Rethinking the Pillars of Borrowing and Lending

Debt and Interest


Azzad Asset Management actively avoids profiting from interest-based lending and from the trading of debt. This is due to ethical and religious objections. Instead, it is preferable to support financiers like Islamic banks that structure their compensation based on mutual participation in the underlying asset or in the enterprise of the debtor. This is predicated on the notion that financiers who have a stake in a debtor’s success are more likely to finance responsible endeavors. For individual investors, avoiding excessive debt and interest-based lending should be seen as a key component of responsible investing that makes both social and financial sense.


Read More From Azzad’s White Paper Series

Investing Basics

There’s nothing complicated about common investing techniques, and it usually doesn’t take much time to understand the basics. The biggest risk you face is not educating yourself about which investments may be able to help you achieve your financial goals. Use this resource to get started today.

Retirement Savings

Planning for retirement isn’t always easy. But there are concrete ways to help you make it reality—including taking advantage of a company retirement plan and investing on your own. For Shariah-sensitive investors, you’ll also need to think about finding halal investment options. This paper suggests practical steps to getting started.

Education Savings

There’s no denying the benefits of a college education: the ability to compete in today’s competitive job market, increased earning power, and expanded horizons. But these advantages come at a price—college is expensive. And yet, year after year, thousands of students graduate from college. So, how do they do it? And how do you do it in a halal way?

Asset Allocation and You

Think of investing like baking a cake that requires flour, eggs, and milk. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining different types of investments, including halal fixed income, in a recipe that is appropriate for you.

Income with Real Estate

Investors in search of manageable income from real estate may want to consider a real estate investment trust, or REIT. A REIT is a company that buys, sells, develops, and manages real estate such as office buildings, apartment complexes, shopping malls, self-storage units, and housing developments. Successful REITs can offer investors high yields, current income, and moderate growth.

The Case for International Investing

Drawing on the expertise of Scout Investments, which runs Azzad Asset Management’s international portfolio, this paper explains why international stocks should be a part of any diversified portfolio.

Impact of Islamic Investment Criteria

Many Shari’ah-sensitive investors wonder how the Islamic screening process might affect the performance of their portfolios. As this paper outlines, the answer lies in part with the sector allocations of traditional portfolios and their Islamically screened counterparts.

Understanding Riba in Islamic Finance

Riba is one of the most often misunderstood terms in Islamic finance. More education on this fundamental concept is not only necessary for the preservation of a halal livelihood; it is also important for the preservation of the proper practice of Islam. Riba is prohibited by the Qur’an, Sunnah (Prophetic example), and consensus of the scholarly community.

Debt and Interest — Rethinking the Pillars of Borrowing and Lending

Azzad Asset Management actively avoids profiting from interest-based lending and from the trading of debt due to ethical and religious considerations. Learn more about the potential social harms of debt and interest and why it can make financial sense to steer clear of them.

Purifying Impermissible Assets

Is the purification of impermissible assets in a savings vehicle like a 401(k) possible according to the tenets of Shariah? This paper outlines the steps that should be taken to embrace a halal strategy in one’s financial affairs, including the most important step of all—repentance from the previous action.

A Sukuk Primer

Global sukuk demand is expected to grow from $240 billion in 2012 to $421 billion by 2016. Learn more about sukuk and sukuk investing.

Participating in an IPO

Initial public offerings, or IPOs, are a frequent topic of conversation among Azzad clients. But is it permissible to invest one? Get the halal perspective here.

Donor-Advised Funds

A donor-advised fund can achieve many of the goals of private foundations without the legal, administrative and accounting costs.

Charitable Lead Trusts

A charitable lead trust is a way for taxpayers to leverage their generosity, producing tax savings that can be used to provide greater benefit to themselves, spouses, charities, and others. It can allow the grantor to support a charitable cause for a certain time period while leaving the remainder to an individual beneficiary, helping to provide an income stream to a favorite charity and ensure a gift to specified individuals.

Reviving the Waqf

A waqf is an endowment created under Islamic guidelines. Learn how this product can help you leave a legacy for generations to come.


The sub-prime mortgage crisis and subsequent financial turbulence that roiled markets starting in 2007 bluntly illustrated the effects that predatory lending and excessive debt accumulation can have on individuals, families, and communities. The irresponsible lending and borrowing that helped bring about the credit crisis has pushed the United States and Western nations to reassess what it means to extend credit in a manner that is safe and secure. Although terms of this reassessment are still being negotiated through international institutions, market participants have learned that fundamental questions need to be asked about the way borrowing and lending is done in a modern, global financial system. This paper seeks to explore three key issue areas as they relate to debt and the giving and taking of interest:

  1. Irresponsible borrowing and lending
  2. Socially responsible banking
  3. Values-based investing

It concludes with an overview of the Azzad Asset Management philosophy and offers a responsible way for investors to use their dollars to support worthy enterprises and, by doing so, to press for change.


Why is interest-based lending an impediment to socially responsible investing? The primary reason relates to the potential for an exploitative relationship between lender and borrower. While lending to help someone in need is an important and noble role lenders play, profiting by interest may lead to exploitation of those in need of capital. Charging interest on borrowed money allows a lender to profit without participating in the risk of a borrower’s underlying asset or enterprise. In order to more accurately align the interests of the two parties, it is in the interests of society that debt is based on fair terms whereby a financier can profit from a loan scenario by participating in the venture with their own capital.

