If all the different factors of production could, possibly, be supplied by one super-human   individual, he/she could rightly claim to appropriate the entire profit. This is not possible when large investments are made. The need for capital is fulfilled through various mechanisms or modalities: the accumulation of share capital, borrowing on interest (from an individual or a bank or the state or some corporation, or by entering into a partnership). Now is there, really, any conceptual/or ethical difference between the above modalities? 

I think they are essentially the same. They are all characterized by a common feature-a claim for monetary return on the strength of some productive contribution towards turning a mere idea or project into a productive concern? And how can this claim be adjudged as morally repugnant in some cases but right in others? It is true that a sleeping partner in an Islamic partnership bears a risk, while the lender of money on interest gets a risk-free and safe return. But how does this economic difference amount to any inherent social injustice. It may be said that the concept of a fixed interest, whether the venture succeeds or fails, is morally evil. But (as stated above) the lender also needs a measure of protection.

In short, we can not hold that interest is immoral or inherently evil like we judge other wrong actions such as murder, rape, falsely incriminating an innocent person and the like. The abhorrence with which many Muslims look upon interest (which they judge as the root of social or economic ills) arises when they mix different types of financial operations or mechanisms with each other. They firstly confuse the modern idea and function of interest with ancient usury. They also confuse developmental loans with distress loans, insurance with gambling, and risk-free low return schemes for investing one’s surplus wealth or hard earned savings with inequitable perpetuation of unearned inherited wealth at the cost of the poor, and so on. In other words, committed Muslims owe it to themselves to overcome their confusions instead of passing a blanket judgment on the issues of interest and investment returns. There can be no doubt that interest in the modern sense is nothing but a thin slice carved out of much larger expected profits and its function is certainly not to exploit the poor but just to protect the legitimate interests of a large segment of society. 

It is true that paying interest to the creditor adds up to the total cost of productions and thus certainly adds to the market price of goods and the rigors of the producer. But then it promotes a proper climate for industrial and commercial investments and promotes a ceaseless concern for reducing production costs in a highly competitive market economy. Both its advantages as well as disadvantages must be kept in mind in order to arrive at a balanced perspective.

Indeed, most economists are of the view that interest performs an irreplaceable socio-economic function and that all efforts to eliminate interest from society are futile. It is significant that socialist thinkers and reformers as Robert Owen (d.1858) of Britain, Rodbertus (d.1875) of Germany, had condemned interest and advocated its abolition. Marx and Lenin, however, did not hold interest to be the arch evil. Though the Soviet Union had excluded interest, as a cost factor, in the early period just after the Russian Revolution of 1917, their ideologues later on gave up this approach. Socialist planners rejected the Capitalist system of production, yet they included interest for computing the total cost of production and for fixing the consumer price.

In short, interest is an economic tool performing several functions only some of which could be taken up by the Islamic partnership model of profit and loss sharing. Social scientists, almost without exception have concluded after prolonged enquiry that there is no effective substitute for interest just as an overwhelming majority of social philosophers and enlightened statesmen affirm that despite the evils of democracy no better substitute is available to the human family.

Concluding Reflections:

Islamic intellectuals and religious leaders must realize the plain truth that the economic directives of the Quran or the classical Islamic polity that gradually developed in early Islam will not suffice in modern times without developing the early economic models and modalities in the light of modern social sciences. The Quranic economic axioms are certainly valid, but they need to be developed in the light of 'economic. rationality'. Committed Muslims could, if they so wish, call the developed economic system Islamic or Quranic. Let me explain this crucial point.

The Quranic fixed coordinates of the economic system are only two: (a) the prohibition of usury and (b) the wealth tax (zakaat). Now all religions prohibit exploitative rates of usury but allow what should be called interest. However, Muslim jurists go by the literal meaning of words and totally disregard the fact that their significance or directive function may clearly change in changing times. They do not see the genuine distinction between the modern concept of ‘interest’ and the ancient or medieval notion of ‘usury’ and (innocently) assert that the Quranic term ‘riba’ covers both. The same remarks apply to ‘zakaat.  In some form or other all religions ordain the rich and affluent among the faithful to care for and generously help the deprived and the weaker sections. The Quranic rate of 2.5% of the net surplus should not be deemed to be a rigid or permanently fixed figure but only a minimum figure as a general guideline for Muslims. To my mind, following an ‘open’ approach to the Quranic economic axioms would converge with the theories and policies of the school of ‘Welfare Economics’.