Profit vs Interest

PDF: Profit vs Interest

بِسْم الله الرحمن الرحيم

“… That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest….” 

In this verse; Verse 265 of Surah Al-Baqarah, Allah makes a clear distinction between Trade and Interest, while giving us the first and probably most important difference between the two – The legality of obtaining Profit (which is generated from trade) and the prohibition of dealing in Riba (Interest).

We know that there is nothing prohibited in the religion except that it causes harm to the individual or society, and nothing permissible except that it yields benefit. So what are the differences in Ribh (Profit) and Riba (Interest) which result in the Islamic Rulings regarding them? What harm does Riba pose to the community? And what benefits does society reap out of profitable businesses?

Riba (Interest) and Profit (Ribh) are dissimilar in that they are both earned through different ways. Profit, by definition, is the extra money added on top of the cost price of a product or service and represents compensation to the trader for his effort, risk, and expenditure.

Trade, which produces profit, exists in the real economy; because selling and buying is a necessity in a world where our needs are interdependent. It is beneficial to both parties as the risks are spread quite equitably, thus allowing for mutual gain. Trade encourages specialization, and this specialization creates value to both parties, due to the difference in the items between the two sides of exchange.  In addition, this diversity allows individuals to satisfy the variety of needs they have, fueling prosperity. Profitable businesses help grow and sustain wealth creation in society. The community flourishes as a whole.

Riba, on the other hand, is usually added on top of a loan of money, as opposed to the cost of a product. It originated during the Pre-Islamic Period of Ignorance, when a person would owe another a sum of money to be paid at a certain time. At the time of paying back, the creditor would give the debtor the option to pay the debt or allow him more time in return for an interest on the borrowed sum. If the debtor chose not to settle the debt, the creditor would prolong the period of payment against an interest, which would naturally result in an excessive increase of debt, causing harm to those already in need. In addition, the risks are one sided towards the borrower. The creditor should instead deal with the debtor by giving him a grace period, as Allah commands us in [2:280]:

 

“And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay, but if you remit it by way of charity, that is better for you if you did but know.”

Another type of Riba occurs when a person sells an item, - namely Gold, Silver, Wheat, Barley, Dates, Salt, or whatever shares their property with regards to weight, measure, edibility - for another of the same type in excess. The usurer consumes the wealth of people without giving them anything useful in return.

Riba is nothing less than injustice, which is the very reason behind Islam imposing a severe punishment on those who deal with it. Allah says in [2:278-289]:

“O you who believe! Be afraid of Allah and give up what remains (due to you) from Riba (usury) (from now onward), if you are (really) believers.”

“And if you do not do it, then take a notice of war from Allah and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums).”

Ibn Taymiya رحمه الله said in this regard:

“The prohibition of Riba is stronger than the prohibition of gambling. This is because the usurer takes unlawfully an increase (the interest) from a person who is in need, while the gambler may gain this increase or lose it……………….As gambling involves taking money unjustly, Allah prohibits it. Yet, the injustice and harm afflicted upon the needy person (who has to borrow) due to Riba are not the case in gambling. Furthermore, it is known that doing injustice to those in need (as in the case of Riba) is graver than doing injustice to others who are not in need”

The main problem with Riba is that it allows debt to grow faster than wealth. Another issue is that it encourages homogeneity, not diversity, because it’s the exchange of two identical items. In other words, it’s dangerous for the economy.

Riba takes place in numerous hidden ways nowadays. Contemporary examples include Interest on Bank Deposits and Loans as well as through Insurance Contract Premiums paid to Insurance Companies. Another example is “Inah”, which is a transaction in which one buys a commodity on credit then sells it in cash to the same person for a lesser price.  These are all forbidden.  

The Prophet ﷺ said: “If you sell to one another with Inah, hold the tails of cows (i.e. Become occupied with worldly gains), are pleased with agriculture, and give up conducting Jihad, Allah will make disgrace prevail over you, and will not withdraw it until you return to your religion” [Abu Dawud]

And He ﷺ said, “There will come a time when people will eat Riba. Even the one who will not eat it may not spare its dust (i.e. he will be affected by it in a way or another” [Ibn Majah]

In another narration: “There will come a time for people when they will consider Riba lawful by means of Trade”

Allah said in [2:276]:

“Allah will destroy Riba (usury) and will give increase for Sadaqat (deeds of charity, alms, etc.) And Allah likes not the disbelievers, sinners.”