Wednesday, December 27, 2006



Attempt to Justify Interest an Exercise in futility
By. Dr. Syed Thanvir Ahmed
It is not new for a few misguided Muslims to raise controversies regarding the prohibition of Riba or interest in Islam. Many unsuccessful attempts have been made in the past to justify the institution of interest. All this has been done in the name of Qur’an and Sunnah.

The latest in this series is a small booklet entitled “ The Qur’anic concept of Riba”
by Muhammad Shafi J.Aga.
Published by M.J. Aga,
Malvani, H. Colony, Mumbai-400 095, pages-26.

The author insists that a reasonable rate of interest (May Allah SWT protect us) is advocated by Qur’an itself. He gives two reasons. One is that since the value of money falls over a period of time due to inflation, charging of interest equivalent to the rate of inflation by the lender is justified. The second reason which, according to the author, justifies charging of interest is to meet the cost of lending such as salaries to employees etc. incurred by banks and also to get a share in the profits. This cost also includes the cost of borrowing by the banks who have to pay interest to their depositors.

The above reasoning is not new. It overlooks the fact that a much higher rate of return can be earned both by the depositors as well as the banks if the Islamic principles of business and trade are adopted. The author does not have any justification which is based upon Qur’an and Sunnah. His entire argument is based upon his lack of understanding of not only the religion of Islam and the principles of Economics given by Islam but also lack of understanding of the subject of Economics given by Islam but also a lack of understanding of the subject of Economics itself. It is necessary to clear some of these misunderstandings and misconceptions. These clarifications are based upon (a) The religious argument and (b) the Economic argument as is generally understood in the western framework.

(i) The Religious Argument
As pointed out by Dr. Md. Uzair, the Holy Qur’an prohibits interest repeatedly and is put as “ (i) Madness (Takhabbut), (ii) a thing God wants to ‘destroy’ (Mahq), (iii) a thing which if not abandoned deserves a ‘war’ (Harb) from God, (iv) a thing which is anti-thesis of faith (Iman) or in other words infidelity (Kufr), and (v) a thing if persisted in which calls for permanent abode in hell (Khulud fin-Nar)”. It may be noted that the Qur’an uses an extremely strong language while prohibiting interest. It clarifies that trade and usury are not the same. It goes to the extent of issuing a “notice of war from Allah and His Messenger” (2:279). One should ponder over these verses of Qur’an before taking a stand on the issue. A Hadith of the Prophet (Pbuh) says: “once incest and interest abounds in a society, the wrath of thy Lord will be fall the citizens”. Thus interest is held to be as bad as incest. In another Hadith charging interest is held to be many times bigger sin than the sins of adultery. The renowned Islamic scholar Dr. Yusuf Ali Qurdavi holds that the question of prohibition of interest is a settled issue and that “there is no provision left in it for any reformist to re-interpret and provide any excuse for stating anything otherwise”. He states that it is “an issue which has withstood the test of consensus (Ijmah) of ummah of the present day as well as of the past”

A series of conferences and Seminars have been held recently in which the most knowledgeable scholars participated. The first international Islamic Economic Conference held at Makkah in February, 1976 and a Seminar held subsequently at Cairo are worth mentioning. Hundreds of specialists reaffirmed the stand that interest in all its forms is prohibited in Islam. For a true Muslim the above arguments are sufficient to convince that interest is prohibited in Islam. However, for those who still have misgivings the following few lines should, Allah willing, convince them.

Syed Hamed Abdul Rahman Alkaff of the Islamic Research Academy, Karachi, in one of his publications, summaries the views of three great Imams, that is, Imam Zaid Bin Ali (80-122 H), Imam Malik Bin Anas (95-179 H) and Iman Mohammed Bin Idris All Shafaee (150-204 H). All the three great Imams hold that addition to the price in a transaction as a compensation for the time factor (time gap caused by payment at a later date) amounts to charging interest and that it is haraam (forbidden). It is held that discounting of principal amount if repayment is made prior to the date of repayment amounts to interest and is prohibited. So also discounting of price for purchases on cash payment is also prohibited. Al Beihaqi reports three sayings of the most prominent legal experts of the generation of the Prophet’s companions in this regard. These three great jurists are Hazrat Omar Bin Khattab, his son Hazrat Abdulla Bin Omar and Hazrat Zaid Bin Thabit (R.A.). Imam Abu Hanifa also confirms these sayings. Thus there was no controversy in the early Islamic period and every one accepted it as prohibited.

More recently renowned scholar Sayyed Qutb held that there is no exception in the prohibition of interest and that it is prohibited in loans as well as sales, in taking as well as in giving and in writing and witnessing. Mohmud Abu argues that Islam prohibits fixed amount of profit without risk of loss or profit. It is so much a dreaded thing that anything amounting to interest is prohibited. He quotes Ahadees to show that even renting of land with the land owner not contributing any capital or labour and getting fixed returns in the form of rent is not permitted on the same grounds. Similarly, Maulana Mawdudi, Anwar Iqbal Qureshi, Nejatullah Siddiqui and a host of others take an extremely clear stand that interest in all its forms is prohibited and unlawful. These are all great scholars who have spent their entire life in acquiring knowledge from the most original and authentic sources. Can we claim to have done the same? A reading of the book, which is under review, clearly shows that it is lacking in such knowledge.

