The Difference Between Interest and Investments

Fatwa ID: 03871

Answered by: Alimah Sabrina al-Faarsiyyah

 

Question

Assalāmu `alaikum Warahmatullāhi Wabarakatuh.

 

Hazrat, can you please explain to me how the Shariah differentiates between investing in a business and accepting profits versus interest that the bank used to make more money.

 

The latter is haram and the former is halal providing the funds are being invested in halal transactions.

 

I'm sorry if this sounds stupid, but they both sound the same to me. You're investing to make more money, so why are bank accounts where you accrue interest haram?

 

 

بِسْمِ اللهِ الرَّحْمنِ الرَّحِيْم

In the name of Allah, the Most Gracious, the Most Merciful

 

Answer:

Assalamu Alaikum Warahmatullahi Wabarakatuh

 

One of the wrong presumptions on which all theories of interest are based is that money has been treated as a commodity. Therefore, it is argued that just as a merchant can sell his commodity for a higher price than its cost, or a lessor can lease his property, he can also sell his money for a higher price than its face value.

 

However, Islamic principles do not subscribe to this presumption. Money and commodity have different characteristics and therefore are treated differently. For example (1) Money has no intrinsic utility whereas a commodity does have an intrinsic utility. (2) Commodities have different qualities whereas money has no quality except that it is a measure of value or a medium of exchange etc. Based on these differences, Islamic Shari’ah has treated money differently from commodities.

 

Money should not be held to be the subject-matter of trade, like other commodities. If money does have to be exchanged for money (such as borrowing), the payment on both sides must be equal. Investing in business and accepting its profits is when, in a transaction, there is a commodity on one side at least, being sold in exchange for money. On the other hand, interest is when money is made the subject-matter of trade and there is money on both sides of the transaction, but one party earns more.[1]

 

Imam Abubakr Al-Jassas, in his famous work, Ahkamul Qur’an, has explained Riba (interest) as the following: “The Riba which was known and practised by the Arabs (in the time of ignorance) was that they used to advance loan in the form of dirham or dinar for a certain period with an agreed increase in the amount of the principal advanced.”[2]

 

Allah Ta’ala says: “Those who consume interest cannot stand [on the Day of Resurrection] except as one stand who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest." But Allah has permitted trade and has forbidden interest…”[3]

 

To answer your question, when you put your money in the bank and thereby earn more, this is interest and impermissible, because of the reasons mentioned above. However, when you invest in a business, wherein the subject matter is anything but money itself, and earn profits, then this is permissible.

 

 

Only Allāh knows best

Written by Alimah Sabrina al-Faarsiyyah

Checked and approved by Mufti Mohammed Tosir Miah

Dārul Iftā Birmingham

 

 


[1] Mufti Taqi ‘Uthmani, The Historic Judgment on Interest, pp. 89-91, Maktabah Ma’ariful Qur’an

 

[2]Ibid: pp.32-33,

 

[3] Al-Qur’an 2/275

 

 

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