The Quran forbids usury, not interest. Quite a few states in USA have laws against usury. Usury is defined as excessive interest. A Dictionary defines usury as “an excessive or inordinate premium for the use of money borrowed”, “extortionate interest”, or “the practice of taking exorbitant or excessive interest.” The Arabic language also makes distinction between interest which is “Fa’eda” and usury which is “Reba”. The Quran forbids Reba (usury).
Earning interest and paying interest is perfectly acceptable, as the Quran has not prohibited interest. Interest is an essential component of the financial aspect of an individual or an organization. Individuals may need to save money in a bank, may carry a credit card for convenience, or may borrow and pay interest for an automobile or to own a house. Borrowing money and thus paying interest for business loans is an essential component for business and organizations. Thus paying interest, as long as it is not considered excessive by the standard of the day and community, to a credit card company, to a financial institution for a loan of any kind (business, car, house mortgage) is allowed and perfectly legal from a Quranic point of view. Also earning interest from a financial institution like a bank or bonds or mutual fund is also fine.
As defined above usury is excessive interest. Unlicensed or illegal moneylenders (mafia as a well known example) charge usury, excessive interest. Such unlicensed or illegal moneylenders are all over the world and can easily be accessed by a few inquiries. For those who live in USA, any individual can find out about these moneylenders by asking about them within their ethnic business community. These illegal moneylenders have entirely separate standards for making loans – they charge excessive interest (usury) and usually rely on someone’s life (guarantor) as collateral. The Quran forbids in dealing with usury – borrowing money and paying usury or earning money by charging usury. The Quran specifically states that usury cannot be equated to commerce or taken as a normal business practice. The practice of usury, unfortunately, is prevalent all over the world with individuals and business engaged in this practice.
In practical terms as long as we are dealing with any state-licensed institution like a bank, Mortgage Company, Credit Card Company, etc., we are not violating any Quranic commandment as these institutions usually follow the law of the land and do not charge excessive interest. They calculate their interest rate on daily basis considering the status of the economy and the need of the society. However, if we deal with the illegal moneylenders who practice usury, we are in violation of clear Quranic commandments. This is not to say that one may not borrow or lend money to a friend or relative and even charge interest. Such transaction must be in writing as the Quran clearly commands in verse 2:282 and may involve interest, to at least pay for the cost of the loan to the lender if any, and compensate for any change in the value of the currency over the time of the loan, but should not involve usury.
[Quran 2:282] O you who believe, when you transact a loan for any period, you shall write it down. An impartial scribe shall do the writing. No scribe shall refuse to perform this service, according to God’s teachings. He shall write, while the debtor dictates the terms. He shall observe God his Lord and never cheat. If the debtor is mentally incapable, or helpless, or cannot dictate, his guardian shall dictate equitably. Two men shall serve as witnesses; if not two men, then a man and two women whose testimony is acceptable to all. Thus, if one woman becomes biased, the other will remind her. It is the obligation of the witnesses to testify when called upon to do so. Do not tire of writing the details, no matter how long, including the time of repayment. This is equitable in the sight of God, assures better witnessing, and eliminates any doubts you may have. Business transactions that you execute on the spot need not be recorded, but have them witnessed. No scribe or witness shall be harmed on account of his services. If you harm them, it would be wickedness on your part. You shall observe God, and God will teach you. God is Omniscient.
A note should be made that the Quran, which spells out religious laws for our great religion, removes the shackles and burdens imposed on us by the ignorant scholars and religious leaders. Most of the “Muslim” countries have various laws against interest and have sham “interest-free banking” reflecting their ignorance of this simple Quranic truth. Unfortunately, quite a few of those who call themselves Muslims fall victims to the falsehood spread by these religious leaders.
[Quran 2:276-280] God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew.
[Quran 3:130] O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed.
[Quran 4:161] And for practicing usury, which was forbidden, and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution.
[Quran 30:39] The usury that is practiced to increase some people’s wealth, does not gain anything at God. But if you give to charity, seeking God’s pleasure, these are the ones who receive their reward manifold.
[Quran 7:157] Those who follow the messenger, the gentile prophet (Muhammad), whom they find written in their Torah and Gospel, who exhorts them to be righteous, enjoins them from evil, allows for them all good food, and prohibits that which is bad, and unloads the burdens and the shackles imposed upon them. Those who believe in him, respect him, support him, and follow the light that came with him are the successful ones.”
Reference: The verses as quoted are taken from the English Translated Version of Quran by Rashad Khalifa Ph.D. from http://submission.org/d/x/webqt.php