Answered by Shaykh Faraz A. Khan
Question: I have been using a micro finance website to loan money to small home business owners without capital for business. What I have found recently is that the local micro finance company would charge the business person taking the loan anywhere from 15-25% on top of the original loan amount.
From shariah point of view is it okay for local micro finance company to charge extra to cover their expenses and get some profit on top of that?
Answer: Assalamu alaikum wa rahmatullah,
I pray this finds you in the best of health and states.
Such a transaction is unlawful, as the 15% markup is usury (riba). According to the Sacred Law (sharia), a loan should have no markup at all, but rather only the same amount lent is owed back upon the due date.
For the wisdom and rationale of the prohibition of riba, please see the following treatise by Mufti Taqi Usmani: http://www.albalagh.net/Islamic_economics/riba_judgement.shtml#Top
You may want to pay particular attention to the sections entitled: “Rationale of the Prohibition of Riba”, “Nature of Money”, “The Nature of Loan”, and “Overall Effects of Interest”.
It clarifies that according to Islam, money is not a commodity and hence no profit can be made off a loan. Moreover, the nature of a loan is that is an act of charity, not a commercial transaction. And finally, the harms of riba — to both individuals and societies — are serious, manifest, and very real. One need only reflect briefly over the current global financial crisis to appreciate the harms of riba.
And with respect to the impact of interest-based micro-loans on small-business debt, one can read about daily farmer suicides in India, which has been termed by the media as “India’s Micro-finance Suicide Epidemic.” This is a serious catastrophe and a social justice matter. Our community must not only abstain from such injustice, but also provide viable alternatives for these people, based on the prophetic way of mercy and justice.
And Allah knows best.
Faraz A. Khan
Checked & Approved by Faraz Rabbani