Interest is the amount paid over capital amount, profit is the fruit of application of capital and labour
A confusion which I have experienced among a lot of people and the queries that are unanswered in my inbox are on the subject of the profit and interest. The similarity in all the questions is that profit and interest are considered as synonymous, though they are not!
They say trade is but like Riba (interest), though Allah has made trade lawful, and forbidden Riba (interest). (Al Quran 2:275). Based on this Quranic verse there is no doubt that the trade on which profit is earned is different from the interest which most of the people consider as one, though Quran has condemned it. Let us comprehend the difference between them so as to make meaningful inference.
Rate of interest is determined in advance while as profit is not determined in advance. While dealing with modern banks we know very well the rate of interest we are being paid on our deposits or we are made to pay on the loan amount. We can easily calculate what we will get at the end of the year on our deposits or we can easily calculate how much we have to pay on loan service after a year. But in case of profit we cannot calculate how much amount we will earn after a year.
Interest is the amount paid over capital amount. While profit is the fruit of application of capital and labour, it is a difference between value of production and factors of production.
Interest is earned without taking risk of investment. The bank has to give us interest on our deposits no matter whether the bank profits or goes into loss, in the same way the person who has availed loan from a bank has to pay the interest which is due to him no matter he goes in profit or loss. That means there is social injustice from both the sides in modern banking because of interest. While as profit is earned after taking the risk of investments. Both the Islamic bank and the client share the risk by way of sharing both the profit as well as loss. That means there is social justice in Islamic banking which is interest free.
Money lender charges interest many times over on the same capital. While as trader charges his profit once and for all.
Interest can also be called as unearned income as it is not earned by putting your efforts hard, no exertion and no tension. While as profit has to be earned by investing labour and capital. You have to work hard to earn profit and a minute laziness can result in loss which is not the case with interest.
In an interest based economy poor become poorer and rich become richer. Poor people need money which they get in the form of loans. They reach their death bed but still they leave behind the debt of banks as the interest rates and non-timely installments increase their liability day by day. The rich become richer as they enjoy unjustifiable interest rates on their huge deposits. While as an interest free economy ensures equitable distribution of wealth in a society. Everyone gets his share of wealth based on the performance and the efforts he does.
So by understanding the difference between profit and interest, one can easily comprehend the ills of interest based economy. By eliminating ‘interest’ in a society one can achieve multi-dimensional objectives in a society from unemployment problems to inflationary situations. Government which is already in the mess of eradicating poverty has to eliminate interest which in itself can eradicate poverty. At the same time all the people can contribute in this noble cause and thus save the economy of our society which is at the brink of disaster.
(The author is an MBA from university of Kashmir and has done PG Diploma in Islamic Banking and Finance. firstname.lastname@example.org)