Are Student Loans Haram?
Since student loans were first introduced in the United Kingdom in the 1990s they have proven to be problematic for Muslim students. The primary reason for this is that student loans incur interest - something that is prohibited in Islam under Sharia rules.
For many Muslim students who want to be compliant with Sharia laws relating to financial transactions, taking out a student loan is not seen as a viable option.
Riba In Islam
The literal Arabic meaning of the word riba is 'increase', 'growth', 'excess', or 'addition'.
According to Sharia laws, an increase of a debt owed or repayment of a loan is considered to be riba, or interest. This is strictly forbidden in Islam. Both the payment of interest and the receipt of interest payments are considered to be contrary to Islamic Sharia rules.
The reason Islam does not permit interest is that it is considered to be a means through which the poor remain poor, and the rich get richer. There is considered to be an inequality between the parties and within the transaction.
Riba is generally deemed to increase the gap between the poor and the rich in society and this goes against Islam and the social responsibility message that permeates Islam.
Student loans within the UK are currently repayable with interest, so this creates a dilemma for Muslim students.
Interest And Student Loans
As student loans require repayments that incur interest, many Muslims deem them to be an unacceptable way of funding their higher education goals.
There has been a great deal of debate within the Muslim community about student loans and the issue of riba.
Islamic Concept Of Finance
One important thing to note for anyone considering taking out a student loan is that traditional western banks and lending organisations treat money solely as a commodity in business.
By contrast, in Islam, money is considered to be a medium of exchange with a measure of value only.In Islam, money performs a social role.
The value of the money is stored within it, not outside it. This is one of the primary reasons riba / interest is not permitted.
Student Loans - History
Student loans have had a variable history. In the 1960s, 12% of school leavers went on to university. This represented 1 in 10 students. There was no such thing as student loans in the 1960s. University fees were actually paid fully by local education authorities. Students left university with little to no debt.
In addition to having fees paid, university students could also apply for a means tested annual grant to cover their living costs.
In the 1970s the number of school leavers attending university increased slightly to one in seven. By the end of the decade, this figure had dropped again as there was a squeeze on university funding.
The 1980s saw a huge increase in the numbers of students wanting to go on to higher education. The then education secretary, Kenneth Barker, pushed for higher numbers of young people to attend university and increase their skill sets.
By 1990, one in five school leavers was attending university. However, the maintenance grants had not increased by much, so in 1989 the Tory government introduced student loans akin to mortgages. These loans were to account for having no increase in the annual student grants and were intended to bridge the gap between the funds available and the increased cost of living. Grants of up to £2265 were available on a means tested basis.
Higher education and university entry really saw a boom period in the 1990s onwards. More and more young people were going to university and the number of courses available increased.
The Labour government got rid of the grant in 1997 and replaced it with a new policy and system whereby a £1,000 means tested tuition fees was available, alongside low cost loans.
By the early 2000s, many more young people were attending university. The Labour government pledged to raise the percentage of young people going to university to 50% and they wanted to make sure students had an incentive to study further. Tuition fees amounted to £1,100 per year, and this was offset by loans of up to £3,950.
In 2006, tuition fees were raised to £3,000 per year which become payable once students graduated and were earning above £15,000 per annum. Students were informed that the repayments were to be made on the 9% of income over the relevant threshold, with inflation-only interest rates.
Coming to modern day student loans, tuition fees are currently £9,000 per year and additional loans are available that could amount to over £12,000. This means that an average university student who undertakes a 3 year degree will come out of it owing a considerable debt. This debt accrues interest.
In the United Kingdom, it is the Student Loans Company that administers and monitors student loans. The Student Loans Company is the organisation that calculates the amount payable to individuals and ensures the payment reaches the right bank account.
INTEREST ON STUDENT LOANS - IS THIS RIBA?
Opinion is divided about whether student loans are considered to be halal or haram.
There are some Islamic scholars who believe that student loans are inherently haram and non Sharia compliant as they incur interest. However, there are also scholars who have the opinion that student loans are halal.
Let's have a look at the arguments for and against student loans.
