Interest and profit: Islamic view on Halal and Haram

Economics 24 Feb 2021 Tamalika Basu
interest and profit

In the Holy Qur’an Allah says, “…Allah has permitted trade and has forbidden interest…” (2: 275)

Allah Almighty has created human beings as the best of creatures and has also provided them with sustenance. For this reason, he has declared the money earned through trade and commerce as Halal and interest as Haram. For this reason, interest and profit are two different things. One of which is Haram or forbidden and the other is Shariah-compliant.

Definition of interest and profit

The Arabic word for interest is ‘Riba’. Which literally means growth, excess, development, etc. In Islamic law, Riba or interest is defined as the amount of money or assets received as a condition of a loan, after which the borrower is obliged to repay the additional assets, including the principal, to the lender.

The Prophet (SAW) said, “The loan that makes a profit is an interest.”

Difference between interest and profit

Many people say that interest and profit are the same things. But that is not the case. They say this mainly because they do not know the difference between interest and profit. So let us know the difference between interest and profit-

1. In case of a transaction, taking an extra loan will be considered as interest. On the other hand, by investing capital in the business, the additional income of capital is profit.

2. Interest depends on the interest rate, time, and amount of the loan. Profits depend on cost savings and favorable market demand.

3. The interest originates from the exchange loan. And the source of profit is from capital investment in the business.

4. The lender does not bear the risk in interest. But there is also a risk of loss in profit.

5. The result of interest is suffered by the lender alone. Profits on the other hand are enjoyed by both the supplier and the user of the business.

6. Interest is a fixed rate pre-determined. Profits on the other hand are earned later in any proportion.

Types of interest

In Islamic economics, interest can be divided into two parts.

1. Riba An-Nasiyah

2. Riba Al-Fazl.

Riba An-Nasiyah or term interest

This is the actual interest or initial interest. Such interest is forbidden in the verses of the Qur’an. The definition of Riba An-Nasiyah is that which is a fixed term for the repayment of a loan and the condition of providing additional capital at a fixed rate.

Riba Al-Fazl

This kind of interest is forbidden by Hadith. Riba Al-Fazl has emerged in the field of hand-to-hand sale of goods. When a large quantity of goods is exchanged hand in hand with a small quantity of the same product, the excess quantity of the original product is called Riba Al-Fazl.

Narrated Abu Saeed Khudri (R):

One day Bilal (R) came to the Messenger of Allah (SAW) with some good quality dates. The Prophet (SAW) asked him, ‘Where did you get these dates?’ Then Bilal (R) said, “Our dates were of inferior quality.” I replaced it with a Burmese date in exchange for two. Upon hearing this, the Prophet (SAW) said, “There is so much unadulterated interest, so much unadulterated interest, so much unadulterated interest. Never do that again. If you want to get good dates, sell yourselves in the market first and then buy good quality dates. ”

According to many scholars, Riba Al-Fazl has a limit on the seven products mentioned in the hadith. But most Islamic jurists believe that the same principle applies to the exchange of any product other than the one mentioned in the hadith.

The topic of interest in the Quran

Interest has been declared forbidden in Islam. There are numerous verses in the Qur’an and Hadith about this. There are at least 15 verses in the Quran about interest. In 6 of them, direct interest has been declared Haram. The first verse about interest was revealed in 615 AD, in the Makki life of the Prophet (SAW).

The topic of interest in the hadith

Many times in the hadith, the Prophet (SAW) has made it clear that interest is forbidden in various contexts. The horrors of interest have been mentioned in many hadiths. In a hadith, it has been said, “The Prophet (SAW) cursed all those who take an interest, pay interest, account for interest and testify to interest, and they are all equal in crime.” The hadith further states, “No matter how much the wealth earned by interest increases, its end result must be destruction.”