may not merely circulate among your rich (al-Hashr 7)
There are many stern warnings in Islam from both the Quran and the Hadith regarding the severity of consuming Riba.
ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَـٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَـٰٓئِكَ أَصْحَـٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَـٰلِدُونَ
Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. That is because they say, “Trade is no different than interest.” But Allah has permitted trading and forbidden interest. Whoever refrains—after having received warning from their Lord—may keep their previous gains, and their case is left to Allah. As for those who persist, it is they who will be the residents of the Fire. They will be there forever (Al-Bakarah 275)
يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ ٱتَّقُوا۟ ٱللَّهَ وَذَرُوا۟ مَا بَقِىَ مِنَ ٱلرِّبَوٰٓا۟ إِن كُنتُم مُّؤْمِنِينَ ٢٧٨ فَإِن لَّمْ تَفْعَلُوا۟ فَأْذَنُوا۟ بِحَرْبٍۢ مِّنَ ٱللَّهِ وَرَسُولِهِۦ ۖ وَإِن تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَٰلِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ ٢٧٩
O believers! Fear Allah, and give up outstanding interest if you are ˹true˺ believer. If you do not, then beware of a war with Allah and His Messenger! But if you repent, you may retain your principal—neither inflicting nor suffering harm (Al-Bakarah 278-279)
"Riba is a curse, and if you do not give it up, then beware of Allah and His Messenger." Musnad Ahmad
Allah has declared it impermissible to engage in interest, whether giving or taking. It is based on Allah’s infinite wisdom that He deems an action to be obligatory or prohibited, prescribing matters in man’s best interests, in this life and in the Hereafter, as He is the All-Wise, All-Knowing. We can suggest some socio-economic reasons as to why Riba is haram:
Interest-Bearing Personal Loans
A common option when looking to make a large purchase is for an individual to obtain a personal loan via friends and family, directly from a bank by paying via credit card, or relying on another form of credit. This unsecured loan may then be used to purchase any asset—in our case, a vehicle—outright with a separate outstanding debt obligation with the creditors/lenders.
From an Islamic perspective, borrowing money which is to be returned with interest from a commercial bank, or from any interest-bearing lender, irrespective of source, for any purchase, whether secured or otherwise, is impermissible. This is the purest form of a Ribawi contract.
Home Mortgages
Home mortgages are interest-bearing lump sum loans to buy property or land for both commercial and personal uses. The loan to an individual is secured against the value of their home until completion, enabling the bank to get at least part of its money if the borrower defaults.
Over 750,000 UK households are at risk of defaulting on their mortgage payments over the next two years, while another 47,000 are trapped as mortgage prisoners, according to the Financial Conduct Authority.
The FCA head wrote: “We focused on this group because the vast majority of mortgage prisoners have a mortgage from a firm that is no longer lending to new customers, and most of these mortgages were sold before 2008/9.”
The lender or mortgage broker will usually begin a full affordability assessment using the evidence and ‘stress test’ your financial situation. This has become stricter after the 2008 financial crisis, in which a contributing factor was people being given a ‘NINJA loan’, a slang term for foregoing the verification process and giving a substantial loan knowing the person is likely to default as they have ‘No Income, No Job or Assets’.
This type of loan falls under the same category as above, an interest-bearing loan, and therefore would be one of the purest forms of a Ribawī contract.
Car Finance
Finance debt for new and used cars has risen to £40 billion per year, prompting concerns that consumers may default on agreements amid soaring living costs. Analysis by The Car Expert shows that UK car finance debt has increased by £29bn since 2009.
Almost all (circa 92%) new cars are purchased using finance agreements, along with a growing number of used cars, meaning hundreds of thousands of owners could be at risk of defaulting on their debts.
The Car Expert found that the average amount financed per new car has more than doubled, increasing from just under £12,000 at the start of 2009 to more than £25,000 by the end of June 2022.
A large percentage of the car finance agreements in place fall under a tripartite hire purchase agreement. A tripartite hire purchase agreement occurs when the buyer borrows money from a third party, usually a financier, to purchase the car from the seller. The third-party financier will secure their loan against the car, and the debtor (buyer) pays an amount greater than that originally lent by the financier.
Unless the Hire Purchase is a bipartite agreement, being involved in the financing method mentioned above would be impermissible. Fortunately, there are many permissible alternatives, such as bipartite agreements, leases, and PCP (Personal Contract Purchase).
Overdrafts
Banks rely on fees charged on overdrafts as a major source of revenue and are not completely committed to transparent, upfront pricing. These often exploitative and hidden fees can have a significant impact on a family’s bank account, and as a result, they have been the subject of much scrutiny and within the purview of regulating bodies. Having a look at the total value of overdrafts in the UK we can see an unhealthy amount of overdraft used by the public with spikes in May and June 2022. In line with the first billable months for many energy price hikes around the UK.
