Part I | Part II
The Wisdom in Prohibiting Interest
Yusuf Qaradawi writes in The Lawful and Prohibited: “The strict prohibition of interest in Islam is a result of its deep concern for the moral, social, and economic welfare of mankind.” In view of succinctness, he then summarises the wisdom behind the prohibition that Razi articulated in his Tafsir:
“First: The taking of interest implies appropriating another person’s property without giving him anything in exchange, because one who lends one dirham for two dirhams gets the extra dirham for nothing. Now, a man’s property is for (the purpose of) fulfilling his needs and it has great sanctity, according to the hadith, ‘A man’s property is as sacred as his blood’ (transmitted by Abu Na’eem in Al-hilbah.) This means that taking it from him without giving him something in exchange is haram.
“‘Second: Dependence on interest prevents people from working to earn money, since the person with dirhams can earn an extra dirham through interest, either in advance or at a later date, without working for it. The value of work will consequently be reduced in his estimation, and he will not bother to take the trouble of running a business or risking his money in trade or industry. This will lead to depriving people of benefits, and the business of the world cannot go on without industries, trade and commerce, building and construction, all of which need capital at risk. (This, from an economic point of view, is unquestionably a weighty argument.)
“‘Third: Permitting the taking of interest discourages people from doing good to one another, as is required by Islam. If interest is prohibited in a society, people will lend to each other with good will, expecting back no more than what they have loaned, while if interest is made permissible the needy person will be required to pay back more on loans (than he has borrowed), weakening his feelings of good will and friendliness toward the lender. (This is the moral aspect of the prohibition of interest.)
“‘Fourth: The lender is very likely to be wealthy and the borrower poor. If interest is allowed, the rich will exploit the poor, and this is against the spirit of mercy and charity. (This is the social aspect of the prohibition of interest.)”
With all due respect to Shaykh Qaradawi, the latter part of his second argument has been refuted by the advance of industrial development in the West, which has been buttressed by the giving and taking of interest. Therefore a person could argue that ‘interest’ makes societal economic sense. Such is the case that Shaykh ‘Aashiq Illahi, in his commentary of Qur’an 2:275, in his Illuminating Discourses on the Noble Quran, states that this is one of the very disputes put forward in opposition to orthodox scholars who uphold the prohibition of riba. Illahi says that “people have grown accustomed to taking usury” due to “the institution of banking,” and they “ridicule the Ulema [religious scholars], saying that ‘their’ prohibition of usury has led to the decline of the Muslims while other nations have progressed far more rapidly.” While this argument can be made, one can rebut it by pointing out that such an understanding lacks profundity, for it fails to see the overall societal harm caused by interest; whereby such an advocate has been beguiled by the wealth of a few, without seeing the general harm, both economic and spiritual.
A person who ignores the Divine command in this matter, and simply argues in favour of interest on the basis that it works because of what we see in the West, has failed to be profound or fully compassionate. For those of us who live very comfortably in the West, alhamdulillah (all praise is due to God), we must not fail to see the global price paid for our luxury. We didn’t just become rich by charging interest, but interest allowed us to militarise so that we could conquer other parts of the world in order to gain wealth. We didn’t export interest as a method of economic enrichment to the people of the Americas, Africa, Asia and Australasia; but instead we were able to plunder to the detriment of millions on the basis of our interest-based development – to use ‘development’ in this sense is to really use the term in a base manner. Therefore interest was a means to this economic advance only because it provided, and provides, the mechanics to militarise and aids the urge to conquer. In all honesty, one must re-evaluate whether our economic methods have really led to ‘progress,’ or whether our wealth is worth the price of most people of the world living in what we would consider to be poverty. Indeed, ‘Uthmani in the Historic Judgment and Meera in The Theft of Nations have spoken of the enslavement of the ‘Third World’ by global banking; and Joseph Stiglitz in Globalization and its Discontents, Noreena Hertz in I.O.U. The Debt Threat and Why We Must Defuse It, Ali Mohammadi and Muhammad Ahsan in Globalisation or Recolonialisation? The Muslim World in the 21st Century and M. Umer Chapra in Islam and the Economic Challenge have indicated the huge failure of banking and Western management to help the ‘Third World,’ together with the issuing of interest-based loans that also dictate deeply damaging terms and conditions which are enforced upon them in their times of genuine need – the ‘Third World’ that we largely colonised and then retained economic control of after colonising, and whose resources we plundered and continue to indirectly or directly control.
