Why Does Islam Prohibit Interest (Riba)? – The Social and  Moral  Rationale (Part iii)

- Zahid Zamir

 

 

Social rationale behind the prohibition of riba

 

Socio-economic justice is one of the most significant characteristics of any society.  Any society where there is no justice and fairness, cannot stay intact too long.  It is undoubtedly true and clear from the Holy Qur’an, Hadith of the Prophet (saw), Islamic literature as well as Islamic scholars that Islam has constantly insisted on social justice in all spheres of human life.  It is a vital element in the Islamic system.  Islam provides for a society where each individual is bound with a duty to help the other and to extort nothing form the other in return for such help.

 

We will see how interest or riba affects a society in varies ways.  In fact, both economic and social effects are inter-related.  When economic plight of an individual or a country gets affected by any external or internal factor, it affects the society too.

 

Riba and concentration of wealth

 

There seems to be a near consensus of opinion among Muslim writers that one of the causes of high concentration of wealth in the capitalist economies is that institution of riba. Riba creates a big source of inequalities of income[44].  Income inequalities bring social inequality, that is inequality of opportunity for the disadvantaged to earn their livelihood.  In the modern world that industrialists borrow capital form the bands and make a large profit but pay only a small part to the depositors through the banking system.  This is an indirect transfer of income form the masses of depositor to a few industrialists.   This leads to the concentration of wealth in the society[45].  Thurs, in the interest based capitalist economy, the flow of wealth is from the ‘many’ to the ‘few’, and in most of the cases the ‘many’ are poor people.   As Dalton writes[46], “the present (1925) annual yield of income tax and super tax (£326m) is only slightly greater than the annual interest charges on the debt (£305m) and falls short of the present annual charge for interest and sinking fund combined (£350m)…now, broadly speaking, it is the income tax payers who themselves receive the interest on debt.  Leaving external debt out of account, the collection of income tax and super tax and the payment of interest resolve themselves into mere transfer of wealth within a comparatively small section of the community.”  In this way society as a whole gets affected. 

 

Misallocation of resources

 

In the secular economies there is no theoretical justification fro the existence of a rate of interest so far as allocation of resources is concerned[47].  Interest rate can only theoretically efficiently allocate resources if money and capital market are perfectly competitive and if the environment is certain and static.  But in the world of imperfection uncertainty and dynamic situation the rate of interest cannot allocate resources efficiently[48].

It is, in fact, true that in the old days production could not be extended owing to lack of capital, but now in a number of rich countries, there is a super-abundance of savings and large sums of money which are simply lying idle.  We find simultaneously with this super-abundance of capital a very large class of unemployed people.  People are unemployed because the capitalists do not find it worthwhile to invest their funds in the fields where the rate of return is less than the current rate of interest[49].  For instance, if the current rate of interest is 4% and money is invested in irrigation works which directly yield only 3%, then according to capitalist view, irrigation is unproductive.  The money will not be invested in irrigation works, however useful these may be for society.  The result is that the capital remains idle while on the other hand resources remain undeveloped.  All public works, however conducive they may be for the benefit of society, remain undone in an interest based economy if the yield from such works is less than the current rate of interest.

 

Justice and equity 

 

In an interest based system the entrepreneur is discriminated against when he has to pay the fixed interest, even in case of losses, and on the other hand the contributor of capital is discriminated against when the entrepreneur makes a large profit but only a nominal interest is paid for the capital.  Such discrimination is clear injustice[50].  Charging a uniform rate of interest from different economic circumstances does not seem to be socially correct or just.  A particular person may be borrowing for education of his children, treatment of prolonged diseases of certain family members, or marriage of his children.  He would be charged almost the same rate of interest as would be perhaps charged from one of the richest businessmen who may be earning a large profit.  Naturally, this is neither economically just nor socially desirable.  In fact, interest based lending/borrowing is based on collateral which means the poor without collateral have no access to credit/capital lying with financial institutions.  Since loan is collateralized, it is not in the interest of any interest based financial institution to dwell into the factors responsible of the business failure.  The profit has been pre-fixed through legal contracts with n bearing to market risks confronted by normal production activities.

 

Transactions based on interest violate the equity aspect of economic organization.  The borrower is obliged to pay a pre-determined rate of interest on the sum borrowed even through he may have incurred loss.  So, this predetermined rate of return, independent or irrespective of the actual productivity, profitability or utility is not reasonable form the point of view of justice.  The predetermined rate of return is by definition usually the same for a more efficient and less efficient, richer and poorer as well as more honest and less honest parties.  In the interest based system, the size of market or demand, need or desirability of the item to be produced are all irrelevant[51]. 


