As a disclaimer, I must emphasise that while I believe the student “loan” offered in the UK currently to be compliant from an Islamic perspective, those who intend to enter into the contract must only do so after diligently concluding that it makes financial sense for them after understanding its terms and conditions well, and the potential contractual liabilities it entails. The same is true for anyone interested in participating in any form of investment or intending to enter any trade/financial contract.
A perennial question
With the new university year on the horizon, I am receiving questions from the youth and their concerned parents regarding the permissibility of student loans in the UK. The structure of the student loan operation is multifaceted, possessing elements found in for-profit contracts, benevolent transactions, loan-based contracts and even tax-related structures.
The topic thus requires understanding conventional economics and finance among other contemporary subjects, partly because this is not as simple as a transaction between two individuals, but rather an operation between a government and its citizens. This difference has a bearing on many considerations in Islamic jurisprudence (fiqh), since in order to understand the objective of a product or transaction, you have to understand the intent of the counterparties to an agreement.
Financial transactions in Islam
The topic of student finance falls under the category of financial transactions, for which Islamic law has a framework derived from the Qur’ān, Sunnah, consensus of jurists, analogy (qiyās), and other epistemic frameworks. A deductive study of these have manifested several established rules and governing principles when determining the Islamic rulings of financial transactions, such as:
- “From the outset, all economic and social activities are permissible unless proven impermissible.”[1]
- “Matters are judged based on their objectives and operational reality, not by their names or appearance.”[2]
Based on this, for student loans to be considered impermissible Islamically, a scholar would have to prove in a substantial way the presence of the following:
- Riba, which is interest (usury) from an Islamic perspective. This is emphasised because in modern finance and economics, the term “interest” is used to describe some things that do not constitute riba according to Islamic law.
- Gharar, which is an unacceptable degree of ambiguity in the transaction.
- Any form of oppression, whether macro or micro.
- Anything which will credibly lead to one of the above.
I do not use “substantial” lightly, given that the Islamic ruling of all contracts being permissible as a default rule is a certain one established by undeniable evidence. This rule cannot be overturned based on evidence that is plausible at best, since another established legal maxim states that “Certainty is not cancelled by doubt”.
Student loans in the United Kingdom
Simply speaking, the Student Loan arrangement in the United Kingdom is a government initiative which provides students with tuition and maintenance financing up to certain yearly amounts dependent on a person’s level of study with specified considerations and conditions. The operation is completed using a non-departmental public body and upon graduating, beneficiaries only begin paying off their “loan” when their earnings reach a set monthly threshold, with “repayments” being set at 9% of a person’s income, with “Interest” being added to the loan from when the first payment is received by the student from the Student Loans Company.
Is the “interest” charged on student loans riba?
It is true that the student loan contract stipulates something called “interest” to be added to the “repayment” of the “loan”, which can be compounded during the term of the “loan”. It is also true that it is a maxim in fiqh that “Every benefit derived from a loan is riba”, and money on top of money is a clear type of “benefit”. This logic is tempting to follow, however in the case of the transaction at hand, using this maxim lacks precision for the following reasons.
Firstly, this maxim refers to a “loan” as defined by the Sharīʿah, not as defined by other customs or systems. Secondly, and related to this, something does not become a loan in the paradigm of Islamic law by simply being called a “loan” or appearing to be one. A loan within the Sharīʿah is a debt-creating contract: a contract that requires the borrower to repay regardless of his or her performance. It is true that the Sharīʿah mandates forbearance (إنظار المعسر) in case of the borrower being in financial difficulty, but forbearance does not cancel the debt—it still remains and is collected even after death from one’s bequeathed estate.
The student loan under consideration, in contrast, is a performance-based or income-contingent financing operation. Upon the student successfully graduating and securing employment with an earned income upon or above a set threshold, the “borrower” must “repay” the tuition and maintenance funds received, which is done via the PAYE tax system at a fixed percentage of an individual’s income. In the event of remaining unemployed or employment with a salary below the set threshold, the “borrower” is not required to “repay”, even if he or she is in possession of adequate funds through alternative means. Performance-based contracts, by construction, are not debt contracts from a Sharīʿah point of view.
In addition, the terms “loan” and “compounding” are used liberally in the official documentation. As such, they do not constitute the description of a debt contract in which the debt actually self-multiplies, as was the case with Riba al-Jāhiliyya (riba during the era of Ignorance before the advent of Islam, which Islam put an end to). This is emphasised by the fact that the entire arrangement requires real economic work, or employment upon a set frame, without which “repayments” cease to be a requirement. Other important considerations include the fact that the loan is written off after 25 or 30 years, and cancelled if the individual becomes permanently disabled, or passes away.