Fatwas That Deem Student Loans To Be Haram
The Al Qalam Institute did its own research and issued a fatwa relating to student loans and their permissibility for Muslim students. The issue they looked at in detail was whether the repayment of the student loans was commensurate with inflation rates, or whether the repayments incurred 'bolt on' interest payments.
The research the Al Qalam institute undertook concluded that the student loans at the time of the fatwa (2013) were deemed to incur riba. This meant that student loans were contrary to Islamic laws relating to finance and loans.
The reasoning behind the judgement was that student loans DID attract riba and were not simply attracting inflation based increases in repayments.
According to the Institute, irrespective of the need for the loan (ie to further a person's education, knowledge, and prospects), if a loan incurs interest then it is prohibited.
There is still a great deal of ongoing debate amongst scholars about whether the loans are strictly linked to index price/inflation raises or whether they do actually incur interest outright.
It is likely the debates will continue for some time until any consensus is reached.
Arguments And Fatwa In Favor Of Permitting Student Loans
There are, however, other schools of thought that have the opinion that by their very nature, student loans do not fit the traditional definition of a loan.
Some Islamic scholars have raised the question of whether student loans do in fact incur riba and whether they should fall under the definition of what a de-facto loan is.
The reasoning behind this argument is that any student who obtains a student loan will never fully take ownership of the loan amount.
The student loan itself is seen as an investment towards a future of learning.
As the bulk of the student loan is given straight to the university or institute of higher education, the student never actually receives full ownership of the money. Without ownership it is questionable as to whether student loans are actual loans under Islamic finance principles.
In addition to the above, it can be argued that as the loan only becomes repayable once a student earns over a certain threshold, there is no automatic interest based repayment.
Shaykh Dr. Haitham al-Haddad has issued his own fatwa relating to student loans. It is his opinion that taking out a student loan is permissible. He maintains that no riba is involved in the student loan transaction.
Shaykh Dr Haitham al-Haddad has researched this issue at length and concluded that student loans within the UK are permissible under the rules of Islam.
The Shaykh raises the following points to note when arguing that student loans are halal:
- the student never receives the full loan amount
- the student does not have full control of where the money is spent nor is there any element of profit
- the loan is eventually written off (cancelled if you die)
- the minimum earning threshold applies before any repayment is due
According to the Shaykh, the points mentioned above render the student loan as an entity that is different from the traditional loan, or qard.
The element of human ownership is not fulfilled as the monies are paid (mostly) directly to the university in lieu of tuition costs.
Of course, opinions on this issue continue to remain divided.
Students are encouraged to undertake their own research and due diligence.
Want Versus Need
Some scholars are of the opinion that there will never be a clear cut answer on whether student loans are considered to be halal or haram.
However, students should always consider whether their desire to pursue further education is a want or a need. If university is seen as a want - that is, it is not essential - then taking out extensive student loans might not be a good idea.
However, for those people who have no choice but to go to university such as doctors, lawyers, and dentists, perhaps there is an argument to say that there is a real need.
Not everyone who attends university is entitled to a bursary or scholarship and it would be a shame for these students to miss out on learning or advancement.
What is clear is that many Muslim students (and parents of students) have felt unable to access Sharia compliant and appropriate student finance. This has affected their employment prospects and their career progression.
Whatever your view of student loans, the UK does need to identify and create solutions that are accessible for Muslim students.
Conclusion
Ultimately, when deciding if student loans are halal or haram. students should be doing their own research on whether they feel comfortable taking out student loans.
Always seek out the knowledge of experienced and knowledgeable scholars. Use a website that you trust to find out more information, and read the opinions and advice of scholars who have researched the topic extensively.
Whilst not all Islamic scholars agree on whether student loans are halal or haram, what is clear is that the subject is still open to debate. Perhaps this is the reason that more and more universities are directing their Muslim students towards Sharia compliant loans and finance options.
In addition, the Federation of Student Islamic Societies, and the National Union of Students have been working collaboratively with the government to find alternative finance solutions for Muslim students who do not want to go down the traditional student loans route.
In the meantime, it is worth having a look at the various scholarships and bursaries available. These could be an alternative form if financing but it is rare to find one that will cover a full university course plus living costs.
In addition to this, many UK banks offer interest free current accounts up to a certain limit so it is also worth checking these out.
