Alhamdulillah we recently did an interview with Incblot.org about Islamic Finance. You can see the whole thing here, but we wanted to highlight this portion of it:
DC: What would surprise most non-Muslims about Islamic notions of finance?
OU: The number one surprise would probably be that it’s severely prohibited for a Muslim to deal with interest. I remember closing an account at my local credit union because my basic checking account was accruing interest. I requested them to stop it, but they said they weren’t able to. After some back and forth, the teller looked me square in the eye and said, “Honey, I’m not sure you understand. We are GIVING you FREE money.” I told her politely that I understood but would need to close my account if they couldn’t stop the interest accrual.
The second thing that is surprising (even to most Muslims) is this – In the books of canonical Islamic law, various facets of life are differentiated out by chapter. So for example, there are chapters on ritualistic acts of worship such as prayer and fasting. Then there are chapters regarding things like marriage, financial transactions, business, charity, wills, and so on. When it comes to the topic of lending someone money, this issue is categorized by classical Islamic scholarship in the chapters of charity – not business. This means that the very act of lending money is meant to be a charitable and helpful act. In fact, not only is there a strictness in a person paying a debt back the moment they are able to, but also a leniency encouraged on the part of the lender to be as forgiving as possible. Lending money is not meant to be a business according to the opinion of classical Islamic scholars.
Third is the zakat – aka mandatory charity. This is one of the 5 primary pillars of faith a Muslim must uphold [the other 4 being: 1) Testimony that no deity has the right to be worshipped but God, and Muhammad is His final prophet, 2) pray 5 times a day, 3) make pilgrimage to Makkah for Hajj once in your lifetime, 4) Fast the month of Ramadan]. This is the only charity actually mandated on a Muslim person. The closest analogy I can think of is a Christian tithing 10% of their income – although this is set up completely differently.
There is a minimum level of wealth that a person must have before zakat is due on them. In modern equivalents (converting from the classical measurements in gold/silver) it’s roughly $900 in savings that you have had for at least one year. The zakat is to give 2.5% of your saved money – not your income. This is meant to keep wealth in circulation and to benefit those who need it, and prevents people from hoarding it. So if a person had $100,000 in savings, the zakat they would owe is $2,500.