Banks charge interest on overdrafts continuously, falling under the interest charged in exchange for an increase in time to repay what is owed. This is Riba in our debt-based transactions (Riba al-duyun).
Credit Cards
There were 355.1 million credit card transactions in November, 0.3% more than in November 2021. The total spend of £19.6 billion was 5.3% higher than November 2021.
Outstanding balances on credit card accounts have grown by 9.4 percent over the past twelve months to November and 50.9 percent of outstanding balances incurred interest compared to 52.9 percent twelve months ago.
These statistics are showing an increase in credit card use as time goes on and the cost of living has increased. A reliance on this form of credit is creating a debt cycle for many already struggling families who are using credit cards to pay for simple necessities such as food and bills. As they increase in debt repayments whilst attempting to pay for basic goods, the cost of the credit card repayments would increase and make it more difficult to be able to make repayments without defaulting.
Credit institutions may offer interest-free periods; however, they ultimately end up charging for deferred payments, falling under interest charged in exchange for an increase in time to repay what is owed. This is Riba in our debt-based transactions (Riba al-duyun).
BNPL (Buy Now Pay Later)
Buy now, pay later (BNPL) schemes are plaguing society, encouraging spending on otherwise unaffordable items or holidays. Gen Z users (those aged 18-24) are using BNPL so that they can afford to keep up with fashion trends. Another common use is to manage pressure from other debts on individuals. FCA have had to step in, attempting to regulate and provide guidance to lenders to review their harmful approaches.
BNPL schemes contain clauses allowing interest to be charged when a minimum payment is not met, or the loan is not fully paid within the interest-free period. This would constitute interest charged in exchange for an increase in time to repay what is owed, the exact definition of Riba in our debt-based transactions (Riba al-duyun).
In conclusion, the concept of Riba, rooted in Islamic teachings, highlights the importance of fostering equitable financial practices and discouraging unjust gains. While many modern financial systems have moved away from these principles and now widely accept interest-based transactions, Riba's fundamental concerns remain relevant today.
As we witness the adverse effects of interest-driven economies, such as wealth inequality, unsustainable debt burdens, and financial crises, it becomes increasingly clear that there is a need for alternative approaches to finance. By revisiting the principles behind the prohibition of Riba, we can gain valuable insights into creating more just, ethical, and sustainable financial systems that promote fairness, risk-sharing, and prioritise our relationship with our Lord.
Consuming Riba could be an obstacle standing between us and having our duas answered by Allah Almighty. The Messenger of Allah ﷺ mentioned the case of a man who spreads out his hands to the sky, making dua, and said about him, “While his food is haram, his drink is haram, his clothing is haram, and he has been nourished with haram, so how can [his supplication] be answered?" By addressing the challenges of Riba in the contemporary context, we can work towards a more equitable and resilient global economy for future generations.
Sheikh Dr. Sajid Ahmed Umar holds a 3-year University Diploma in Arabic language and Islamic Studies, a Bachelors degree in Comparative Islamic Law and Jurisprudence Methodology. He also holds a Masters degree in Judiciary, and is a qualified Judge. Sheikh Dr. Sajid has also completed a PhD in Comparative Islamic Law with his postgraduate research focusing on the area of Liquidity Management and Financial Risk Management through an Islamic lens.
A common question today is asked about Riba: ''Is the Riba of today the same as that of yesteryear,'' because in today's age, Riba is seen as a privilege and certainly not oppressive. In this two-part series, we will shed some light on this dilemma across several discussion points.
A common question today is asked about Riba:
Does modern day interest still qualify as Riba? Because Riba is seen as a privilege that is not oppressive to the individual
In this two-part series, we will shed some light on this dilemma across several discussion points. By understanding Riba-based economies, we can appreciate the value of exploring alternative financial models that promote equitable and just economic systems.
In the modern financial landscape, interest is commonly defined as the monetary charge for the privilege of borrowing money. Interest is often expressed as a fiat unit amount, while the interest rate used to calculate interest is typically expressed as an annual percentage rate (APR). Interestingly, the idea of 'privilege' is attached to these interest-based transactions, an idea that starkly contrasts with Islam's worldview on the subject.
According to Islamic principles, wealth is considered the property of Allah Almighty, entrusted upon those holding it. As such, Islamic Law sets the boundaries that clearly differentiate fair transaction practices from oppressive ones.
Riba is an Arabic term which linguistically refers to "excess" or "growth". In English, it has been translated as both "usury" and "interest" by different authors. Riba refers to a system that necessitates an undeserved gain and creates overwhelming harm to individuals, society, and the economy. In this context, Riba is strictly prohibited in Islamic finance.