The UK government has been looking into having an alternative financing option for Muslim students to ensure that they have access to higher education.
In 2014, the government approved a non-interest based student loan model, and this is still under review.
However, in June 2022, the Federation of Student Islamic Societies reported that a date has been finalised for the non-interest based student loan and it would be available in 2025.
Until then, of course, the most beneficial course of action would be to seek out halal funding options. There are service providers available who provide Sharia compliant loans and products. In addition, there are some Muslim charities who will fund higher education.
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Unsecured loans are popular with businesses looking to raise money. The borrower receives a lump sum of cash, from their bank or other lender, and they repay it over a number of months or a few years. The money is put to work in the business and if all goes well, it should help generate revenues and profit that enable repayment of the loan plus any associated costs.
What is an unsecured business loan?
An unsecured business loan is where a business borrows money without providing security. This security is usually in the form of an asset, such as a building or valuable piece of equipment, which the business owns. This asset becomes a form of guarantee to the lender. Should the business be unable to repay the loan, the lender is given the right to take control of the asset and use it to recover some or all of the debt - typically by selling it.
An unsecured business loan is not linked to an asset in this way, which means the lender is taking a greater risk. If the business can't afford to repay the debt it will be more difficult for the lender to get the money back.
In recent years, it's become common for company directors to sign personal guarantees when taking out an unsecured loan. This gives the lender more confidence they have some recourse should the business become unable to make repayments.
Reasons for taking an unsecured business loan
One of the main reasons why businesses borrow is to fund growth plans. This growth requires investment in advance - it could mean opening a new office, hiring new staff or purchasing new equipment. Many businesses don't have the working capital needed for such investment, meaning they need to find a way to raise the funds. An unsecured loan is a common choice.
As part of the growth plans the business owner will usually have prepared a business plan. This sets out how they intend to spend the capital they have borrowed and includes a budget for repayments.
If a business wants to borrow because it faces cashflow difficulties in its daily operations, it's unlikely to be approved for an unsecured loan. Before they agree to make a loan, potential lenders will perform a series of checks on the business and business owners, in order to assess the credit risk. This includes looking at the firm's credit history, its credit rating, and reviewing information supplied by the business such as financial accounts, budgets and cash flow projections. These checks help the lender to quantify the financial health of the business.
For businesses facing short-term cash flow problems, other forms of funding could be more accessible, such as invoice finance or merchant cash advances.
Benefits of an unsecured business loan
Ideal for smaller amounts - Unsecured loans are typically for smaller amounts, usually less than around £15,000.
Quicker to arrange - Because the amounts are smaller and there are no assets involved, the legal and financial application processes are faster. It's often possible to arrange an unsecured loan in just a few days.
Good for businesses with trading history - Finance providers look more favourably on businesses and owners who can demonstrate a history of growth over a number of years. Such businesses will have a better credit score, because they have managed their finances well.
Assets not put at risk - An unsecured loan leaves control of all the assets with the business.
Alternatives to an unsecured loan
While they can be a convenient way to raise money for your business, an unsecured loan is not always the most cost-effective solution, as the fees tend to be higher to reflect the risk to the lender. These loans can also be hard for startup businesses to access, because they lack the trading history needed to demonstrate creditworthiness.
Alternatives to unsecured loans include:
- Equity finance, such as funding from an angel investor or venture capitalists.
- A private loan, from friends or family.
- A secured loan.
- An overdraft facility with your bank.
- A mortgage on property.
- A startup loan, designed for very new businesses.
- Peer-to-peer crowdfunding.
The range of funding options continues to increase, with a growing number of fintechs bringing innovation to the business finance market.
Funding for growing businesses from Qardus
We help business owners get access to growth finance. The funding we provide is of between £50k and £200k on terms of between 6 and 36 months.
You can use this finance for a variety of business purposes, such as purchasing new equipment or other assets, hiring and training new employees, investing in improved processes or boosting your inventory. Our funding allows business owners to invest for growth. Because we want to see businesses do well, we work with firms that have a proven product and a strong management team.
Our clients are drawn from across the UK, operating in different industries. What they have in common, in addition to their growth ambitions, is a commitment to the wider community, good governance and strong ethical principles.