‘Uthmani states, in The Historic Judgment, that “the evil consequences of interest were never so evident in the past than they are today. Injustice in a personal consumption loan was restricted to a debtor only, while the injustice brought by the modern interest affects the economy as a whole.” He then lists four main adverse effects of interest on global economics as things currently stand, in reality.
Firstly, he quotes Chapra who spoke to the Pakistani court in the case on interest as a juris-consult, touching on the fact that the banking system reinforces ‘the unequal distribution of capital,’ in a manner that does not serve ‘maturing smaller companies or venture capitalist’; hence, as Chapra quotes from Lester Thurow, the system favours the ‘lucky rather than smart or meritocratic.’
Secondly, there is an ill effect on production because, generally, people are encouraged to take loans so as to live beyond their means, and ‘the rich people do not borrow for productive projects only, but also for conspicuous consumption’; as is also, says ‘Uthmani, the case with government borrowing, where they borrow for ‘lavish expenditure and for projects motivated by their political ambitions rather than being based on sound economic assessment.’ He notes that in Pakistan the budget for 1998/99 showed that 46 percent of government spending was ‘devoted to debt-servicing, while only 18% is allocated for development which includes education, health and infrastructure.’
Thirdly, there is an adverse distribution in which ‘64.5% total advances went only to 0.4243% of total account holders, it means that the profits generated mostly by money of millions of people went almost exclusively to 9,269 borrowers’; hence, as pointed out, the role of interest is to transfer money from the poor to the rich, whether from the ‘Third World’ to the ‘developed world’ or average depositors to the wealthy.
Fourthly, and this is crucial, the interest-based system has led to the ‘expansion of artificial money and inflation.’ ‘Uthmani laments that ‘primary books of economics’ can, often, treat the fact that ‘banks create money’ with complacence, and he asserts that the ‘apparently miraculous function’ is an ‘illusion.’ He writes:
“But the net result [of fractional reserve lending] is that the modern banks are creating money out of nothing. They are allowed to advance loans in the amounts ten times more than their deposits. The coins and notes issued by the government as a genuine and debt-free money have now a very insignificant proportion in the total money in circulation…The spiral of loans built upon loans is now the major part of the money supply. Taking the example of UK according to statistics of 1997 the total money stock in the country was 680 billion pounds, out of which only 25 billion pounds were issued by the government in the form of coins and notes. All the rest, i.e. 655 billion pounds, were created by the banks. It means that the original debt-free money remained only 3.6% of the whole money supply while 96.4% is nothing but a bubble created by the banks…[and] it means that 96.4% of the aggregate money circulated in the country is nothing but numbers created by computers, having no real thing behind them. The position in USA is almost the same as that in U.K.”
Furthermore, on a more local, Western basis, we must not underestimate the cost of interest’s prevalence in light of the third and fourth points made by Qaradawi from Razi above. Who of us could honestly deny that our affluent society is not beset by these ills? Are we generous? Is poverty being eliminated in our own lands? Just look at events following on from a disaster of some sort: Do people willingly rush to simply contribute to various charities, or do they need to get something in return, like a singing or comedic performance, or maybe a sporting exhibition?