The Islamic ban on interest is not new. For centuries banned by Christians and Jews, Islamic finance prohibits paying or earning interest, irrespective of whether a loan is personal or commercial.


While responsible lending practices can undoubtedly empower and improve the lives of individuals and communities, interest-based lending lacks effective mechanisms to prevent borrowers, lenders and financial intermediaries from engaging in reckless and harmful behaviors.

Interest-based lending lacks a system to prevent a lender from exploiting the borrower. Most loan contracts allow debt to accrue interest due to the mere passage of time. If the debtor faces economic hardship, this can cause the debt to spiral far beyond the ability of the debtor to repay. For example, if the borrower took out a loan to finance a business that no longer produces the expected return, the loan may begin to eat away at the equity of the business. Ultimately, the business may be worth less than the original loan. Yet the borrower will continue to owe principal and growing interest payments. Although lenders have lien rights to collateral assets, the litigation process is costly and long, leaving borrowers to debt collectors in the interim.

Interest-based lending may also create opportunity for the borrower to abuse the lender. A borrower may delay or evade payment, behave recklessly with collateral, or undermine the enterprise. For example, during the subprime mortgage crisis, homeowners sometimes vandalized their own properties when they learned that mortgage companies would foreclose and take their houses. If homeowners had been able to participate in a partnership arrangement whereby their share of equity would not have vanished with the sale of the property, they would have likely acted more responsibly.

Finally, in an interest-based lending system, lenders and borrowers alike are subject to potential abuse or unfair treatment by financial intermediaries. Since the compensation structure for intermediaries is based on how much lending they have arranged, there is a perverse incentive to help non-creditworthy borrowers obtain loans by reporting fraudulent information.

The central juristic principle in Islamic finance that informs the concept of risk-sharing states: “al ghunm bil ghurm,” meaning “there is no return without risk.”


In addition to the issue of interest, common practices at certain financial institutions pose other conundrums to the socially responsible impact (SRI) investor.

For one, these institutions observe few limitations on where they can invest depositor funds or use shareholder money. They may invest in industries irrespective of SRI screens or prey on vulnerable consumers with too-good-to-be-true loan offers. Conventional banks, especially larger multinationals, may have little interest in whether loaned monies create a tangible benefit in communities. These banks may also be solely interested in the collateral and the ability of the borrower to repay principal and interest. Unlike Islamic banks, they do not typically offer support services to borrowers to help them succeed in their enterprise.

During the 2008 credit crisis, mortgage brokers and loan officers were paid excessive fees by lenders to put unsuspecting borrowers into expensive loans. The Department of Housing and Urban Development estimates that this practice cost borrowers $16 billion in 2007 alone…”


When evaluating the landscape of investable securities, it is often best to avoid institutions that offer interest-based lending, as well as those heavily in debt. This is because excessive debt on corporate balance sheets can negatively affect the financial health of the institution, especially during difficult economic times.

High debt decreases a company’s ability to take risk. With significant debt to repay, a company no longer has the risk capacity to engage in innovative ventures, research and development, charitable donations, or increased hiring. Furthermore, companies may be hindered from pursuing opportunities that will give them a competitive advantage. While leverage may be a tool companies use to expand, excessive debt can in fact inhibit this goal.

Significant debt can also cause companies to become more vulnerable to takeovers and external control. It can also shift efforts away from a company’s number one task: working on behalf of shareholders. If a company is forced into bankruptcy, equity shareholders are the last to be paid in the liquidation, if at all.

In their September 2011 research paper, “The real effects of debt,” economists Stephen G. Cecchetti, M.S. Mohanty and Fabrizio Zampolli, say “Our examination of debt and economic activity in industrial countries leads us to conclude that there is a clear linkage: high debt is bad for growth.” The research team found that when debt is in a range of 90% of GDP, further increases may begin to have a significant impact on growth.

[Source: Cecchetti is economic adviser at the Bank for International Settlements (BIS) and head of its Monetary and Economic Department; Mohanty is head of the Macroeconomic Analysis Unit at the BIS; and Zampolli is senior economist at the BIS. This paper was prepared for the “Achieving Maximum Long-Run Growth” symposium sponsored by the

Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 25–27 August 2011.]


Azzad Asset Management seeks to avoid the exploitation of human weaknesses and temptations. While this includes screening out industries such as alcohol, tobacco and gambling from our investments, we also extend this to industries involved in or profiting from excessive debt and interest-based lending. Learn more about our socially responsible screens on our website.

Note: Information contained in this publication is not intended to replace specific advice or recommendations by your investment advisor. It is not intended to provide tax, legal, insurance or investment advice, and nothing in this publication should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Unless otherwise specified, you alone are solely responsible for determining whether any investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. Asset allocation and diversification cannot guarantee a profit or insure against a loss. There is no guarantee that any investment strategy will be successful; all investing involves risk, including the possible loss of principal. You should consult an attorney or tax professional regarding your specific legal or tax situation. Please check with your advisor for more information: 888.86.AZZAD or

Investments are not FDIC insured, nor are they deposits of or guaranteed by a bank or any other entity, so you may lose money. Azzad does not guarantee that your investment objectives will be achieved. Past performance cannot guarantee future results. Azzad only transacts business where it is properly registered or notice filed, or excluded or exempted from registration requirements. The Ethical Wrap Program is made available through an Investment Advisory Agreement and the firm’s ADV Part II brochure. The Azzad mutual funds are available by prospectus only. To request a free copy including other important disclosure information, please call 888.862.9923. 9/2013©