Recovering Interest Paid on Loan from Payment Protection Insurance (PPI)

Before answering your question, it is important to note that dealing in interest-based transactions is decisively prohibited in Islam, and the Shari’ah considers an interest based transaction to be void. This includes both the paying and receiving of interest.

Sayyiduna Jabir (Allah be pleased with him) relates that the Messenger of Allah (Allah bless him & grant him peace) invoked curse (la’na) on the receiver of interest, the payer of interest, the scribe and the two witnesses; and said, “They are all equal [in sin].” (Sahih Muslim)

This prohibition applies even if the intention is to take interest from one transaction and return it via another. For example, one opens an interest-bearing account at a bank with the intention of taking out a mortgage at a later date and using the interest earned from this account to pay off the mortgage interest; or one takes an interest-based loan from the bank with the intention of opening an interest-bearing account and using the interest earned to pay off the interest on the loan. In fact, in this case, one will be guilty of two sins: the sin of receiving interest and the sin of paying interest.

However, if one was previously involved in interest-based transactions from which one has sincerely repented, then it is permitted for him to use the interest money – should he have some – to pay off the interest charged by the bank for another transaction, provided: 1) the interest received and paid is at the same bank, and 2) the interest received and paid are equal in amount.

Coming to your question, you say that you took an interest-based loan a few years ago from which you have now repented, and the bank is now prepared to give you some ‘interest’ due to miss-selling payment protection insurance (PPI).

In light of the above explanation, it is permitted for you to take this interest money from the bank, with the intention of recovering the interest you previously paid on the loan to the bank.

Islamically, any interest paid in a given transaction must be returned to the payer. This is because Shari’ah considers this extra (interest) amount paid to remain in the ownership of the one who paid it. Imam Haskafi, the renowned Hanafi jurist, states, “It is necessary to return the interest (riba) amount…”

Imam Ibn Abidin (Allah have mercy on him) elaborates further by saying, “In summary, there are two rights [in an interest-based transaction]. The slave’s right – which is to return the actual item if it exists, and its equivalent if consumed; and the right of Shari’ah – which is to return the actual item in order to reverse an Islamically prohibited transaction.” (Radd al-Muhtar ala ‘l-Durr al-Mukhtar 5/169)

As such, the interest amount you paid on the loan is still considered to be in your ownership and therefore should be returned to you. Consequently, the interest that the bank is now paying you as a result of miss-selling PPI can be taken with the intention of recovering the interest you paid on the loan. (Fatawa Darul Uloom 2/851)

However, this is provided you are dealing with the same bank. If there are two different banks involved, then it is not permitted. Also, the interest amount which the bank is paying you should not be in excess of the interest you paid on the loan.

And Allah knows best