 

Riba and exploitation in the society

 

The mechanism of exploitation is made possible through the operation of interest based loan transaction system.  Although the relatively rich in society exploit the relatively rich poor through loan transactions, the mechanism of exploitation woks in a very complicated way depending upon the nature of economic activities either on individual or a group of individuals with identical interest involved[52].

 

Who exploits whom ?[53]

 

Corollary 1: A) The investors, including the self employed, doctors, engineers, professionals of all highest income class.  B) The savers, including village money lenders, surplus farmers, traders, etc. of the middle income groups.

 

Corollary 2: B) The savers.  C) The poor, including subsistence wage earners, small and marginal farmers, unemployed, self employed, etc. of the lowest income class.

 

Corollary 3: A) The investors.  C) The poor.

 

Corollary 4: A) The highest income class.  B) The middle income class and C) The lowest income class.

While A exploits B – not directly but by the operation of the banking system through the cheaper/subsidized loans without having the obligation of sharing excessive profits with the savers, B exploits C rather directly through exorbitant rate of interest.  Again A exploits C not directly through the element of interest, but by charging excessive prices for the good and services the production of which is possible by the availability of cheaper/subsidized loans form the banking system with no obligation of profit sharing.  It is, in fact, true that once the investors/borrowers know the interest rate has to be paid along with the capital, he will maximize his profit by all means, either through creating artificial crisis that is hoarding, speculation, gambling, supply wrong information or by exercising monopoly power, etc.  His undue expectation is further aided by the presence of all sorts of imperfections in the market and to the availability of subsidized loans through the formal institutions.

 

Moral rationale  behind the prohibition of riba

 

Moral and spiritual feelings are considered to be the vitality of humanity.  Interest or riba creates miserliness, selfishness, greed, cruelty and unsympathetic outlook among the people.  The very acts of lending money on the basis or riba reflects the fact that the lender only cares for the principal and the riba on it, that has to be paid by the borrower under any circumstances.  In the social level it implies that a society consisting of people who have the above noted characteristics, is bound to produce an atmosphere where not only most of the individuals have diametrically-opposed social interest but their individual interest are also divergent[54].  So, interest uproots the very foundation of humanity and mutual help.  It promotes widespread malpractice’s in society.  Justice between man and man, which is the corner-stone of Islamic philosophy of social life, is eroded by the institution of riba.

 

It is well known that ordinary effects of interest on consumption loans not only cripple the borrowers but also demoralize the lenders.  In India it is said the “A cultivator is born in debt, lives in debt and dies in debt”[55].  Sir Malcolm Loyal darling, in his classic book, Punjab Peasant in Prosperity and in Debt, remarks that the interest paid by the cultivators in Punjab is twice the amount of the total land revenue payments.  Comparing the poverty of the Punjab peasants to the prosperity of money lenders, he observes that in every village the best house belongs to money lenders.  There is no doubt that the money lenders perform a very useful service n the rural economy of the country and help the cultivators at time so need, but he cost of this help is very disproportionate to the service rendered.  It has been very pertinently remarked that this credit holds the borrower just as the rope holds the hanged[56].

 

The master and the subservient 

 

With regard to man and money, it is the former that is the master and the latter that is the subservient.  In fact, man invented money to serve his own convenience[57].  Now set this concept against interest to see how master becomes the subservient and the subservient becomes the master.  This reversal of places is implicit in the fixity of the rate of interest.  Supposing A takes a loan of $10,000 at 10% interest for one year form B with the intention of opening a small shop to earn a living.  Due to some misfortune or accident or sudden fall in the price of stock he can earn a net return of only $1,100. in one year.  He must pay $1,000 to the lender as interest and retain only $100 to himself.  Here is a man who has sweated a whole year and has earned only $100 while the lender for the mere permission of using his money claims $1,000.  If the borrower has lost $1,100 instead of earning $1,100, he would still have to meet contractual commitment commanded by the capital.  It does not call for any particular scintillation intellect to discover who is the master and who is the slave[58].  If still there can be men who can regard interest as something useful, they must have been driven to madness by the touch of the evil one[59].

 

We have seen how interest or riba leads to high concentration of income and wealth form the poor to the rich.  Because of that, low and middle income groups poor people will not bother to indulge in any malpractices for their survival.  These poor people will not be able to provide higher education for their children.  Eventually, crime rate in the society will flourish.  These all happen due to moral degradation of the people which is the outcome of interest or riba.  Mutual and bilateral relation among people will deteriorate.  People will try to maximize their own profit at the cost of others.  Co-operation between man and man will be replaced by the malevolence.  Undoubtedly it will lead to a total havoc in the social system.  In fact, riba not only brings havoc in the society but it will create a blockade for the international co-operation among various countries as well.

