Riba vs. Rate of Return 65
interest is a property right that falls outside the legitimate framework of
individual property rights recognized by Islam. Such a claim is instanta-
neous because a right to the borrower’s property is created for the lender as
soon as the contract for lending is concluded, regardless of the outcome of
the enterprise for which the money is used.
Money lent on interest is used either productively, in the sense that it
creates additional wealth, or unproductively, in the sense that it does not
lead to incremental wealth produced by the borrower. In the former case —
when the funds are used in combination with the labor of the entrepreneur
to produce additional wealth — the money lent cannot have any property
rights claim to the incremental wealth because the lender, when lending
money, does not bargain for a proportion of the additional wealth but for
a fi xed return, irrespective of the outcome of the enterprise. He, in effect,
transfers the right to his property to the borrower. In the latter case, since no
additional wealth, property or assets are created by the borrower, the money
lent — even if legitimately acquired — cannot be used to claim any additional
property rights since none is created.
PROMOTING PROFIT AND RISK SHARING
When the Arabs argued that “trade is but like riba” (2:275), they were
decisively informed that “Allah has permitted trade and forbidden riba.”
The legal differences between trade and riba as set out in the Qur’an have
been detailed over the centuries by capable Muslim jurists. However, the
fact remains that the sophisticated Arab traders of Mecca did not at fi rst
see any discernible difference between the Islamic model and the one based
on riba. The sharing of the enterprise’s risks and uncertainties is an extremely
important characteristic of Islamic fi nancial contracts. The Shari’ah con-
demns even a guarantee by the working partner to restore the invested funds
intact, not only because it removes the element of uncertainty needed to
legitimize the agreed distribution of expected profi ts, but also because the
lender will not be remunerated to the extent of the productivity of his fi nan-
cial capital in the resulting profi t.
In Islam, the fi nancial instruments for trade and production purposes are
based on risk/profi t sharing as a return for the entrepreneurial effort and on
fi nancial capital. The lender who advances money for trade and production
can contract to receive a share of the profi t. In doing so, he becomes part-
owner of the capital of the enterprise and shares in its risk. As a shareholder in
the enterprise, he becomes liable for its debts to the extent of his investment,
and receives a return (a dividend) only when a profi t is earned. A creditor, on
the other hand, as a debenture holder, lends money without the risk of own-
ing and operating capital goods and claims interest regardless of the profi t or
loss position of the enterprise. The creditor runs a risk, but it is the risk of the
solvency of the borrower, not of the success or failure of the enterprise.