As you have rightly
pointed out, interest is forbidden in Islam. The basic reason is that the
rights of the borrower and lender are not protected on equal grounds. While
the lender is ensured a safe return, the borrower is not and the lender is
least bothered with it. This makes the contract an unethical one.
However, there is another way
out for a person who does not want to earn money through interest (neither
does he want to enter into a profit and loss agreement but wants to earn
money through lending: The contract between the lender and the borrower
should be made on the basis that the lender gives an undertaking to the
borrower that he will be entitled to a percentage share in the profit only
if the borrower earns profit on the investment made.