The literal meaning of interest is the money paid for borrowing money, or the rent on money, and it is always according to a fixed ratio. It is known by every living person and interest has become completely institutionalized and it is commonly accepted in every modern economy. Most of the people accept dealing in interest except for Muslims. Devout Muslims stay away from dealings that involve interest.
The reason why Muslims refuse to receive and pay interest is that Islam has strictly forbidden such practice. But this is not considered by Muslims like any kind of a harsh restriction, they know that staying away from interest dealing is directly or indirectly benefiting them. They believe that all Islamic teachings are based on wisdom, knowledge and justice and there are sound reasons for every single thing is Islam. So the forbidding of interest has some reasons, some of which we are able to see.
When you read the Islamic texts about interest, you will come to know how strict the warnings are against dealing in interest (both receiving and paying). Islam condemns many acts, like adultery, fornication, consuming alcohol, murder and homosexuality. But the extent to which interest is condemned in Islam is on another level and Sayyid Qutb has written that Usury is more strongly denounced than any other issue. It has even been compared to having sexual relations with your mother.
The Quran gives a strong warning to people who deal with interest and warns them of the hellfire.
The dealings of stock are permitted in Islam, Muslims can buy and sell shares in the stock market and make a healthy living through it. But it is important to note that not all types of share are allowed in Islam. Common shares are allowed in Islam but preference shares are prohibited. The reason being that common shares don’t have a fixed rate of return, and the shareholders will receive dividends according to the company’s profits. On the other hand preference shares are more like loans that companies take from the general public. Preference shares have a fixed rate of return and the profitability of the company does not affect the dividends. Furthermore there are two types of preference share, cumulative shares and non-cumulative shares, both of which are condemned in Islam. In case of cumulative shares if the company incurs a loss and cannot make dividend payments they will have to pay the accumulated amount next year. But in case of non-cumulative shares if the company incurs a loss and the company is not able to make the interest payment, they will not have to pay the accumulated amount next year.
Preference share dividends are more like interest payments because both have a fixed rate and the profit on both is guaranteed.
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