Ribā, or interest, is sometimes confused with rent, whereas the two are quite different from each other.
Rent is a payment made periodically for the use (not consumption) of an asset, for example for the use of some land, building a machinery.
On the other hand, two simultaneously present conditions are present in any transaction which involves Ribā.
i) Some benefit (in cash, kind, service or spirit) over and above the value of the commodity lent is made a condition by the lender for the loan he gives.
ii) The commodity borrowed, or its value, is to be ‘recreated’ by the borrower if he uses up the commodity or part of it so that he may return it, or its value, to the lender.
To use the terminology of accountancy, Ribā is charged on circulating capital whereas rent is charged on fixed capital. It must be remembered that the nature of a transaction, not the commodity involved, determines whether the capital is circulating or fixed. For example, some equipment hired for producing other goods will be categorised as fixed capital, whereas the same equipment borrowed as stock-in-trade for sale by a trader who sells such equipment will be circulating capital.
Illustration
B rents his house to A for one year at Rs. 500 per month. If in one of these months A does not have Rs. 500 to pay the rent, he will only have to vacate the house. In other words, he will have to return the asset he was using. He will not have to ‘re-create’ the building to return it to the lender. This arrangement pertains to rent not Ribā.
But if A borrows some wheat from B and has to pay Rs. 100 every month as interest, this arrangement involve Ribā. The reason is that A will first use up (consume) the wheat and then will have to ‘re-create’ it (or its value) to return it to B.
In the case of rent, A is never burdened beyond his ability to pay. If he is unable to pay the rent in any given month, he will have to vacate the premises at most. However, in the case of Ribā, if he is unable to pay his dues, the lender has the right to demand not only the interest but also the ‘re-creation’ of the value of the commodity borrowed by A, who at this stage, obviously does not even have the ability to pay the interest.
It is clear that in the case of Ribā, the very nature of the arrangement is indicative of, and indeed based on, a great deal of indifference, apathy and callousness towards the borrower by the lending as the arrangement takes no account whatsoever of the conditions of the borrower before holding him liable for the total payment it entails. Occasionally, a situation arises in which the creditor sells the personal property of the borrower to get the interest and the value of the commodity loaned.