In light of this, without riba, gharar or oppression being a part of the structure, and with real value-adding work being an actual part of the arrangement, I conclude the student loan offering in the United Kingdom to be a compliant one from the perspective of Islamic Fiqh.
Existing fatwas
Shaykh Haitham al-Haddad has a famous ruling on this topic from a few years ago wherein he concluded student loans in the United Kingdom to be permissible.[3] This was based on his alignment of the loan’s structure to the well-known Mudāraba arrangement found in the books of Islamic Fiqh.[4] Given that I have not come across anything conclusive which passes the evidentiary bar of the Sharīʿah to overturn the original ruling of permission for this type of contract in principle, the default ruling would thus persist, and I would therefore agree with Shaykh Haitham al-Haddad’s conclusion, even though I find his framing of the student loan arrangement as a form of Mudāraba unnecessary. The maxim defining financial transactions as permissible in Islam implies that there are no limits to the number of possible Sharīʿah-compliant contracts that can exist at any given time, and thus it isn’t a requirement from the perspective of Islamic Fiqh to fit new contracts within the framework of the old ones discussed in the books of fiqh. Disproving Mudāraba thus would not render this a riba-based contract.
Conclusion
In summary, I believe in principle that the student loan product offered by the UK government currently is acceptable from the Sharīʿah point of view. As has been stated, the principles of Islamic law tell us that “Matters are judged based on their objectives and operational reality, not by their names or appearance,” and that “From the outset, everything (not considered worship) is permissible unless proven impermissible.” In particular, the arrangement is income-contingent and performance-linked, which makes it consistent with the principles of Sharīʿah.
And Allah knows best.
Also read
Source: Islam21c
Notes
[1] Al-Qawāid al-Nūrāniyyah
[2] Al-Ashbāh wal-Nathāir: Ibn al-Subki
[3] https://www.islam21c.com/islamic-law/on-sh-haithams-student-loans-fatwa/
[4] Mudāraba is a partnership in profit whereby one party provides capital (Rab al-Māl), and the other party provides labour (Mudārib). See: AAOIFI Sharīʿah Standard (13).
I agree with Dr. Umar’s opinion and note the fact that he has analyzed the situation in depth. There are quite a number of scholars (Fazlur Rahman Malik, Abdullah Saeed) who differentiate between riba as practised by unscrupulous moneylenders on poor debtors at the time of the prophet, and interest which is not exploitive.
When this is understood, it is obvious then that Sajida’s example in the comment above (20,000 payback on a 10,000 loan) is riba, but the student loan program is not. I believe also after a period of time if the student loan cannot be repaid it is forgiven, also in line with Islamic principles.
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Is it possible for the shaykh to name any senior scholars that this fatwa was checked by?
Obviously not.
Based on this fatwa, if one lends £10000 to one’s friend and demand £20000 once other person has found job in 5 years, it will be halal, how unfortunate?
How did you understand that from the article Sajida? Your example is totally different, and obviously would be Haram. Anyway, best check back with the author before putting words in his article.
This is what we call harram taqleed blind following a modern day scholar blindly
Those who do taqleed on four madhab will never fall for these kind of harram
This fatwa is equally bad to those who claim mortgage is halal not riba it is something else
This fatwa easily fails mufti faraz fatwa of sheikh haitham last fatwa which was equally wrong
https://darulfiqh.com/knowledgebase/are-student-loans-a-mudharabah-investment-contract/
The author has neglected to mention that student loans get sold off to private companies. And those companies are seeking to make a profit from the debt. This profit is only possible if riba is involved. The student loans company may be a governmental department seeking to assist students, but these private organisations have no benevolent motives.
The article is clearly dealing with the actual contract. Based on your line of thinking, a whole list of contracts all of us are involved in would be Haram too.
Salaams,
Thank you for this article.
I have a question and hope you can explain this to me.
This article talks about how the loan is performance based and you say “Performance-based contracts, by construction, are not debt contracts from a Sharia point of view.”
My question is as follows;
Due to the fact that you also have the option (according to the government page on paying back the student loans) to pay in a lump sum, such as paying more than the percentage (so extra payments) to reduce the overall “loan”, does this not mean you have the option to “pay off the full balance before the loan term ends”. This then changes it from a ‘performance based’ loan to an actual loan as you can actually pay it off beforehand thus stopping one from having tp pay the ‘9% from your income’ (over the threshold) before the 30 years period when it automatically stops itself?
Does the fact this is possible not negate the contract and make it a normal haraam loan…?
Your response would be greatly appreciated!
