Profit & Interest: In the light of Islam

Profit & Interest: In the Light of Islam

In Islam trade is allowed but like in every other aspect Allah SWT has educated Muslims, the best manners of trade and transactions. What is permitted and beneficial and what is forbidden and harmful for us? Allah SWT has explained to us the halal means to earn profit in our trade and also ordered us to stay away from haram means like interest or riba. He SWT has also taught us the rewards for earning through lawful means and also the devastating consequences of opting unlawful and haram means. Islam even shows how an individual can earn profit without indulging in interest.

1.   Interest:

Interest means “Money paid for the use of money lent (the principal), or for forbearance of a debt, according to a fixed ratio” (Zarabozo). According to Yousuf Ibnul Hasan, Interest is when money takes the status of a commodity and is being bought and sold with guaranteed profit (Hasan). In Islam the term use for interest and usury is riba. It means to increase in particular things. Allah SWT defined riba in Quran “O you who believe! Eat not Riba (usury) doubled and multiplied, but fear Allah that you may be successful.” (Quran 3:130) Interest means to take an increase in the lent amount or taking any sort of increased benefit from the indebted on the loaned commodity. Interest and Riba have destroyed many countries’ economy. The severity of dealing in interest is huge that is why Allah SWT and his messenger ﷺ has declared war on those dealing in interest, Allah SWT says in Quran “O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger…” (Quran 2:278-279)

   

2.   Profit In light of Shariah:

Islam has allowed lawful trade and any amount of profit that comes from it. There were many great sahabas who were successful traders like Usman Ibn Affan and Abdur Rehman Ibn Awf, both of them were really successful merchants and great companion of Prophet Muhammad ﷺ. Profit in light of Islam depends on the supply and demand of the product. Still it is better for the seller to be easy going and not to take advantage of the ignorance of his costumers (al-Munajjid). Any profit made in a sale in which harm or injustice is not done and Allah’s commands are obeyed then that profit is deemed permissible in Islam. 

3.   Names used to refer to profit or interest:

In Islam the word which engulfs interest in itself is “Riba.” There are two basic types of Riba A) Riban-Nasi’ah which means delayed usury; in this debt of an insolvent person is increased by delaying the due date of debt and B) Ribal-Fadl means excess usury; in this same item is sold for the same item but seller receives an excess in same commodity at time of return.
“Profit” in Islam is usually referred to as Ribh. In any trade when after covering all the expenses and cost on the commodity or service the asset or wealth which remains is called profit or Ribh.

4.   Examples of Riba:

1-   If party A lend party B 2000$ and party B is supposed to return 2000$ after 3 months and part A stipulates a condition that if Party B is unable to pay back the debt in due time then party B will be entitled to pay 4% of the loaned amount for the extension of the due date. This type of riba is called Riban-Nasi’ah

2-   If party A sells party B 30 kilos of wheat and receives 50 kilos of wheat in return this type of riba is called Ribal-fadl.

3-    If party A has loaned party B any amount and is now taking any sort of benefit from party B due to the loan than it is also Riba. “Any loan that brings a profit is (kind of) riba” (Al-Bayhaqi: 10933)

5.   Differences between Profit and Interest:

“…Allah has permitted trading and forbidden Riba (usury)...” (Quran 2:275). There are distinct differences between the two that is why one is allowed and other is strictly forbidden.

“Profit” is the sum of money added on top of the cost of the product or a service. This “surplus amount” is known as a “mark-up.” The profit comes from this mark up, after all expenses are paid and all overhead cost is cleared. This “surplus amount” in the shape of mark-up is compensation to the trader for spending his time, wealth and efforts (Abdullah). 

Riba (interest) on the other hand is usually added not to a cost of a product but to a lent amount. Interest and profit differ in the way both of them are earned. Profit includes trading and investment which happens in real economy and the economy is also affected by it. When one buy or sell they meet people’s demands. However lending people money on interest meets others needs as money in it of itself is useless and has no benefit. “Profits, have to be earned by active participation in economic activity, interest is gained passively, without the participation of lenders in the production or distribution process” (Abdullah). In cases where people loan money on interest and take collateral from the counterparty even risk factor is eliminated.

Profit is earned by investing labour, effort and resources however; in interest it is unearned as no effort is required. Profit is uncertain while in interest return of payment is ensured. Prefixed cost of commodities and services provided many a times result in inflation whereas profit is obtained after the deducing the expenditure cost from total income so profit is not related to the inflation.

One of the biggest differences between Interest and Profit is; With Interest assets are always transferred from poor to rich people resulting in a chaotic and devastated society in which rich are always becoming richer while poor are suffocating. As a result many other diseases like theft, murder, robbery, kidnapping, depression, increasing suicidal rate etc. are born which cripples the societies and even countries on a larger scale while profit ensure equal distribution of wealth, assets and resources providing equal chances for everyone, resulting in a harmonious and peaceful society.       

6.   Wisdom in legislation of profitable business:

There is great wisdom behind the legislation of profitable business. First of all it provides an alternative for Riba or interest. It shows that one can still earn healthy sum of money even without dealing in Interest. As sahaba like Abdur Rehman Bin Awf earned huge profits and his trade was free from riba. He used to say “I left half of what is halal, afraid I would accidentally engage in riba” (theidealmuslimman). Prophet ﷺ prayed for him that Allah SWT bless his wealth and after that he got so accustomed to profit in his transaction that he said “if I lifted a stone I expected to find gold or silver under it.” Allah SWT showered His blessings on Him because he RA was looking for halal means to earn profit.

7.   Conclusion:

Our wealth is a test from Allah SWT as He SWT says in Quran “You shall certainly be tried and tested in your wealth and properties…” (Quran 3:186) How we earn our wealth plays a vital role in our success in dunya and akhira. Prophet ﷺ says “The truthful, trustworthy merchant is with the Prophets, the truthful, and the martyrs.” (Jami Tirmidhi: 1209) Islam permits profit and it is permissible for one to wish for profit in his transaction but at the same time Islam also forbids all sorts of unlawful means like dealing in interest or riba. Allah SWT says “Allah destroys interest and gives increase for charities.” (Quran 2:276).

 

Bibliography

Abdullah, Abdul Karim. "IAIS Bulletin." 9 July 2012. Islamic Institute Of Advance Islamic Studies (IAIS) Malaysia. Document. 30 June 2016.

al-Munajjid, Shaykh Muhammad Saalih. Principles of Fiqh » Jurisprudence and Islamic Rulings . 4 March 2006. Web. 30 June 2016.

Hasan, Yousuf Ibnul. Concept of RIBA, Interest & Profit in Islamic Economics System. 14 March 2014. Web. 30 June 2016.

theidealmuslimman. Case Study of a Muslim Man: Lessons from Abdul Rahman ibn Awf. 2 December 2015. Web. 1 June 2016.

Zarabozo, Jamaal al-Din. Interest and its Role in Economy and Life (part 1 of 7): An Introduction. 2 April 2007. Web. 2 June 2016. <http://www.islamreligion.com/articles/538/viewall/interest-and-its-role-in-economy-and-life/>.