Question
What do scholars of Islam and experts in Sharia say about Student loans that the British government offers to university students? As a concerned father I want to ensure that my daughter is not borrowing money in haram way. I understand that once she finishes the course, she’ll start repaying that amount and the interest that has accrued. Isn’t this Riba? Abdal Kareem Sethi, Nottingham
Answer
At end of September 1977, I went to Aston university to study Biomedical sciences. As a fresher I registered and received a university ID card and a handsome cheque for my maintenance grant for the first term. Wow! That was a generous gift from the crown of nearly £1200, I would receive three such cheques per year for the three years of study. Your daughter can only envy those days of benevolent state. Since 2011 the British government has introduced a new way of financing Higher education, through the Students Loan Company. Once the student graduates and earns enough salary above a threshold, repayment will be collected by employers through the UK tax system.
So, is the student loan Riba, usury that the Quran prohibits? Usury practiced in the time of the messenger PBUH was compounded interest where the original capital was multiplied many times.
I have seen three fatwas that clearly state government student loan is permissible.
- Dr Sajid Umar gave Islamic juristic principles that clearly indicate that students loan is not the conventional Riba. He said– 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. “From my reading of the contractual and operational framework of the process, I conclude it to be a permissible arrangement”[1]
- Shaykh Haitham al-Haddād also argued that student loan is not riba but considers it a Mudarabah transaction therefore its permissible. [2]
- Islamic Fiqh Academy of India originally didn’t allow Muslim students to take government loans, now after fifty year they have reversed their judgement and are allowing them to take loans. This change is due to the declining number of Muslim students at Indian universities because they can’t afford to pay the costs. Islamic Fiqh Academy of India has seen how Muslims have been left behind in education and how damaging it has been they have changed their fatwa.
Is the “interest” charged on student loan 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 Sharia, 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 Sharia is a debt-creating contract: a contract that requires the borrower to repay regardless of his or her performance. It is true that the Sharia mandates forbearance (إنظار المعسر) in case of the borrower being in financial difficulty, but forbearance does not cancel the debt—it 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 Sharia 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 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.
Considering 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 permissible one from the perspective of Islamic Fiqh.
Conclusion
In summary, I believe in principle that the student loan product offered by the UK government currently is acceptable from the Sharia 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 Sharia.
And Allah ﷻ knows best.
This fatwa is written by Dr. Musharraf Hussain al-Azhari
[1] Fatwa: Student Loans are Permissible – Islam21c
[2] https://www.islam21c.com/islamic-law/on-sh-haithams-student-loans-fatwa/
