Avoiding Riba: A Guide to Keeping Your Investments Halal

Introduction

Riba, often translated as interest or usury, is strictly prohibited in Islam. It refers to an excess or increase in a transaction without just counter-value. The prohibition of Riba is a significant principle in Islamic finance.

The Qur'an condemns and prohibits Riba in several verses.

Surah Ali Imran states, "O believers, take not doubled and redoubled Riba, and fear Allah so that you may prosper".

This prohibition is rooted in the Islamic belief that Riba leads to exploitation, injustice, and strained relationships.

The economic impact of Riba is viewed as far-reaching and detrimental. Riba is seen as an instrument of human exploitation that affects every sector of the economy and harms socioeconomic equity.

Riba is believed to perpetuate unfairness by concentrating wealth among a few, leading to mass exploitation. It is also seen as a practice that discourages innovation, especially for small businesses.

For Muslims in Singapore, avoiding Riba is both a spiritual obligation and a financial challenge given the prevalence of conventional financial products.

From savings accounts to home loans, Riba often lurks in everyday transactions, making it essential to stay informed and proactive.

This article explores practical steps to identify and avoid Riba, offering Shariah-compliant alternatives tailored to the Singapore context. Whether you are just beginning your investment journey or transitions from conventional to Halal options, this guide will help you align your wealth management practices with Islamic values.

What is Riba and Why is it Prohibited?

Defining Riba

Riba is an Arabic word that literally means "increase", "addition", or "growth". However, in the context of Islamic finance, it refers to any unjustifiable increment in a loan or debt. Islamic jurists (Fuqaha) generally agree that Riba technically refers to the premium paid by a borrower to a lender, above the principal amount, as a condition of the loan or for extending its maturity.

Some erroneously equate Riba solely with interest, however, the term Riba is aimed to describe a wider concept including interest, even covering unequal exchange of goods.

Types of Riba

Islamic scholars categorise Riba into different types, with two primary classifications:

Riba al-Nasiah (Riba of Delay): This involves an excess charged in a loan due to the time factor. It occurs when there is a delay in repayment, and a premium is charged for that delay.

Examples of Riba al-Nasiah:

• Basic Scenario: Person A lends person B $1,000 with the agreement that person B will repay $1,100 after one year. The additional $100 is Riba al-Nasiah because it is an excess charged due to the time given for repayment.

• Default and Extension: A owes B RM1,000 due on January 1st. A cannot pay on that date, so B allows A to delay payment until February 1st, but A must pay him RM1,200 instead of RM1,000. the additional RM200 constitutes Riba al-Jahiliyyah, which is a type of Riba al-Nasiah.

• Mortgage/Credit Card Interest: Conventional mortgages or credit card balances that charge interest over time.

• Late Payment Fees: While some late payment fees may permissible under certain conditions, those that are simply interest charges for delaying payment on a debt would be considered Riba al-Nasiah.

Riba al-Fadhl (Riba of Excess): This relates to the unequal exchange of goods of the same kind. It involves the exchange of a commodity for another of the same type but in unequal quantities.

The Prophet Muhammad (peace be upon him) explicitly prohibited unequal exchanges, stating:

"Sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver, sell dates in exchange of equivalent dates, sell wheat in exchange of equivalent wheat, sell salt in exchange of equivalent salt, sell barley in exchange of equivalent barley, but if a person transacts in excess, it will be usury (Riba)."

Examples of Riba al-Fadhl:

• Gold to Gold: Exchanging gold for gold but not in equal measure (e.g., trading 1 ounce of gold for 1.1 ounces of gold) violates the principle of equivalence.

• Dates for Dates: Selling good quality dates for a larger quantity of poor-quality dates. The key is that the exchange must be equal in quantity and made on the spot.

Islamic References on the Prohibition of Riba

The prohibition of Riba is deeply rooted in the Quran, Sunnah, and scholarly consensus (Ijma).

• Surah al-Baqarah (2:275-281) discusses the consequences of dealing with usury and emphasises the importance of adhering to Allah's command.

• Surah Ali Imran (3:130) explicitly instructs believers not to consume Riba, multiplied and redoubled.

• Surah Ar-Rum (30:39) indicates that wealth does not increase in Allah's sight.

The Prophet Muhammad (peace be upon him) strongly condemned Riba in various Hadiths. He cursed those who accept interest, pay it, record it, and witness it, stating they are all equal in sin.

Rationale Behind the Prohibition

There are several reasons why Riba is prohibited in Islam:

• Exploitation and Injustice (Zulm): Riba is seen as a form of exploitation where the lender benefits without sharing in the risk.

• Discourages Benevolence: Islam encourages acts of charity and kindness, whereas Riba is seen as a selfish practice that prioritises monetary gain over human welfare.

• Economic Stability: Riba can lead to wealth concentration and economic instability, as it allows the rich to exploit those in financial need.

• Ethical and Spiritual Growth: Engaging in Riba is considered a sin that hinders spiritual growth and weakens one's relationship with Allah.

Clarifications and Considerations

Riba vs. Trade (Bay'): The Quran differentiates between trade and Riba, permitting the former while prohibiting the latter. Trade involves the exchange of goods and services with mutual benefit and risk-sharing, whereas Riba involves a guaranteed return on money lent.