Indeed, the idea of issuing a non-interest loan makes many wonder, ‘Well, what’s in it for me?’ Moreover, one sees the cutthroat nature of lenders when it comes to reclaiming their loans. How many people are thrown out of their homes, or made homeless, because they couldn’t repay their mortgages? Now I accept that there is a systemic problem when it comes to home-buying, and the matter of people wanting to live beyond their means, but the fact remains that all parties could do with wanting a little less. The recent consequences of the sub-prime mortgage disaster are a clear warning to us all. Nevertheless, a prudent loaning system in the context of a caring society would mean the extension of wide grace to those who have entered an unforeseen economic predicament not of their making.
Zuhayli, in Financial Transactions, expounds on the distinction that should be afforded ‘Islamic financial institutions.’ He states the ‘principles of mercy and forgiveness when clients face financial difficulties,’ based on the Qur’anic command, ‘If the debtor is in difficulty, grant him time till it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew’ (2:280). Zuhayli contrasts this ‘with conventional banks, who in their blind pursuit of profits will be quick to repossess the properties of the debtors that were presented as collateral for their debt.’ He adds that Islamic financial institutions do not have a ‘primary goal’ of profit-making, ‘but the endorsement of social goals of socio-economic development and the alleviation of poverty,’ and thus ‘avoid excessively speculative or untruthful transactions.’ Furthermore, they ‘aim to provide their services to all economic groups, while conventional banks are not accessible to the poorer classes,’ so the Islamic institutions provide ‘greater social harmony due to the upward mobility of those who lack resources, and can be invigorating for the economy by giving opportunities to the young and the energetic entrepreneurial classes.’ Zuhayli does state that ‘Islam does not forbid anyone from making reasonable profits,’ but he talks of this reasonableness in terms of 20% or 33%. In fact, one sees many instances of vastly profitable trade, both personal and general, based on Islamic law that had great societal benefits from the time of the Companions’ emigration to Madina to the successful economic policies of Sultan Abdal-Hamid II of the ‘Uthmaniyya up to the early twentieth century – for the latter, see the instance of economic growth enumerated in Shaw and Shaw’s History of the Ottoman Empire and Modern Turkey, volume 2.
For a person led by high Prophetic morals, the inner diseases of stinginess and avarice are deeply shameful. If we were truly honest, I don’t think we could say that we are a naturally generous people; and such a spiritual disease can be intrinsically connected to the taking of interest, and the psychological impact it has on one and society as a whole. Qaradawi notes:
“Thus, in a society in which interest is lawful, the strong benefit from the suffering of the weak. As a result, the rich become richer and the poor poorer, creating socio-economic classes in the society separated by wide gulfs. Naturally this generates envy and hatred among the poor toward the rich, and contempt and callousness among the rich toward the poor. Conflicts arise, the socio-economic fabric is rent, revolutions are born, and social order is threatened.”
Naturally, a person would ask, ‘Where is the alternative?’ I can’t say it exists on a societal scale anywhere. However, as with any economic theory, I can point to where it has previously worked in a holistic fashion in the Muslim world; and Chapra in Islam and the Economic Challenge and ‘Uthmani in An Introduction to Islamic Finance have many important points on how it could work in a modern context. Nevertheless, there is a great deal of evidence to point out how the current system is not working; and, as is the case whenever dealing with a dominant system, we are forced to make mostly suggestions, and that is our case here. Nevertheless, there is great potential for these economic reforms if the Muslim world co-operated on a large scale, as expressed by Mahathir Mohamad, then Prime Minister of Malaysia, in his address to the ‘Gold Dinar in Multilateral Trade Seminar’ in Kuala Lumpur, 23 October 2002 (as included by Meera in Theft of Nations). However, this requires a global and widespread profound spirituality and high scholarship that understands the civilisation-building imperative of Islam. At present, these aspects seem to be lacking in the Muslim world; and to God we ask for success.
