Is a Loan That Charges a 1% Fee for Lending Permissible?

Answered by Shaykh Muhammad Carr

Question 

For a student visa, a student must demonstrate financial stability by showing a certain amount of money in their bank account. Often, students do not have the total required amount. In such cases, the bank employs a method in which the student deposits 10% of the total amount needed while the bank covers the remaining 90% through a loan.

To facilitate this, a third party lends the student $27,000 for one day and charges a 1% fee on the loan amount, which comes to $270. The question arises whether charging a 1% fee for lending money for one day is halal.

ِAnswer

In the Name of Allah, the Most Merciful and Compassionate.

I pray you are in good faith and health. Thank you for your question.

Interest is a stipulated positive return over and above the principal amount owed. [Khatib, Mughni] Charging a 1% fee for lending money is considered interest (riba) and is, therefore, haram. The rule is that Interest is prohibited regardless of whether it is charged for a day or a longer period.

An alternative is for the third party to lend the money to the student without any charge (qard hasan), while imposing a service fee for actual, direct services rendered. Indirect expenses cannot be included in the service fee, and simply labeling interest as a service charge does not make it permissible.

Giving Interest

Giving and receiving interest is decisively impermissible in Islam. Allah says, “O believers! Fear Allah, and give up outstanding interest if you are (true) believers. If you do not, then beware of a war with Allah and His Messenger! But if you repent, you may retain your principal—neither inflicting nor suffering harm.” [Quran, 2:278-279]

The Messenger of Allah (Allah bless him and grant him peace) cursed those who take interest, those who give it, document the transaction, and witness it. He said, “They are all the same.” [Muslim]

And with Allah alone is our success.

[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Muhammad Abu Bakr Badhib

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door for students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari’ah Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.