What is Riba?
The word “Riba” translates to increment, increase or growth. Under Islamic law, it is interpreted as usury, unjust or unfairly earned wealth, commodities or even services. In today’s day and age, it is difficult to avoid Riba, thanks to the vast lending economies and open trade channels, however, there are simple ways to change the way you manage your finances to ensure you are not accepting riba.
- Avoid Savings Accounts
When you deposit your wealth in a savings account, you are essentially allowing the bank to use your money for investing. In exchange, with a savings account, the bank provides you with an interest rate and pays you interest on the money you have stored in your account. This constitutes riba as you are increasing your wealth, albeit in a small percentage, via interest rates.
Switching from a savings account to a current account is the simplest way to avoid riba. Since current accounts do not provide you with an interest on your deposits, you are not accepting any usury payments for your wealth. However, keeping your money in a current account does not protect you from global inflation and your wealth will stagnate. It is easier to practice halal investment with Wahed to keep your finances healthy and growing without compromising on Islamic law.
- Credit cards
When you use a credit card you are borrowing money from the issuer of your card for payments. You eventually repay the borrowed money at the end of the month and if your payments are regular and timely, you are safe from riba. Credit card debts paid on time do not accrue any interest and essentially you are paying back the amount you have borrowed in its exact amount. This changes, however, when you fail to pay your debts in time.
The bank or financial institution charges interest on credit card debts when they are beyond the due date. By paying the bank interest on the amount you have borrowed, you are essentially paying riba. To avoid accepting or contributing to riba, it is advised to make all your credit card debt payments before the due date, or even better, avoid credit cards completely.
On the face of it, if you invest money in a company and are receiving payments in lieu of your investment, you are not accepting riba. However, this depends on the company that you have given your money to, as riba also depends on the services or practices that the company partakes in. For example, an investment in a bank goes against riba as you are providing the means for an institution to generate wealth via interest. On the other hand, investing with a water company or gas company that contributes to the community in a positive manner is well within the limits of riba.
Purchasing stocks and receiving dividends do not go against the rule of Islamic investment as you are essentially buying yourself a small amount of the company. Should the company generate revenue lawfully, you are entitled to a percentage of the increased value and revenue. The important part is to ensure that you are investing in companies that comply with Shariah and does not practice unlawful trade.