The Dire Consequences of Money from Money and Interest Rates in an Economy
‘Uthmani argues, in The Historic Judgment, that it is a modern mistake to treat money as a ‘commodity,’ hence ‘a merchant can sell his commodity for a higher price than his cost, he can also sell his money for a higher price than its face value,’ or lease it and charge rent. However, he argues that Islamic law treats money as being different to a commodity in that, firstly, it is not to be a ‘subject-matter of trade’ for it is merely ‘a medium of exchange and a measure of value’; and, secondly, ‘if money has to be exchanged for money or it is borrowed, the payment on both sides must be equal.’ Therefore it should have been logically concluded that ‘money should not be taken as an instrument that gives birth to more money.’ He uses the work of John Gray, from the latter’s False Dawn: The Delusions of Capitalism (1998), to highlight how the misunderstanding of the nature of money has led to a ‘foreign exchange’ market of:
“The astonishing sum of around $1.2 trillion a day, over fifty times the level of the world trade. Around 95 percent of these transactions are speculative in nature, many using complex new derivative’s financial instruments based on futures and options…This virtual financial economy has a terrible potential for disrupting the underlying real economy as seen in the collapse in 1995 of Barings, Britain’s oldest bank.”
An interesting update to Gray’s research would be found in the current banking crisis that has engulfed the entire globe. The greed factor that is sadly inbuilt to the workings of the speculative system have led to currencies and economies being undermined, and real people’s lives being crushed, as they are the collateral damage of other people’s games and avarice. Naomi Klein, in The Shock Doctrine: The Rise of Disaster Capitalism, has spoken at length on countries being ‘victims of pure panic, made lethal by the speed and volatility of globalized markets.’
It has now become a popular understanding that the current economic crisis is simply to be blamed on the bankers, and that they can be regulated. However, ‘Uthmani has in this matter relied upon Michael Rowbotham’s The Grip of Death: A Study of Modern Money (1998), but ‘Uthmani has himself said:
“Although the conventional Quantity theory of money has suggested many devices to control the money supply, including the control of interest rates by the government, these remedies are not the cure of the disease. They are temporary measures and they themselves have their own side effects that subject the economy with shocks of the business cycle.”
‘Uthmani then quotes an illuminating passage from Rowbotham:
“This (monetary management) a government does by lowering or raising interest rates. This alternately encourages or discourages borrowing, thereby speeding up or slowing down the creation of money and the growth of the economy…The fact that, by this method, people and businesses with outstanding debts can be suddenly hit with huge extra charges on their debts, simply as a management device to deter other borrowers, is an injustice quite lost in the almost religious conviction surrounding this ideology…
‘Many past borrowers are rendered bankrupt; homes are repossessed, businesses are ruined and millions are thrown out of work as the economy sinks into recession. Until inflation and overheating are no longer deemed to be a danger, borrowing is discouraged and the economy becomes a stagnating sea of human misery. Of course, no sooner has this been done, than the problem is lack of demand, so we must reduce interest rates and wait for the consumer confidence and the positive investment climate to return. The business cycle begins all over again…”
Nevertheless, the problem is compounded because, in the words of ‘Uthmani, ‘the baseless money created by the banks and financial institutions itself has now become the subject of speculative trade through the derivatives in the form of Futures and Options in the international markets.’ Therefore whilst before, ‘Uthmani writes, ‘claims over money have been treated as money’, we now have ‘claims over claims’ that are now being treated as money. He notes that estimates put the figure dealt-with in this manner, at the time of writing at the end of the 1990’s, at ‘over one trillion US dollars,’ ‘whereas the combined GDP of all the 188 countries of the world is around 30 trillion US dollars only.’ Furthermore, ‘almost 80% of this trade is in the hands of some two dozen big banks and hedge funds.’ ‘Uthmani then quotes James Robertson’s Transforming Economic Life: A Millennial Challenge:
“The money-must-grow imperative is ecologically destructive…(It) also results in a massive world-wide diversion of effort away from providing useful goods and services, into making money out of money. At least 95% of the billions of dollars transferred daily around the world are of purely financial transactions, unlinked to transactions in the real economy…
“‘Why should they [people] lose their houses and their jobs as a result of financial decisions taken in distant parts of the world? Why should the national and international money and the finance system involve the systematic transfer of wealth from poor people to rich people, and from poor countries to rich countries?…Why do young people trading in derivatives in the City of London get annual bonuses larger than the whole annual budgets of primary schools?”