The funding we provide is certified Sharia-compliant, meaning it's operated in line with Islamic finance principles. This does not mean it's only available to Muslim-owned businesses. Many of our clients are outside the Muslim community but they share our values, and operate in industries we are open to supporting.
If your business is looking for growth funding that's fast, affordable and ethical, get in touch with us today.
The United Kingdom is going through a turbulent financial and economic situation. Coming out of the pandemic, navigating the financial landscape and the economy has resulted in the highest inflation we have seen in decades, alongside stagnant wages and rises in energy bills.
The cost of everything is increasing and it is ordinary people who are struggling. From the National Health Service, to the private sector, and across every community we are all feeling the pinch.
Whilst we expect the government to ensure there is sufficient funding and investment in communities, families, and industries, what is clear is that we all need to be taking steps to minimise the risk of financial losses.
Whilst the government seems more focused on climate action, decarbonisation, and reducing emissions than effective financial planning, as individuals we need to take responsibility for our own actions.
Now is the time for us to be examining out own finances and expenditure.
As we move forward into 2024 and beyond there are some key steps you can take to make sure you are in the best financial position you can be.
Get Informed
Before we move on to the steps we can take to improve our finances, we need to consider our own financial literacy.
As individuals and communities we need to prioritise learning about and understanding finance. Prepare for the future by taking the time to learn about the key principles around money and money management. Learn how interest works, and why it is deemed to be haram in Islam.
As consumers, we need to scrutinise and assess our impact on our finances and understand how we spend and save.
The more information you have the better. The worst thing you can do is bury your head in the sand.
Start by getting details of all your bank accounts, savings, direct debits and debts. Understand your incomings and outgoings and make sure you are living within your means.
One of the key principles of Islam is to live within your means. This encourages people to be mindful of how they consume and spend, and to avoid extravagance.
There are also stringent obligations to ensure that you stay away from riba (interest) and haram spending. You cannot do this properly unless you understand your finances fully.
Knowing your finances means you can avoid haram practices. Also, in order to plan effectively for the future you need to understand how your money is saved, whether it accrues interest, and how much you can save each month.
There is ample information and advice on this website to guide you along the way. In addition, technology is so advanced that these days we can check all our accounts and finances using our mobile phones. As a result, you can keep a close eye on your finances.
Focus On Sustainable And Responsible Consumption And Investing
Focusing on sustainable and responsible consumption is key for everyone, but especially Muslims who want to live in a Sharia compliant way. Islam encourages ethical and socially responsible behaviour in every area of life.
We are required to make a commitment to being sustainable and responsible. Over-consumption goes against Islamic finance principles.
Some of the best ways of achieving a more halal and sustainable level of consumption include:
- The concept of amanah
- Islam considers money and wealth to be an amanah from Allah. What this means is that Muslims act as stewards of the wealth and will be held accountable for how they use and spend it. Sharia rules guide us to use the wealth in morally and ethically sound ways, and Islamic finance provides us with the structure in which to do this. The construction of Islamic finance principles helps us to make sure we operate within Islamic principles when it comes to our finances. In personal terms, it means that we should be more considered and careful with our finances, avoiding excessive spending, and always taking care to mind our money.
- Avoiding waste
- Any kind of waste should be avoided, and this includes wasteful purchases and spending. Responsible consumption aligns with the principle of stewardship. Keep an analysis of what you spend on and how you spend and you will be able to identify and report on poor spending and then eliminate it.
- Avoiding haram but invest wisely
- As Islam prohibits actions that cause harm to others, we need to be mindful of any spending that is deemed to be haram. This includes investing in industries that are haram such as gambling, alcohol and porn industries. Instead, we should look at halal investment options and services.
- There is a huge social impact to investing in haram industries. Be mindful of where your sums are stored and being invested. The corporate world may be focused on profits, but there are socially responsible and Sharia compliant industries you can invest in. There is also increased regulation and protective policy of most investment options across the United Kingdom which means you can be assured that your money will be safe.
Think Long Term
As mentioned above, try and think long-term. When it comes to your finances, whilst it may seem like you are living from one pay day to the next, there are some small steps you can take to plan for the future. As the old saying goes - fail to prepare, prepare to fail.Planning ahead can relieve the pressure you face tomorrow. The market is fluctuating and temperamental now but it will not always be like this.
