Interest in the modern sense, however, is computed as a function of the generally viable rate of profit in a given society. This approach has, considerably, pushed down interest rates in the modern age. Furthermore, the law prohibits penal bonded labour if the debtor be genuinely unable to discharge his commitments. Interest in the modern sense is, thus, quite different from usury. The assumption of their structural and functional identity breaks down in the light of historical and analytical scrutiny. The debate among Islamic economists whether insurance involves gambling (which Islam prohibits) is very relevant for correctly interpreting the Quranic prohibition of riba.

Insurance finds no mention in Islamic jurisprudence, while gambling and games of chance are prohibited. Since insurance is definitely linked with the workings of chance, the principle of analogical reasoning (qeyaas) led most jurists to conclude that Islam also prohibited insurance. However, many modern Islamic jurists now permit insurance. They make (rightly) a distinction between the function of gambling and the function of insurance, and hold that the function of gambling is momentary thrill (without giving anything in return to society) the function of insurance is protection against unhappy contingencies) and is, thus, pre-eminently desirable. Now why should not this method of interpretation also be applied to the different types of loans and the issue of interest? While the charging of interest on a distress loan does involve exploiting human misery, does the same apply in the case of a loan for development of industry or commerce? Again, is not ancient and medieval usury involving exorbitantly high rates plus bonded labour functionally very different from interest used as a tool for stimulating the economy and protecting the legitimate interests of the investor, the entrepreneur and society as a whole? 

Analytical discrimination and juristic reflection have, indeed always been practised by Muslim jurists no less than the Prophet and the pious Caliphs. The classical distinction between developed and virgin land, and permitting farming or sharecropping in the former case but prohibiting it in the case of the latter is a good example. The classical Islamic jurists applied the same principle when thy waived the Quranic penalty for theft in several cases. Why should not the same approach be followed in the case of interest?

(b) We now come to the second assumption--unearned profit which is risk-bearing is equitable, but unearned interest which is devoid of risk is inequitable. Is there really any moral distinction between the risk-bearing nature of profit and the risk-free nature of interest over and above the purely economic difference that while profit is contingent and flexible, interest is pre-determined and fixed?

It may be thought that since interest is payable to the lender as an absolute claim irrespective of the economic health of the productive enterprise, this causes unmerited hardship to the producer if and when things go badly with his enterprise for no fault of his own. This unmerited suffering does not occur when the lender shares profit or loss in a partnership. There is an element of truth in this contention. But this moral factor becomes relevant only when the producer is close to or actually reaches the state of economic breakdown or the rate of interest be so exorbitantly high as to make the profit almost nominal. Otherwise the factor of risk in a partnership or the absence of risk in the case of interest do not matter except when the rate of interest be so exorbitantly high as to cripple the debtor. In general, when a sleeping partner partakes of profits merely on the strength of supplying capital to the active partner, this appears to me to be as equitable or not as receiving a fixed but small and unconditional return for his monetary contribution to the enterprise.

Social justice is a highly complex goal having several aspects or coordinates. Justice certainly requires that the producer be protected against rough economic weather, but it also requires the reasonable protection of the supplier of capital. It appears that interest (viewed as a .fixed charge paid by the producer) tends to motivate him to keep costs down and earn enough to be able to pay the cost of borrowing the capital, while cost-free capital tends to make the economic enterprise much too soft for the entrepreneur and to slow down the motor of economic growth. On the other hand, when the lender agrees to receiving a low rate of interest he pays a definite price for eliminating the factor of risk in the investment. Choosing a lower share for the sake of security and the elimination of risk does not involve any moral wrong. It is a measure of caution and the creditor’s preference for secure returns and paying a price for this advantage. This appears to me as justified caution, and not evil. Charging interest (at high rates) becomes exploitation of the weak only when money lenders do so in the case of distress loans to the weaker sections of society. However, no inequity is involved when the supplier of capital demands a fixed (relatively low return) for his contribution to the complex productive process and foregoes all profits that accrue to the producer.

(c) Let us now examine the assumption that the charging of interest is an absolute evil and must be abolished in one stroke and that true Muslims must aspire to do so without any ‘ifs and buts’, and that such abolition and the universal adoption of the ‘Islamic model of partnership production’ will make the world economy to prosper rather than cause a break-down.