 

Conclusion

 

 In this paper I have made an attempt to analyze the conceptual aspects as well as the prohibition of riba and its economic, social and moral rationale form various aspects.  It has been shown that riba or interest affects an economy of a country and brings havoc in the social system as well demoralizes the people.  Malevolence, greed, miserliness and unsympathetic outlook become the order of the day in an interest-based system.  Cooperation between man and man deteriorates and there arises a man who flourishes on material relationship rather than brotherly feelings.  Justice, humanity and altruism do not pay any role in the society where interest is prevailing.  We have seen that saving and investment will not decline in an interest-free economic system, in fact, saving does not depend upon interest rate.  That was proven by the famous economist J.M. Keynes.

 

Investment which is an essential element for economic growth and development does not seem to be flourishing in an interest based economic system.  It has been argued that the Islamic system of profit and loss sharing increases both saving and investments.  It has the capacity of combating both unemployment and inflation since interest rate will not longer enter into the profit calculation of the investor.  We argued that high or low interest rate could contribute to both cost push and demand pull inflation and at the same time leads to unemployment.  Riba or interest does not encourage innovation which is the dynamic function of an entrepreneur, thus riba hinders economic development.  PLS system on the other hand, encourages innovation and high profitability since the entrepreneur can venture into high risk projects which are usually more profitable that the low rate projects.  In terms of profitability and productivity, profit and loss sharing system seems to be more profitable and in general has a positive relationship with productivity.  It is also argued that PLS system promises leverage benefits to the firms free of risk, higher return and small fluctuations in the rate of profit than the interest based finance.

We have also seen that interest is one of the most destabilizing factors in the capitalist economy.  As we have proven one of the causes of the prohibition of interest is the concentration of income and wealth in fewer hands which affects a society severely because this concentration of wealth is from the poor to the rich.  In fact, the prohibition of riba is likely to promote distributive justice.  This is because all inequalities in income distribution which arise form the interest based institution will be eliminated.  In an interest based system resources will not be allocated efficiently.  Capitalists tend to invest in projects which will give higher rate of return than the rate of interest even though those projects may be harmful to the society.  It was also shown in this paper that exploitation becomes the order of the day in an interest based system and people become greedy and malevolent, whereas interest-free system promotes cooperation and man to man brotherly relationship.

 

Thus interest in Islam is rightly prohibited.  Islam, on the other hand, provides very definite solutions and reasons to our problems and the problems that modern progressive world is unable to solve.  Islam provides just, straight forward solutions.  Islamic economic system in isolation cannot be effective.  In order to make PLS system more meaningful, all Islamic values and norms have to be observed in their totality.  We should not just mould one aspect of our life in accordance with Islamic values and norms and neglect others.  Islamic system of life has to be implanted in all spheres of life, be it economic, social, political, moral, spiritual or legal in order to benefit from that system. 

 

[44] Sadeq, A.H.M., op. cit., p.53.

[45] Ibid., p.53.

[46]Khan, M.A., Issues in Islamic Economics, Islamic Publications Limited, Lahore, Pakistan, 1983, p.64.

[47] Murat, Cizaka, “Tax-Farming and Resource Allocation in Post Islamic Societies”, JKAU: Islamic Economics, Vol. 1, No. 1, p.60.

[48] Anwar, M., Modeling Interest-Free Economy:  A Study in Macro-Economics and Development, The International Institute of Islamic Thought, 1990, p.83.

[49] Qureshi, A.I., op. cit., pp. 184-185.

[50] Sadeq, A.H.M., op. cit., p.53.

[51] Uzair, M., op. cit., p.10.

[52] Pramanik, A.H., A.H., “Objectives and Functioning of Islamic Banking in the Context of Poor Country Like Bangladesh”, in Readings in Islamic Banking, Ataul Huque (ed.), Islamic Foundation, Dhaka, Bangladesh, 1987, pp.151-152.

[53] Ibid., p.152-153.

[54] Khan, M.A., Towards an Interest-Free Islamic Economic System, The Islamic Foundation, UK and The International Association for Islamic Economics, Islamabad, Pakistan, 1985, p. 26.

[55] Qureshi, A.I., op. cit., p.147.

[56] Ibid., p. 147.

[57] Ahmad, S.M., Social Justice in Islam, Institute of Islamic Culture, Lahore, Pakistan, 1987, pp. 19-20.

[58] Ibid., p. 20.

[59] Qur’an 2:275