Planning ahead builds financial stability and means you can cope with emergencies when they arise. Think of the scenario of when you are much older and unable to work as hard.
Living from one pay day to the next can result in more and more people turning to debt and credit to cover their everyday expenses. Long-term financial planning helps break the cycle of debt. The UK has an ageing population, so it is even more important that we plan ahead and make the right financial decision for our future.
Here are some steps you can take to effectively plan ahead:
- Set some financial goals: these do not have to be complicated or difficult. Instead, they should be realistic. For example, one goal could be to start saving for a home.
- Create a budget: once you have a goal, go through all your financial data including incomings and outgoings. Try and track your spending to see where you can cut back and what you can do cheaper. This will help you identify any spare funds for saving. Even £5 a month will help.
- Have an emergency fund: to stop yourself from falling into debt, try your very best to have an emergency fund.
- Save and invest regularly: consistent investing, even with the tiniest amounts, can accumulate over time. When dealing with the increasing cost of living, we need to have some money set aside for emergencies.
- Ditch the debt: overspending is one of the fastest ways to end up in debt. If you are in debt there is help and support out there, so reach out and see if you can reduce your debt and lower your spending.
For Muslims, financial literacy means they can plan and prepare responsibly. It also means they can account for their zakat payments which are obligatory.
Embrace Islamic Finance Principles
Muslims are obliged to follow the Sharia rules relating to finance. For Muslims, true success comes with pleasing Allah.
Embracing Islamic finance principles is extremely important for those wanting to be compliant with Islamic rules relating to financial dealings, but also for those wanting to live and manage their money responsibly.
Islamic finance prohibits any form of interest - that includes payment of interest or receipt of it. The whole idea behind avoiding interest is that this creates a fairer society and does not burden one group more than others. Interest is seen as being rooted in unethical and irresponsible economics.
Islamic finance is based on social justice and fairness. Islam places great emphasis on ethical behaviour, through choice. This means there is an obligation on Muslims to treat all their social and economic dealings with care.
Another key concept from Islamic finance is the idea of profit and loss sharing. Sharia rules encourage profit and loss sharing arrangements. This is to ensure that both parties are treated fairly.
For Muslims looking to save costs and stay away from debt, focusing on Islamic finance rules means they can operate Islamically but also in a way that maximises their money and makes it go further.
Establish Zakat And Sadaqa
Establishing zakat and sadaqa are critically important in Islam. Zakat is an obligation upon all Muslims, whilst sadaqa is voluntary but hugely encouraged.
In order to pay your zakat you need to understand your finances fully. Calculating and paying zakat on an annual basis is essential for Muslims.
Working out your zakat requires an important wealth assessment and analysis calculation. What it means is that through the whole year you are more conscious of your spending and you are making plans for the payment of zakat.
Zakat encourages people to be aware of their financial assets and situation. This prevents the problem of not knowing how much zakat you need to pay.
Understanding the importance of zakat and sadaqa actually encourages savings throughout the year. It also helps people to budget and plan accordingly. Also, by paying zakat people are able to understand the importance of distinguishing between needs and wants in their own lives.
Sadaqa, whilst voluntary, generates a feeling of generosity, compassion and empathy. By willingly sharing our wealth with others it means we are attuned to the needs of others and can budget accordingly.
Stay Away From Debt And Interest
Now is the time to really understand and analyse your spending habits. Make more informed choices about where to spend and save your money. This encourages a more balanced and moderate lifestyle.
Managing your debt is always a good risk management strategy. If you have a credit card then try and stop using it and clear any debt you owe. Credit card debt carries high interest rates and is deemed haram.
Staying away from debt is one of the best financial decisions you can make for yourself. Debt can lead to financial strain, and negatively impacted credit scores. It also means you have overall less disposable income from jobs, and this limits you being able to set goals, save and invest for the future. This will give you greater peace of mind when preparing for the future.
Qardus Ltd do not provide financial or investment advice. It is recommended that you seek your own independent advice from a qualified professional.
