Now, let us try to understand the logic that forbids Interest Income. When a person gives loan to someone for investing in Business, the lender does so on condition of receiving Interest on the amount of loan when the loan is repaid. Now if you notice here, the condition implies that, the person taking the loan for investing in business has to pay the interest irrespective of the fact that whether he makes a profit or loss in the business which he had financed through the loan amount. Thus the person receiving Interest is not sharing the RISKS, associated with the business of the person who borrowed money from him. He will be receiving the Fixed rate of money i.e Interest even when the borrower has made a loss. Islam forbids any contract which gives a position to the party to contract to avoid the Risks associated with it. For this very same reason INSURANCE of any kind is FORBIDDEN in ISLAM.
People keep money in Banks to earn Interest on their deposits so that they can fight Inflation. But they forget that their money is loaned out to borrowers who invest the money in their Business and despite them making losses, the depositers earn interest on the same.
The best way for a muslim to fight Inflation is to either Invest in Property and Gold. and not into Debentures, Banks and Derivatives i.e FUTURES AND OPTIONS.
The Islamic system of giving loans is as follows; Suppose Mr Akbar wants to buy a House available for Rs 20,00,00. He is short of money at the moment so he approaches an Institution which is into Islamic Financing. Now what the Institution will do is that it will first buy the House itself for Rs 20,00,000 and add its profit margin to it say @ 10 % i.e 200,000. Now The Institution will sell the House to Mr. Akbar for Rs 22,00,000 ( 20,00,000 + 200,000) today and ask him to pay the same in Installments, say in 11 monthly installments. Thus, Mr Akbar will pay Rs 200,000 for 11 months each.
The Islamic Business Loan is as Follows : Suppose Mr Rahim, needs a loan of Rs 30,00,000 to set up a business. The Islamic Financial Institution will enter into an agreement with Mr Rahim that whatever profit Mr Rahim makes out of the Business, he would share say 20 % with the Institution and in situations where he incurs losses, he need not pay anything to the Institution. Thus, we can see here that The Institution is sharing both the Rewards and Risks and thus the 10% would not be a fixed amount. The profit may be Rs. 30,000 for one month and may be Rs. 50000 for another month and even losses in some month.
The Most important thing to be remembered is that, Interest Income is not Allowed In Islam because ALLAH has stated in the Holy Quran that Receiving or giving Interest is equivalent to waging a war against ALLAH and his MESSENGER PROPHET MUHAMMAD (SALLALLAAHU ALAIHI WA SALLAM) (SALLALLAAHU ALAIHI WA SALLAM).