Ws
Jazakallah Khair
How can you allow somethings based on your assumption that Islam looks at things from other people’s customs? Is not Islam’s purpose in this regard to judge things based on its own customs? This ‘fatwa’ is clearly invalid and not even the type of Riba some scholars allowed under the Hanafi…
https://www.islamiqate.com/3337/did-the-prophet-saw-permit-riba-usury-in-dar-al-harb
Thank you for sharing. As was mentioned, the shari’ah is based on the reality and not names. ‘Ginger beer’ says ‘beer’ but we know it is not beer, so those who panic upon hearing the word ‘interest’ should consider this. ‘Riba’ and ‘interest’ are different concepts.
Very welcome fatwa alhamdulillāh, it is very important we define things from our own sharia rather than just accepting what non-Muslims label as a loan or not.
This is what happens when they focus more on taking Haram pictures to focus on how handsome they can look. To be “cool” Shaykh.
How do these people sleep at night.
The end times are near.
As salaam alaykum,
You do not need to research and go into great detail on this matter. I was one of the initial people who were told student loans would be interest free and found every year they were charging me interest until I paid it off. No one can state student loans are halaal; no matter who you are getting the loan from if you are paying back more than you borrowed it is haraam.
Did you take out a student loan before you decided to conclude it was permissible? Did you ask for statements from students showing no interest on their statements? How can you conclude such a thing?
Riba is a major sin and should not be taken lightly when making such fatwas. Rather setup an Islamic loan company and give out interest free loans to students than make the haraam halaal.
Is there any ruling regarding maintenance loans in the UK, many if not most students who take tuition loans also take maintenance loans to cope with the high uni living costs, however in my case at one point I was living at home, and just saving up the maintenance loan, using it to spend on luxury items, is there any ruling in this?
Subhanallah, so many people attacking the writer with no actual objections to the argument. Let us not use emotions in navigating and understanding this fatwa.
Well said brother we request our scholars to please let the harram remain harram fiding loopholes will not make it halal
Asalamoalikum, it’s a great fitna by dr Sajid. Islam can never turn into modern Islam. Even in the Quran and hadees nowhere it says bring changes in the Hukm of Allah subhana tala. I know British history based on deception and always buy Muslims scholars to bring changes in Islam due to the fact see Muslims condition with no Eman living in a Muslims land and follow kuffar’s Hukm and ignore deliberately Allah’s Hukm I establish whoever follows his debate and hukum or fatwah on student loan is permissible will r caught on the day of judgement. This man may not be Muslim as British prepare Aleme deen in fact they are not muslims
بسم الله الرحمن الرحيم
[personal abuse censored]
May Allah Ta’ala guide you and us.
May Allah Ta’ala grant you and us the correct understanding of Deen.
May Allah Ta’ala
Assalamu alaikum warahmatullah wa barakatuh,
I read your views on the student loans in the UK and wanted to say JazakAllahu khaira. It was a much better covering of the topic than most people do. As a result of ill thought out fatawa regarding this topic many youth have pulled out of study and therefore furthering of the Muslim community.
May Allah ta’ala increase you in His obedience.
Wsalam
Why don’t you read and understand the article before commenting??
This is what happens when people decide to focus on issues more then thye are supposed to they mess up and give these kinds of fatwa
Imran hoseim over researched end of tiems became a crackpot
Last time I said sheikh haitham over researched this issue and messed up now i say sheikh sajid did the same and messed up
Please dont make halal harram and put people at risk of never repenting for a big sin
Subhanallah, so many people attacking the writer with no actual objections to the argument. Let us not use emotions in navigating and understanding this fatwa.
Currently they charge 5.4 percent interest. If this is not “riba”, then what is it. The sheikh has talked about oppression, performance based contracts and income linked. But he has failed to talk about this interest rate they are charging.
It looks like riba, it sounds like riba, the people giving the loan are calling it riba. Even the students from amongst the non Muslims are calling it riba and oppression.
This is what we call harram taqleed blind following a modern day scholar blindly
Those who do taqleed on four madhab will never fall for these kind of harram
This fatwa is equally bad to those who claim mortgage is halal not riba it is something else
This fatwa easily fails mufti faraz fatwa of sheikh haitham last fatwa which was equally wrong
https://darulfiqh.com/knowledgebase/are-student-loans-a-mudharabah-investment-contract/
Abdullah, please write clearly. It’s hard to understand what you’re saying. Clearly you have made up your mind but this matter affects all of us, and all you’re offering is spam! Did you even read the article properly?
This isn’t a 4 mazhab issue. Riba jaahiliy is something they all agree on last I checked.
If you want to help go ahead and write an article, and with clear English please and offer something more beneficial than rants, so we can benefit from the time spent reading!