In Islam Riba (Interest) is strictly prohibited. Islam support business based banking where banks are allowed to earn through profit from business. That is banks profit will not be fixed prior to business. But Riba (Interest) is fixed whatever the business situation is. I will try to difference Riba (Interest) against Profit and Rent.
Difference between Riba (Interest) and Profit:
Different between Riba and Rent:
Difference between Riba (Interest) and Profit:
Riba (interest)
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Profit
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1. Excess over the principal in a loan transaction.
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1. Positive end result of business operation.
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2. Unearned income
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2. Has to earn by investing labour and capital.
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3. Return of principal with additional amount (interest) is ensured.
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3. No such surety.
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4. Pre-determined
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4. Uncertain
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5. Interest may repetitively be earned on a single transaction.
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5. Profit may be earned once from a single deal.
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6. Prefixed cost of goods and services and creates inflation.
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6. Profit is found after deduction of all expenses from total income. So it has no relation with inflation.
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7. Interest increases money supply in the market.
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7. There is no opportunity of increasing money supply.
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8. These is the opportunity of compounding
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8. Close end transaction.
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9. There is no risk of erosion of capital.
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9. Risk of erosion of capital is there.
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10. No chance of negative end result i.e., loss.
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10. This is every possibility of negative end result.
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11. Declared Haram (prohibited) unequivocal terms in the holy Quran.
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11. Halal (permitted) as declared by the holy Quran.
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12. Transfers assets from poor to rich.
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12. Ensure equitable distribution.
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Different between Riba and Rent:
Riba
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Rent
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1. Excess paid over the principal in a loan transaction.
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1. Rent is paid for consuming utilities of an asset which have repetitive use.
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2. Interest (riba) unilaterally determined and has no relation with market forces.
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2. IT depends on market forces i.e., demand and supply.
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3. Lender is not concerned over the lent money. Borrower will have to pay back principal with interest.
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3. Rent is paid on an asset so long the same remains useable.
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4. Lender has no responsibility of maintaining the fund lent out.
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4. The owner of the asset is bound to maintain the asset to keep the same useable.
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5. Principal and interest is always safe.
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5. All along these is the possibility of damage.
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6 By lending the ownership of money or commodity is transferred.
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6. Ownership of the asset is not transferred. The hirer only can use the asset.
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Jazakom Allaho khairan, this has been immensely helpful & is clear.
ReplyDeleteYour sister,
Somaya
Jazakallah khaer
ReplyDeleteLoan (money) and assest .is there any difference b/w them? In both cases assets are being used and excess is being paid by the user to the owner. Market value is considered in both cases. Asset is maintained through out the transaction period while it is owned by user and not the orignal owner. During the transaction period (temporary) ownership of the asset is not transferred in litteral meaning but both users are free to use the asset.
ReplyDeleteCan you please elaborate a bit more kindly? :)
Rent from money doesnt really seem sufficiently different from rent on an object.
ReplyDeleteSurely if a borrower is willing to take the risk that the object he purchases with borrowed money will go up or down in value (more likely up- perpetual inflation eg housing market) while lender takes the risk of inflation and currency devaluation, such a contract should be acceptable.
Also "principal and interest is always safe" , there is a risk of borrowers defaulting- even with collateralized loans the asset may be overvalued when borrower defaults. Furthermore there is a risk of the borrower in some cases declaring bankruptcy