The 21st century has provided unfortunate opportunities for us to experience first-hand the oppressive reality of Riba-based economies and their harms. We will delve deeper into the adverse consequences and examine their implications in greater detail later in this discussion.
We come across the term "interest" quite often in our daily lives, whether it's through loans, mortgages, or our savings accounts. But what exactly is interest? Let's break down this financial concept.
There are two main types of interest: simple interest and compound interest.
Simple Interest: This is the most basic form of interest. It's calculated as a percentage of the initial amount borrowed or invested. Simple interest doesn't consider any interest earned over time. For example, if a person borrows £1,000 at a 10% annual simple interest rate for two years, they'd pay £100 in interest each year (£1,000 x 10% = £100), for a total of £200 in interest over the two years.
Compound Interest: This is a more complex form of interest because it considers not only the original amount borrowed or invested but also any interest that has been added to that amount. With compound interest, an individual earns or pays interest on both the principal and the accumulated interest. This can lead to faster growth of an investment or, in the case of a loan, a higher total amount to repay. Expanding on the above example, if a person borrows £1,000 at a 10% annual compound interest rate for two years, they'd pay £100 in interest the first year (£1,000 x 10% = £100), and £110 in the second year (£1,100 x 10% = £110), totaling £210 over the two years.
Why Interest Matters: Interest plays a significant role in our financial lives. When individuals take out loans or mortgages, the interest rate determines how much they will ultimately pay back to the lender. When we invest in savings accounts, bonds, or other investment vehicles, the interest rate helps us gauge how much our investments will grow over time.
It's essential to understand interest rates and how they affect the world around us, whether directly or indirectly. By grasping the concept of interest, we can make more informed choices and better manage our personal finances to avoid the pitfalls of interest.
A Note on Islamic Finance: While interest is a common feature of conventional finance systems, it is considered forbidden (haram) in Islamic finance. Islamic finance principles prohibit interest-based transactions, as they can lead to wealth inequality and economic exploitation. Instead, Islamic finance offers alternative financial instruments that promote fairness, risk-sharing, and social justice, such as profit-and-loss sharing, partnerships, and leasing arrangements.
The idea of renting money is unnatural to the laws of nature. Imagine an individual who has his surplus wealth in the form of a physical asset, say a horse, for example. He would incur the physical storage cost of the asset, and the horse's value would wane over time as it aged. Depending on the nature of the asset, the one holding it would encounter some sort of cost in doing so.
If the individual lent his physical wealth, the horse, usually one of two repayment terms may be asked for:
When we think about a rent for using money, we are essentially asking for both at the same time. A return for the horse as it left the owner and a charge for being able to use the wealth. An owner hoping for new wealth in addition to their non-depreciating asset which in turn would be converted to a non-depreciating asset sounds wonderful and an investors dream. However, in the physical world perpetual wealth creation from a single stock of non-depreciating asset will remain impossible.
Although Riba is commonly translated to interest, there are cases where that which we conventionally would call interest would not fall under Riba and cases where we would say a transaction contains Riba but would not include any interest as we know it. So, let’s have a deeper dive into the types of Riba.
In Islamic Law, the topic of Usury is listed to occur in two forms.
Debt-based usury entails interest charged due to a loan, either at the beginning of the transaction, as we find with home-based mortgages as an example, or at the end of the time period of the loan in the event of the borrower requiring extra time to pay off the loan, as we find with credit card-based transactions.
Debt-based Riba occurs in two types:
A. Interest for extension (zidnī unẓirka)
Interest charged in exchange for an increase for time to repay what is owed. This debt could be a result of borrowing interest-free or on a credit-based sale and was a common practice before Islam amongst the Arabs. We find this type of Riba prevalent in Credit cards, Buy Now Pay Later schemes & Overdrafts.
B. Pre-defined interest (Riba al-qurūḍ)
Interest charged from the outset of borrowing. We find this type of Riba prevalent in personal loans, mortgages & car finance agreements.
2. Sales-Based Transaction (Riba al-buyū)
The most defining elements of Sales-based Riba are Riba al-faḍl (usury of surplus) and Riba al-nasī’ah (usury of waiting). Riba al-faḍl involves the exchange of Ribawī items with different weights, amounts, or qualities at the same time. The transaction is taken on the spot and an exchange is done instantly with the only factors being the quantities or qualities of the commodities.
Riba al-nasī’ah on the other hand is an asynchronous transaction with regards to delivery and the quantities and qualities of the commodities remain the same.
The teachings of the Messenger (May Allah’s praise and blessings be upon him) list Riba-based wealth as two categories, as follows:
1. Gold, Silver, and any wealth considered similar. In today’s age, this would include fiat money, like dollars and pounds etc.
2. Dates, Wheat, Barley, Salt, and similar storable staples, such as rice in today’s age.
In Islamic jurisprudence these items are known as Ribawi items. According to Islamic law, trading Ribawī items must follow specific rules to avoid Riba (usury or interest), which is forbidden in Islam.
