WHY IS INTEREST HARAM?
The important question whenever we speak about Islamic finance is, why is the element of interest, as applicable in the conventional banking model, prohibited, or why is it haram?
Interest is haram because of various reasons, however I’ll just summarize it or I’ll just focus on 2 main points.
Taking advantage
One, is because interest is considered as taking advantage over the person who is in a financial difficulty.
Whenever a person goes to the bank, to borrow money, it is because valid or pressing reasons, let’s say he wants to finance his education, his health, his marriage, or even to purchase certain necessity item, for instance car or home.
So whenever the customer does’t have sufficient funds, he goes to the bank, he applies for a loan, in order to facilitate the purchase, or the use, or the purpose that he intends to use.
Making money at low risk environment
Secondly, interest is prohibited, because it’s a form of making money at a very low risk environment.
What you only need is a big pool of amount of money, and you lend it to the borrower who does not have that capacity, and then you expect the repayment of that amount, over the period of time.
So its making money out of money, over a period of time.
So in a sense, the rich will become richer and the poor may become poorer.
Riba (Interest)
So interest is mentioned a few times in the Quran, whereby it’s mentioned as Englishly translated as “Allah permits trade, but prohibits riba”.
Riba here means interest.
So the question here is, then how does Islamic banks make profit out of their business activity.
So the only form of lending which is permissible under Islam is called “Qardul Hassan” which is a soft loan, an interest free loan.
So whenever the borrower wishes to borrow money from the lender, the lender will give the capital or the principal amount, lets say 1 million, and then the borrower will have to repay that principal amount without any additional amount imposed or attached to it.
So, lending 1 million, repaying 1 million.
If lets say, the argument comes saying that, how does Bank make profit?
So Banks are allowed to make profit, however it has to involve, the real economy.
So, under Islamic banking, products are offered for instance, the product of buying and selling, so the Bank may be able to make money out of the selling of the property at a mark up price, which we call a Murabaha.
So this is the difference between conventional banking and Islamic banking, where conventional banking, they make money out of money = interest, whereas Islamic banking they make money out of transaction.
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