In the name of Allah, Most Merciful, the Bestower of Mercy.
All praise is due to Allah, Lord of all creation, and may the peace and blessings of Allah be upon our Prophet Muhammad, his family and all his Companions.
That which is prevalent in societies where the one who owes a debt and does not pay it on time is charged an increased sum so that he can have more time, then this is ribā (usury or interest) that is forbidden in the Shariah. This is the usury of the people of pre-Islamic ignorance―they would say to the one who owed the debt, “Either pay up or pay interest!” So Allah forbade that and said instead, “And if the debtor is going through difficulties, then grant him time until it is easy for him to repay.” (Quran 2:280) There is a unanimous agreement (ijmā’) upon the forbiddance of every transaction that tries to make this increase permissible.
It is forbidden to enter into a loan that involves increase: either a percentage increase annually (or monthly) or an unrestricted increase or a fixed increase. For example, a person loans someone £1000 under the condition that he repays him £1200 ― or at an interest rate of 5% per annum.
Student loans in the UK are forbidden (harām) because it is a clear and apparent interest-based (ribā) transaction. A loan is taken from a students loans company and repayments are made at RPI (Retail Price Index) plus 3% interest. RPI is a measure of inflation, and the 3% is what they refer to as interest, usually totalling 6.1% interest. After graduation, this is paid back in instalments over a period of time, as the interest plus RPI is continually being added. This is a ribā (or interest) based transaction and clearly forbidden in Islam by the Revelation and Ijmā’ (consensus).
Ibn Mas’ood narrated that: Allah’s Messenger (salallāhu ‘alaihi wasallam) cursed the one who consumes ribā (interest) and the one who pays it, the one who writes it down and the two who witness it, and he (salallāhu ‘alaihi wasallam) said: “They are all the same.” (Reported by Muslim, no.1598)
Below is the government statement of interest payable and a typical summary of accounts for a student loan:
(Click an image to enlarge)
There is a grave warning in the Qur’ān and Sunnah for those who deal in usury and interest (Ribā). Allah stated:
الَّذِينَ يَأْكُلُونَ الرِّبَا لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ الَّذِي يَتَخَبَّطُهُ الشَّيْطَانُ مِنَ الْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوا إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا ۗ وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا ۚ فَمَن جَاءَهُ مَوْعِظَةٌ مِّن رَّبِّهِ فَانتَهَىٰ فَلَهُ مَا سَلَفَ وَأَمْرُهُ إِلَى اللَّهِ ۖ وَمَنْ عَادَ فَأُولَٰئِكَ أَصْحَابُ النَّارِ ۖ هُمْ فِيهَا خَالِدُونَ
يَمْحَقُ اللَّهُ الرِّبَا وَيُرْبِي الصَّدَقَاتِ ۗ وَاللَّهُ لَا يُحِبُّ كُلَّ كَفَّارٍ أَثِيمٍ
“Those who consume usury will not stand on the Day of Resurrection except like the standing of a person beaten by Satan into insanity. That is because they say, “Trading is just like usury,” but Allah has permitted trading and has forbidden usury. So whosoever receives an admonition from his Lord and stops consuming interest may keep the profits of what has past. His affair rests with Allāh, but whoever returns to dealing in interest, such are the dwellers of the Fire, they will abide therein. Allah destroys usury and gives an increased reward for charity. And Allah does not like the disbelievers, sinners.” (Al-Baqarah 2:275-276)
Usury (Arabic: ribā) is an increase in gain to either one of the two parties in a transaction when trading the same currency or the same type of merchandise specified in the Prophetic narrations. Ribā or usury is forbidden by revelation and consensus (ijmā’). Paper money and currencies take the same ruling as gold and silver in transactions. For a more comprehensive discussion read: The Grave Crime of Usury and Interest: Ribā-based Transactions: What is Allowed and What is Not.
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