Understanding Islamic View of Money, Profit and Banking

As Islamic banking continues to gather traction in East Africa, questions have been raised on what Islamic views are about money .

The understanding of this issue is likely to determine how fast Islamic banking will grow towards promoting financial inclusion .

Just how does Islamic banking jell with financial inclusion and the flow of money in the economy ?

The factors of production under the Islamic economic framework are capital, land and labour .

Capital includes all that is employed in the production process. It may also include all the means of production that cannot be directly used in production until they are consumed or altered in form during the course of production .

Under the Islamic economic system, money is viewed as “potential” capital and can only be translated into actual capital when it gets combined with other resources to be used in production .

Applying the concept, profit is viewed as compensation of capital under the Islamic system only if the same capital bears responsibility or liability .

This means profit on any capital is realised as the residual revenue of a business that employed the said capital once payments to other entities or parties in the business have been made .

In the event that the residual value is negative, the capital provider bears the loss, provided that there is no negligence or theft by the entrepreneur .

Land employed in the production process, on the other hand, enjoys returns that may accrue in form of rent while labour that comes in the form of physical or mental deployment earns wages as compensation .

Earning “money from money” is not acceptable in Islam. Money is only seen as a medium of exchange and the expression of value of an item and thus lacks value in itself .

Potential capital

Muslim jurists do however consider money as potential capital until it is invested in business. This is the wisdom behind considering money as a debt to a business when it is advanced to the business as a loan and it gets no return in the form of interest .

Interestingly, money has no time value in the Islamic economic system unless it ceases to be potential capital and gets utilised in productive activities. Capital is an entrepreneurial capacity that facilitates the economy and fuels the transformative process of value creation .

It therefore follows that money, or financial capital, allows entrepreneurs to translate an idea into action and create the infrastructure to sustain a business .