Assignment Subject : Riba, Profit, Conventional Economics Course Title Course code Assignment No.

and Islamic Economics. : Principles of Islamic Economics : ECON- 2403 : 01

Submitted To :
Name : Md. Nizam Uddin

Lecturer of

: Economics (BBA Department)

IIUC (DC)

Submitted By :
Group Captain : Md. Tareq Abdullah Group Members ID : B091841, B091835, B091837, B091839, B091847,
Batch Program
B091815, B092003, B092005, B092011, B092021, B091849. : 28 A10 : BBA

Submission date : 07-01-2011

1. Arguments for Riba

According to classical economics, interest plays a very important role in the mobilization of savings and investment. It is said that people save in order to earn interest and investment is not possible without saving. Therefore, in the absence of interest rapid economic development cant be achieved Receipt and payment of interests and its application is very simple and hence goes to the advantages of both the payers and the takers . Each party knows how much to pay and how much to receive . There is no risk or uncertainty . Interest helps those families who have enough cash money but have no earning member . If this families keep their idle money in any bank , They can get and assured income every year . Perhaps the most fundamental argument in favor of interest is that everything has value and time has also value . Therefore, The borrower must pay the price of time in the form of interest . If the loan is used for productive purposes ,the payment of interest cant be regarded as julum or exploitative .

2. Arguments Against RIBA

This argument that people save in order to earn interest is not valid in practice. If the rate of interest is zero, does it mean that people will not keep their excess money in the bank? Definitely, they will. The point is that saving is not necessarily a function of interest, rather it is a function of income. Actually, people save for the future, for unfortunate event of the future. The assumption of perfect foresight is not possible, and hence, unacceptable in Islamic economics. Actually, the mystery of time and perfect knowledge of all affairs of the human beings including the outcome of the economic activities lies with Allah, and Allah alone. As the Quran says, Lo! Allah! With Him is knowledge of the Hourno soul knoweth what it will earn tomorrow, and no soul knoweth what land it will die. Lo! Allah is knower, Aware [ Lukman 31:34] For example, if anybody invests TK (say) one million, can one say with certainty how much one will get as profit10%, 15%, 20% or something negative? The answer is hundred percent NO. therefore, simplicity is accepted at the cost of exploitation of the borrowers by the lenders in the so-called modern economy. The third argument is also not acceptable. In the definition of Islamic bank, it has been mentioned that it is a multi-institution so that there would be some arrangements for utilizing fund of those families who have no earning members. The possibility is that if that if the money of these types of families is properly invested under the guidance of the Islamic bank, it may even earn more income than the income provided by the fixed rate of interest. Time has definitely value, but it cannot have predetermined and certain value. It should be used as a variable. Therefore, the price of time should be allowed to have either positive or negative value so that predetermined values become useless. Since Riba is an additional payment conditioned over and above the amount lent, the distinction between production loan and consumption loan or institutional loan and non-institutional loan or any type of distinction is unnecessary. For instance, the production loan based on fixed interest may also be exploitative either for the borrowers or for the lenders depending upon the actual outcome: if the profit is low or negative the borrower is exploited and if it is far above the fixed interest, the lender is exploited. Justice demands that both the risks and the gain of business should be equitably distributed between the lenders and the borrowers. Apart from the above arguments, there are other popular arguments against interest. For instance, interest makes the rich richer and poor poorer. This is because, banks collect deposits form thousands and thousands of small and big depositors but these funds are given as loan to only a few well-to-do business men so that funds actually get transferred (through profit) form the poor to the rich. The fixed rate of interest makes the depositors idle. A person, depositing some 25 lakh taka, according to present arrangement in Bangladesh, can earn TK 27 thousand every month without any risk!

3. Distinction Between Riba and Profit :

There are people who, either willingly or unwillingly, try to equate profit with interest. It must be borne in mind these two concept are fundamentally different. The basic difference between these two concept are given bellow :

Riba
1. By definition, Riba is the premium paid by the borrower to the lender along with the principal amount as a condition for the loan. 2. It is prefixed, and hence there is no uncertainty on parts on either the givers or the takers in so far as its amount is concerned. 3. Riba can not be negative, it can at best be very low or zero. 4. From the Islamic Shariah point of view, it is Haram. 5. Its a Haram, so it is prohibited in Islam.

Profit
1. By definition, Profit is the difference between value of production and the cost of production. 2. It is post determined, and hence its amount is not known until the activity is done. 3. Profit can be positive, zero or even negative. 4. From the Islamic Shariah point of view, it is Halal. 5. Its a Halal, so it is not prohibited in Islam.

4. Comparison between Conventional and Islamic Banks : Conventional Banks

1. The functions and operating modes of conventional banks are based on manmade principles. 2. The investors is assured of a predetermined rate of interest. 3. It aims at maximizing profit without any restriction. 4. It does not deal with Zakat.

Islamic Banks
1. The functions and operating modes of Islamic banks are based on the principles f Islamic Shariah. 2. In contrast, it promotes risk sharing between provider of capital and the user of funds.

3. It also aims at maximizing profit but subject to the Shariah restrictions. 4. It is one of the service oriented functions of the Islamic banks to collect and distribute zakat. 5. Landing money and getting it back 5. Participation in partnership business on with interest is the fundamental function PLS basis is the fundamental function of of the conventional bank. 6. It can charge the Islamic banks. additional money(compound rate of interest) from defaulters. 6. Its scope of activities is narrower when 6. Its scope of activities is wider when compared with an Islamic bank. compared with a conventional bank. It is, in effect a multi-purpose institution 7. It can charge additional money 7. Islamic banks have no provision to (compound rate of interest) from charge any extra money from defaulters. defaulters. 8. In it very often, individual interest 8. It gives due importance to the public becomes prominent. It makes no effort to interest. Its ultimate aim is to ensure ensure growth with equity. growth with equity. 9. For interest based commercial banks, 9. For Islamic banks, it is comparatively borrowing from the money market is difficult to borrow from the money relatively easier. market. 10. Since income from the advances is 10. Since it shares profit and loss, Islamic fixed, it gives little importance to banks pay greater attention to developing developing expertise in project appraisal project appraisal and evaluations. and evaluations. 11. It gives greater emphasis on credit11. It gives greater emphasis on the worthiness of the clients. viability of the projects . 12. The status of a conventional bank, in 12. The status of Islamic bank in relation relation to its clients, is that of creditor to its clients is that of partners, investors and debtors. and trader. 13. A conventional bank has to guarantee 13. Strictly speaking, an Islamic bank can all its deposits. not do that.