Making loan (qard) is not the way to make profits

Saiful Azhar Rosly, Ph.D saiful@inceif.org

Surah al-Baqarah 275 says that, "Allah has allowed al-bay and
prohibits riba". The question now is to whom this verse pointed at?The
answer lies in the verse preceding the above according to which the
disbelievers (i.e. musyrikun) says, " that al-bay is the same as riba".

Apparently, the Quran is putting one point very straight to the

musyrikun. If you have money and intends to earn from the money, do
it by way of trading (al-bay') and not by making loans and charging riba
on them.

The rich merchants of Mekkah (i.e the musyrikun) who relentlessly

stood against the teaching of Prophet Muhammad (saw) usually make
money from loans (qard) in two ways:
1) making loans to the poor sorely for their consumption needs
2) making loans to traders as capital

Making loans with riba to the poor often exploits them. Defauting
borrowers eventually becomes slaves to the lending party. For this
reason, the Quran prohibits riba as it is unfair. Riba opens the doors to
exploitation.

The rich people of Mekah also provide riba loans to the merchants and
traders. Artisans may borrow to purchase raw materials. The traders
involved in caravans trading resorted to riba loans, while others opted
to trade by way of mudarabah. The former must return the capital and
riba upon arrival in Mekah. If they fail to do so, the implication has been
disastrous.
The caravan trade is highly dangerous and risky. It involves long-
journey travels through severe heat of the day and cold in the nights.
Highway robberies and desert storms are the norms. Equally important,
caravan traders are also exposed to market volatilities. There is no
guarantees that goods can be sold at profits.

For example, a caravan merchant buys X for 5 dinar in Mekkah and sells
it for 10 dinar in Syria. While in Syria he purchases Y for 10 dinar and
sells it in Mekkah for 20 dinar. In this way his total profit is 20 dinar - 5
dinar = 15 dinar while the ROI = 15/5 x 100 = 300%. But this is true
only when he reached Mekkah alive and well as the journey took him
more than 1000 miles across the desert. He will see the creditor and
pays back the 5 dinar loans plus the riba.

However when he failed to sell X due to unforseable reasons, say losing

market or destruction of goods during the caravan travels, he end up
defaulting the loan. For this reason, when traders seek to use riba loans
to finance their travelling expenses (say, from Mekah to Damascus) as
well as purchases in Mekah, failure to earn profits always means a
failure to pay up the loans and riba attached to the loans. That failure as
mentioned earlier always leads to disaster. The rich lenders will
confiscate properties belonging to the traders or turn them in slaves
when nothing is found enough to replace the loans.

The same does not apply in the mudarabah system. The mudarabah is
the financing aspects of the whole business of caravan trading. The main
line of transactions remains to be buying and selling of goods and
commodities where payments are settled on the spot. It does not make
sense, to see the Prophet Muhammad (saw) having purchased an item
worth 4 dinar in Mekkah offers the same for 10 dinar cash or 14 dinar
on credit in Damascus. Certainly, the sale is settled on the spot in
Damascus at 10 dinar!
The mudarabah system is an egalitarian one. If the business does not go
well, the capital provider shall bear the loss. The agent-entreprenuer
(i.e. mudarib) is spared from all liabilities except those incurred by way
of negligence.

The caravan trading actually illustrates the nature of risk that people
always face in that business. It is by no means to bring us back to the old
ways. The risks are severe as in any modern business today. Some
examples are price and operational risks.

To sum up. to earn money one must stay away from lending. Lending
money to consumers and producers often invites injurious relationship.
Of course, when lenders dutifully pay up their debts, riba is beneficial
but the reverse has always brought injury and hardship to the
counterparty.