Identifying Common Riba-Based Financial Products in Singapore

To avoid Riba in Singapore, it is important to steer clear of financial products that involve interest. However, when faced with genuine necessity and no alternative options exist, conventional products may be temporarily allowed.

Conventional Home Loans:

Most mortgages for HDB flats and private properties include interest payments. Borrowers repay more than the principal due to interest charges, directly involving in Riba. In cases of necessity (e.g., urgent housing needs), scholars may permit conventional loans temporarily, provided alternatives are actively sought.

Conventional Savings Accounts and Fixed Deposits:

Regular savings accounts and fixed deposits earn interest on your balance. While this might seem beneficial and has been the norm in the conventional financial system, earning interest is considered Riba, as it profits from money alone without underlying assets or services. Direct alternatives include Islamic savings accounts and fixed deposit accounts offered by Maybank and CIMB.

Personal and Car Loans:

These conventional loans come with interest rates, meaning you will pay back more than you borrowed. Engaging in such interest-based loans involves Riba and can lead to debt practices discouraged in Islam.

Credit Cards:

Using conventional credit cards can result in accruing interest if balances are not paid in full. Even with timely payments, unexpected expenses might lead to interest charges, entangling you in Riba.

Investment Products:

Many conventional investments, like bonds and certain stocks, generate returns through interest or involve companies not adhering to Islamic ethics. For example, government bonds pay regular interest, such as Singapore Savings Bonds (SSB) that pays interest every six months, and some companies operate in non-halal industries. Consider Islamic investment funds of Shariah-compliant ETFs to invest without compromising your values.

Insurance Policies:

Traditional insurance often includes elements of Riba (interest), Gharar (uncertainty), and Maysir (gambling). Premiums paid without guaranteed returns introduce uncertainty, and interest arises when companies invest these premiums. Takaful, an Islamic alternative, operates on mutual risk-sharing and avoids interest.

How to Transition from Riba-Based Investments in Singapore

Transitioning from Riba-based (interest-bearing) investments to Halal alternatives can seem daunting, but with careful planning and guidance, you can align your finances with Islamic principles.

Here is a step-by-step guide to help you make the shift:

Understand the Importance of Avoiding Riba

• Recognise the Impact: Riba has adverse effects on economic equity and social well-being. It can lead to wealth disparities and unjust financial practices.

• Ethical Commitment: Emphasising the ethical dimension of avoiding Riba promotes a more equitable society and aligns your finances with moral values.

Evaluate Your Current Portfolio

• Identify Riba-Based Products: Review your financial holdings to pinpoint products that involve Riba, such as conventional savings accounts, fixed deposits, interest-bearing loans, and certain investment products like bonds.

• Assess Necessity: Determine if any Riba-based products are due to necessity and if viable alternatives exist.

Consult an Islamic Finance Expert

• Seek Guidance: Consult with qualified and learned Asatizah on the topic of Islamic finance, or local institutions.

• Gain Knowledge: They can provide personalised advice and educate you on Shariah-compliant financial practices.

Explore Shariah-Compliant Alternatives

• Islamic Banking Services: Explore banks offering Islamic banking options in Singapore, such as Maybank Islamic and CIMB Islamic.

• Halal Investment Platforms: Consider using certified Shariah-compliant platforms which offer ethical investments tailored for Muslims.

• Shariah-Compliant Products:

  • Savings Accounts: Islamic savings account operate on profit-sharing models rather than interest.

  • Financing Options: Products like Murabaha (cost-plus financing) and Musharakah (partnerships) are alternatives to interest-based loans.

  • Takaful Insurance: Replace conventional insurance with the available Takaful alternatives, which is based on mutual cooperation and shared responsibility.

Gradually Transition Your Investments

• Close Riba-Based Accounts: Begin phasing out conventional accounts and products involving interest.

• Reinvest in Halal Options: For example, if you have a fixed deposit earning interest, withdraw the funds upon maturity and reinvest them in an Islamic fixed deposit or Sukuk (Islamic bond).

Practice Informed Decision-Making

• Thorough Research: Before investing or using financial products, thoroughly explore and understand their features to ensure they are Shariah-compliant.

• Avoid Speculation: Avoid speculative (Gharar) transactions, such as derivatives trading, which involve excessive uncertainty.

Increase Public Awareness and Community Engagement

• Educate Others: Share information about the importance and availability of Islamic finance through social media, community events, or discussions.

• Promote Ethical Finance: Encourage institutions to offer more Shariah-compliant products by demonstrating demand.

• Align Finances with Faith: Recognize that adhering to Islamic financial principles not only enhances spiritual devotion and ethical conduct but also contributes to community welfare.

Maintain Authenticity in your Financial Practices

• Balance and Adaptation: While committing to Islamic principles, be open to necessary adaptations that comply with Shariah law without compromising on authenticity.

• Support Islamic Finance Growth: Your participation aids the sustainable development of Islamic finance in Singapore.

Conclusion

By understanding the detrimental effects of Riba and actively transitioning to Halal alternatives, you align your financial practices with your ethical and religious values. This alignment fosters personal spiritual growth and supports Singapore’s growing ecosystem of ethical Islamic finance.