The United Kingdom, and in particular London, has become one of the leading voices and stages for the development of Islamic finance. As the global Islamic finance industry has grown, London has emerged as one of the leading Western markets offering and improving Islamic finance services and products.
One of the key reasons for the investment and development of the Islamic finance market in London is to ensure that the finance markets and industry is able to keep pace with the emerging and dynamic markets in the Muslim centred Middle East region (Dubai and the UAE included).
The Islamic Finance Industry
There are other reasons Islamic finance has really surged ahead in London, and they include the importance of financial inclusion and providing access to funding and finance to those looking to invest in the economy without compromising their beliefs.
The UK is not the only country that is fast developing its Islamic finance reputation, regulation, and provision. Most European countries also offer Islamic finance products and services to individuals and companies.
What has become clear is that Islamic finance has enabled many people from diverse backgrounds to trade, invest and operate a business in the West. This can only be a good thing for the economy and when it comes to financial inclusion.
Interest, Profit Sharing And Risk Management
Many Muslims only use the Islamic finance system so that they do not have to pay interest and can trade and deal with any income, savings, investment strategy, and asset they own in a Sharia compliant way.
The result is that the Islamic finance industry is booming and entering the mainstream finance industry.
Islamic finance has opened up and increased the scope of investment options for investors wanting to raise or build capital, property and other assets.
In addition, the profit and risk sharing element of Islamic finance transactions and contracts are growing in appeal to a much wider audience. The first Islamic finance bank launched in the UK in 1982 - the Al Baraka Bank. Since then the Sharia compliant market has seen growth on a huge scale with Islamic finance products available in trade finance, project finance and real estate.
The Islamic sukuk (bond) market in the UK started around 2007 and has continued to grow. In 2014, the UK government was the first to issue sovereign sukuk.
Understanding Islamic Finance - Knowledge Matters
Many financial experts and researchers have become knowledgeable about Islamic finance and how it operates. In order to offer financial services and products that are Islamic finance and Sharia compliant, there needs to be a good depth of understanding relating to Islam and its principles and rules.
Islamic finance has proven to yield competitive and attractive rewards, and Islam's core underlying principle relating to social justice and equity is becoming more attractive to Muslim and non-Muslim customers alike.
The focus on risk sharing and collaboration between the parties means transactions are more transparent and fair. This in turn creates more stable investment options in volatile markets and economies.
Uk Leading Western Islamic Finance Centre
A recent report from The City UK has stated that the UK is the leading Western centre for Islamic finance. In 2021, the Islamic finance banking asset market was said to be worth approximately $7.5bn.
In addition to general Islamic finance products, Islamic fintech is also growing rapidly in the UK and Europe. The strong regulatory support from the UK government has led to an increasing number of Sharia compliant fintech services.
The UK has also been able to reach attract a large number of professionals with Islamic finance knowledge and expertise.
The growing Muslim population in the UK, the vast majority of whom are young professionals with capital, further strengthens the UK's resolve to continue developing its Islamic financial services market.
London Stock Exchange
The London Stock Exchange (LSE) is one of the leading exchanges for sukuk listings.
In addition, The UK has become one of the world's biggest providers of Islamic finance education. There has been a recent surge in the number of Islamic finance courses and qualifications available to those wanting to expand their knowledge and work in this field.
What is driving this demand for Islamic finance services is private sector initiatives. This coupled with support from government policy and compliance rules has provided a solution for those investors and businesses looking for financial services that are compliant with Islamic finance rules.
Investment
If the UK wants to continue to strengthen its position and status as a leading international centre for Islamic finance then it needs to continue to invest in the Islamic finance market.
This will require the development and progression of the right financial infrastructure and ecosystem to support the industry. It is forecasted that the Islamic finance assets under management are likely to double over the next decade.
The UK is well placed to grow its Islamic finance market and offerings. However, this must be done in line with Sharia rules relating to finance without cutting corners and innovation which could lead to non-compliance. More investment needs to be made in research relating to how Islamic finance operates so that any investor is reassured that their Islamic values are not being compromised during financial transactions.
The growing confidence in the Islamic finance market in the UK has attracted investments in regeneration projects and infrastructure - thereby directly benefiting society as a whole.
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