If a person gives someone one ounce of gold now and receives two ounces of gold a month later, that's a Ribawī transaction.
A Ribawī transaction is a type of trade that has one or both of the following features:
1. A surplus in the quantity of specific commodities traded with the same commodity. There's more of one thing traded than the other, like if you gave someone two dates and they only gave you one in return.
This rule does not apply on commodities traded with a non-similar commodity in either category. For example, trading Gold with Silver or Gold with Dates would not necessitate similar quantities. A failure to comply with this condition would result in Riba al-faḍl and would be prohibited.
2. There's a delay in one or both parties receiving what they're owed, like if you gave someone 1kg of Gold but they gave you 500g Silver in return in one week's time or gave someone 2kg of dates for 1kg of Barley in a week’s time.
This rule always applies between any Ribawī items traded with another in the same category, whether identical or dissimilar.
A failure to comply with this condition would result in Riba al-nasī’ah would be prohibited.
If wealth from one category is exchanged for wealth from another category; there are no rules that apply. This means it would be permissible to have a deferred exchange of 100g of silver for 4 kg of dates or 1g of gold for 10 kg of rice.
Having examined Riba from an Islamic lens, let's now turn our attention to understanding interest as it is commonly known in the conventional financial system.
Interest has a long and complex history, particularly in its relationship with religious beliefs and cultures through the ages. In Christianity, the practice of charging interest was initially viewed as morally wrong and prohibited. However, over time, this stance evolved, eventually leading to the acceptance of interest in modern financial systems and by the Church itself. Here is a brief overview of this transformation:
1. Early Christianity: In the early days of Christianity, the practice of usury, or charging interest on loans, was considered sinful and forbidden. This prohibition was rooted in various biblical passages, such as Exodus 22:25, Leviticus 25:36-37, and Deuteronomy 23:19-20, which discouraged the taking of interest from fellow believers in need.
2. Middle Ages: During the Middle Ages, the Catholic Church maintained its opposition to usury. Theologians like St. Thomas Aquinas argued that charging interest was morally wrong, as it constituted a form of double-charging for the same good. [1] Money, in their view, was a medium of exchange and should not be used to generate further wealth.
3. Rise of Trade and Commerce: As trade and commerce expanded throughout Europe, the demand for credit increased. This growth led to the emergence of alternative financial arrangements, such as partnerships and profit-sharing agreements, which circumvented the church's prohibition on usury.[2] Some financial institutions, like the Medici Bank in Italy, thrived during this period, with their operations often involving interest-bearing transactions.[3]
4. Reformation and Changing Attitudes: The Protestant Reformation in the 16th century brought significant changes to the religious landscape, including a shift in attitudes toward usury.
The rise of trade in Europe led to an increased demand for credit, which created pressure to find ways around the Church's prohibition of usury.
As a result, alternative financial arrangements emerged, such as partnerships, profit-sharing agreements, and the use of "hidden" interest rates.
Reformers like Martin Luther and John Calvin acknowledged the practical necessity of interest in a growing economy. While they did not wholly endorse the practice, they believed that moderate interest rates could be morally acceptable under certain circumstances.
5. Gradual Acceptance: Over time, the practical needs of burgeoning economies and the influence of new religious perspectives led to a more widespread acceptance of interest. Governments began to regulate interest rates, setting limits on the amounts that could be charged. This change legitimised the practice of lending and borrowing at interest within the view of the christians.
6. Modern Financial Systems: Today, interest is a fundamental component of modern financial systems, playing a vital role in loans, mortgages, investments, and more. While some religious organisations and individuals still express concern over the moral implications of interest, it is generally accepted by both Church and Christians in today’s financial landscape.
In summary, the evolution of interest in Christianity has been marked by significant changes over time. The initial prohibition of usury, rooted in religious teachings, eventually gave way to the acceptance of interest as a fundamental aspect of modern financial systems. Understanding this Historical context offers valuable insights into the development of contemporary financial practices and the role of eroding religious beliefs in shaping economic systems.
This concludes the first of our two part series on Riba. Stay tuned for next week, where we dive deep to discuss the ruling of Riba in Islam and its wisdom, the economic pitfalls of Riba and begin to gain a clear picture of how entrenched our society is in Riba today.
Sheikh Dr. Sajid Ahmed Umar holds a 3-year University Diploma in Arabic language and Islamic Studies, a Bachelors degree in Comparative Islamic Law and Jurisprudence Methodology. He also holds a Masters degree in Judiciary, and is a qualified Judge. Sheikh Dr. Sajid has also completed a PhD in Comparative Islamic Law with his postgraduate research focusing on the area of Liquidity Management and Financial Risk Management through an Islamic lens.
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