Question: What is the difference between profit made through trade and profit made through interest? This is one question I have been receiving from many of my readers.
Let’s look at it today! Note: Islam unanimously looks at the form of business transaction rather than the substance of it even though other schools of thought also consider the substance of transactions but not over form as in conventional finance.
Answer: In verse 275 of Surah al-Baqarah, Allah starts with a frontal attack on riba (interest), describing those who take interest profit in the most severe terms: “Those who devour interest stand up like someone lurching from Shaytan’s touch.”
The verse compares one who consumes riba (interest) to a staggering madman. Then the verse mentions the standard justification used by those who take interest: “They say: ‘Trade is just like taking interest.’”
This justification is still the basis of one of the arguments used for taking interest today. Which is that one must pay for the usage of someone else’s capital.
If he had kept that capital, he could have invested it and made a profit so the borrower has to compensate the lender for the loss of his potential profits, especially since the borrower will use the lender’s capital to make profits.
This is what is referred to as the ‘opportunity cost of lending’ in conventional finance.
However, Allah rejects their crafty arguments and twisted logic saying: “But Allah has made trade permissible (halal) and interest forbidden (haraam).”
One of the basic principles of Islamic finance is what we call Kharaj bi Daman or Al Ghunm bil Ghurm (Gain accompanies liability for loss, a Hadith forming a legal maxim and a basic principle of Islamic finance).
Again, basic conditions for halal transactions such as the present of a buyer and a seller, offer and acceptance, and taking a calculated risk in a business coupled with economic activity remove impermissible activities such as gharar (uncertainty) or maysir (gambling) from halal trade which Allah has made permissible in the Quran.
On the other hand, when you observe a conventional form of lending/loans, you will realize that it is a transaction that uses money as a commodity instead of a medium of exchange, which lacks all the halal conditions enumerated above by the Shariah hence, rendering it shariah non-compliant transaction.
To make it short, what distinguishes between profit made through trade and profit made through riba (interest) is that the former has a commodity between the transaction whilst the latter uses money as a commodity.
In addition, the former has taken calculated risks in business whilst the latter has transferred his risk to the borrower. This makes trade profit just and interest profit exploitative.
The last strongest distinction between profit made through trade and profit made through interest is the permissibility of the former and the unequivocal prohibition of the latter by the lawgiver in His divine Book, and the permissibility of the former and prohibition of the latter by His holy prophet, may the peace and blessings of God be upon him. In other words, justice is determined by what God says is, and injustice is also determined by what God says is.
I hope and pray that through this explanation Allah will give us an understanding of this popular issue about the difference between trade profit and interest profit And Allah knows best! “Praise be to God in whose favor good deeds are accomplished”- (ibn Maja 3803).
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana and beyond.
Email: yahaya0246873726@gmail.com
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