To the latter question, we could add: Why are sports’ events and sportspeople paid more than doctors and nurses? And the list in a similar vein could go on.
Interestingly, the current economic and banking crisis has led certain Western commentators to speak of the greater stability exhibited in this time by ‘Islamic banks’ – a term that we should treat with caution in light of ‘Uthmani’s balanced appraisal of the pros and cons of the present status quo in his Islamic Finance. One such academic to write about this issue has been Rodney Wilson. He has written of how the non-interest method of ‘Islamic banking’ has shown itself to be ‘resilient’ in the face of the current crisis, and how the ‘risk sharing’ nature of Islamic finance does not have the hallmarks of the sub-prime lending scandal (which was exploitative of the poor, and where the banks tried to risk huge profit-making at the expense and chance of the poor people who were open to such dangerous loans). Moreover, he writes that the strength shown by ‘Islamic banking,’ based on ‘deposits’ rather than ‘being funded by borrowings from wholesale markets,’ has led to it being seen as ‘a viable alternative to conventional banking’; as well as being ‘less cycle prone’ (which was highlighted above by Rowbotham, in particular, to be the case with conventional methods). I would say that such benefits are evident from witnessing a very limited role of Islamic values being utilised in the present banking world; and one can only imagine the widespread justice that could ensue if Islamic values dominated economic practice. Indeed, the current crisis should be a deep warning to theorists of Islamic economics to show high aspiration to develop leading theories and practices for all people, rather than continuing to play a limited role for a niche market, whilst the majority of people face the inequities of the current system. Such brave theorising and practice might mean also challenging some other religiously believed tenets of conventional economics, such as money creation and paper money.
We live in an apathetic age, which is perhaps made worse by our luxury and detachment from the reality of the majority of those living lives in the world. Moreover, the prevalence of spiritual ills makes it hard for us to taste the states of higher consciousness demanded by the revelation of God. As is the case with so many modern horrors – from poverty, to environmental destruction, to unjust killing – it is sad that the Muslims are not productively at the forefront of opposing such injustices in light of the Prophetic imperatives of, “None of you [truly] believes until he wishes for his brother what he wishes for himself” (Bukhari and Muslim); and, “Whoever of you sees an evil action, let him change it with his hand; and if he is not able to do so, then with his tongue; and if he is not able to do so, then with his heart – and that is the weakest of faith” (Muslim) – for a commentary on these narrations see Ibn Rajab’s Compendium of Knowledge and Wisdom, Jamaal Zarabozo’s Commentary on the Forty Hadith of al-Nawawi and Imam Nawawi’s Complete Forty Hadith, in which the latter explains that ‘brother’ here includes those who disbelieve in Islam. Part of our apathy is not finding out the truth about important matters, and one cannot act if one does not know. When one reads Islamic history and sees the figures who rose above the ills of their time in line with the Prophetic example of spiritual excellence and societal service, then one is always in hope of Divine deliverance through worldly support; yet one knows that the affair is always His, Glorified be He! As we can understand from the words of Ibn ‘Ashur quoted earlier, one expects the spiritually enlightened to be those who manage to rise to the challenge of serving society in a comprehensive sense. Indeed, one can confidently assert that one only expects such effort from those whose dispositions have been truly nurtured in the shade of the Qur’an. The spirit of activism is literally the heart of the matter. Yet this spirituality is the Prophetic one that seeks the best for society, and is not a spirituality cut off from actively seeking the good for the brotherhood of humanity. For it is clear from the evidence that the dangers posed by interest and where it has led to are perilous for us all; and the establishment of an equitable economic order is what befits humans, unlike treating human beings as some animal species, whereby the law of the jungle is allowed to reign supreme. Part of our ennoblement is the desire of the strong to raise the weak; and if we do not do that, then where is our human distinction, especially if we ourselves have contributed to another’s miserable plight?