Interest was prohibited under Christianity also. The Old Testament states “If thou lend money to any of my people that is poor by thee, thou shall not be to him as an usurer, neither shalt thou lay upon him usury”. (Exodus 22:25-26). The New Testament quotes Prophet Jesus (Pbuh) as saying “And if you lend to those from whom you expect a return, what credit is that to you? Sinners lend to sinners as well, to get back an equal amount. But love your enemies, do good and lend without prospect of return” (Luke 6:33-35) Great Roman Catholic writers like Augustine condemn usury as “detestable, odious, and execrable a thing”. Similarly Aristotle and Acquinas condemn usury. Even Jews quote ‘Torah’ to state that interest is prohibited while lending money to a Jew, though they are permitted to charge interest if the borrower is a non-Jew.

(ii) The Economic Argument
The doubts expressed by the author of the book, which is under review, can easily be dispelled if we look into the Economic literature and the latest developments in various countries. An interest free economy is defended on the grounds of Growth, Stability and Distributive justice - the fundamental problems dealt by Economic Theory.

It is now an accepted fact that the greatest hindrance to growth is the institution of interest. Prudhon observed “why are we short of houses, machinery and ships? Because money is a sentinel posted at the entrance to the markets with orders to let no one pass”. John Maynard Keynes argued that the best way to revive the economy is to increase the money supply so that the rate of interest falls. A fall in the rate of interest would lead to higher investment, employment and output. In fact Keynes held that ultimately an ideal economy is one wherein interest does not exist.

This writer, in one of his papers, has shown, using modern economic tools of analysis, that high rates of economic growth can be achieved only through the abolition of interest. Higher investment is extremely essential for economic growth. For investment to take placXe, economists say that the Marginal efficiency of capital (MEC) should be higher than the rate of interest. Therefore interest determines investment and thus employment and growth. In the absence of interest, the cost of holding idle cash balances or hoarding money and the MEC will determine the level of investment instead of rate of interest and MEC. Investment so determined will definitely be extremely high. If one goes into this analysis in greater detail one will understand the significance of the following verse of the Holy Qur’an. “Allah will deprive usury of all blessings, But will give increase for deeds of charity” (2.276). It has been shown in the above paper that the prohibition of interest and the insistence upon Zakah and charity will ensure a higher and higher growth rate for the economy on a continuing basis bringing prosperity to rich and poor.

Economists like Milton Friedman, Kindleberger and H.C. Simon hold fixed interest rates to be responsible for instability. Friedman contends that changes in rate of interest bring about either inflation or deflation and both are harmful to the Society. He therefore argues “ Our final rule for the optimum quantity of money is that it will be attained by a rate of price deflation that makes the nominal rate of interest equal to zero” (Friedman, 1969). This proposition is known as Friedman’s Rule, and it is “one of the most celebrated propositions in modern monetary theory”. (Woodford, 1995) Hence, Yousifi, McCormick and Abizadeh argue that Islam’s prohibition of interest has proved to be of much significance with this realisation in the west.

The recent developments in Asia where the so called Asian tigers (the East Asian countries) have collapsed from the high rates of growth and prosperity which they had attained during the last ten-fifteen years, has made economists to reassess their assumptions. It is proved beyond doubt that the most important factor contributing to the Asian crises is the institution of interest and the interest based transactions. The Indian experience of the last couple of years where efforts made by the Government to revive the economy have failed strengthens our argument. The Government is forced to reduce the rate of interest realising that interest is the factor responsible for the current problem of lower growth, falling exports and increasing inflation.

Mehra and Prescott (1985), Siegel(1992) and Darrat (1988) through their studies on “Equity premium puzzle”, have found that even though stocks carry risk, they offer much higher returns than bonds, which proves the superiority of Islamic principles of business and industry. In an article published in the World Bank’s June 1997 issue of ‘Finance and Development’, Zamir Iqbal has convincingly argued that the Islamic Financial system “encourages risk sharing, promotes entrepreneurship, discourages speculative behaviour and emphasises the sanctity of contracts”.

Josh Martin in his article in ‘Management Review’, New York, points out that U.S. companies doing business globally “are turning to Islamic finance as an alternative source of funding for everything from trade finance to equipment leasing” - Multinationals such as General Motors, IBM, Xerox, Enron and Shell have used Islamic Banks to finance their activities. Citibank opened its City Islamic Investment Bank in 1996. The Islamic banks have now assets exceeding $ 160 billion. There are more than 100 financial institutions operating in 45 different countries based upon Islamic principles. Their annual growth rates are more than 15 percent. Multilateral organisations such as IFC have successfully completed funding arrangements in various countries amounting to $ 40 million. These facts show that it is no longer a blind belief that interest free economy can function. It shows that the foundation laid by Imam Abu Haneefa in establishing an interest free bank having deposits of more than 50 million Dinars is now revived and structures of modern business are being constructed on it.

As far as the distribution aspect is concerned, not much needs to be written because everyone accepts that interest is exploitative and has resulted in increasing inequalities in the distribution of income and wealth.

I hope that Mr. Mohammad Shafi Aga will make efforts to study the interest free banking system, with an open mind. This system ensures that the depositors, the banks and the borrowers get much higher returns than what they would get under the traditional interest based banking system can offer. One should realise that religion is not a matter that can be taken lightly. It is not one’s own limited knowledge or thinking powers which are paramount in the matters of religion. What are paramount are the words of Allah (SWT) and the Sunnah of the Prophet (Pbuh).

(*. Author is Deputy Secretary to Govt. of Karnataka, Finance Department, 12th Floor, Vishveshwaraiah Main Tower, Bangalore-560001.)

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