Understanding Islamic Finance - Doha Academy of Tertiary Studies

438 Understanding Islamic Financelike buildings and machinery have claims on rent because the lessor retains their ownershipand bears the related risks. Therefore, one cannot derive any benefit from money unless onegives it up in exchange for commodities or services using the structure of any of the validcontracts of sale or lease.Real sector business transactions take any of the following three forms: sale/purchasethat may be either on cash or credit, loaning or leasing. When executed, these transactionshave different implications in respect of transfer of ownership, risk and liability. Earning ofprofit depending upon the outcome of the business is permissible. Whether it is a real sectorbusiness or a financial activity, risk always remains with the ownership. A person who givesa loan has the right to get it back; he bears no risk irrespective of whether the borrowerearned any profit or incurred loss or even used the borrowed money in consumption. Hence,he cannot claim any return on his loaned capital. If a person who is providing the fundswants any profit over his money, he will have to agree to bear the loss, if any. In this case,the realized profit would be distributed as per a pre-agreed ratio, while a loss would beshared in proportion to the investment made by each financier; a fund user’s loss being hisunrewarded labour. Hence, there is no place for “interest”. That is to say, one is entitled toprofit only if one bears the risk of loss.If a person purchases a commodity, gets its possession/risk, he can sell it with a marginof profit on cash or credit. As soon as the (credit) sale is executed, his right is the receivablethus created, while the asset risk is transferred to the buyer. If he transforms his moneycapital into a fixed/nonconsumable asset, he has the right to lease it on rent provided hebears the ownership-related risks and expenses. Keeping in mind this principle, it can besaid that one can earn profit on his investment or financing but that has to be related tocertain assets exposed to direct or indirect business risk. As a lender or a creditor bears norisk and is entitled to repayment of the whole amount of the loan or the debt, he has no rightto claim any return or rent.17.3.3 Inflation and InterestInterest cannot be legalized on the basis of inflation, mainly because of the fact that loaningin Islam is a noncommutative and virtuous activity. It should not be mixed with a businessthat is conducted with the objective of earning profit. Profit can be earned if capital is linkedto any liability, risk or responsibility. Islamic finance does not have the provision of linkingany debt or receivable with any currency/commodity. The clear injunctions of the HolyQur´ān and Sunnah reveal that if financial contribution takes the form of a loan or a debt,it is to be paid back exactly in the same kind and quantity, irrespective of any change inthe value of the concerned currency or price of the commodity lent or borrowed at the timeof return of the loan. If one wants to avoid the risk of depreciation in value, one shouldtransform one’s money into a real asset, undertake any business, earn profit thereby and geta rental or a share in the realized profit by taking liability of the loss. In the presence of theNass of the Holy Qur´ān (verse 2: 279), the idea of linking loans/debts to the purchasingpower of money cannot be justified on the basis of Ijtihad, because Ijtihad is carried outonly where a clear directive by the Qur´ān or Sunnah does not exist.During an inflationary period, the intrinsic characteristics of money, i.e. its role as amedium of exchange and as a unit of account, remain intact. Only the relative characteristicchanges, i.e. the future value of money in terms of its exchange value; but this has beenchanging since the introduction of money, even in respect of full-bodied coins. The value of