Riba: The Main Cause of Recession and Depressions
General monetary economics (rate of interest is the reward for saving) Vs Islamic monetary economics (interest less banking)
According to classical and Neo-classical economists rate of interest is the reward for savings. Where in Islam interest is prohibited. The reasons are Interest rate made people manipulate poor people and interest made the rich richer and the poor poorer. On expectation of guaranteed return at the maturity period interest rate made people work less.
As the world economy made the transition to a market economy after the industrial revolution, it is not hard to see when Riba1 applies and when it does not?
What is Riba?
In other words riba is seen as an unjustified earning where a person could receive a monetary advantage in a business transaction without giving just a counter value. Technically it’s a premium that must be paid by borrower to the lender along with the principle amount as a condition for the loan or for an extension of maturity.
Riba (Rate of Interest) is a sin under Islamic law even those hired to write the contract or who witness (and then confirm) contract are a party to the sin. Here prohibition of Riba means that money can be lent lawfully only for either charitable purposes (without any expectation of return above the amount of the principle), or for the purpose of doing lawful business i.e.; investment on the basis of profit and risk sharing. i.e. an investment of the kind that seeks profit while sharing the risk is encouraged in Islam, indeed it is commended.
Islam doesn’t consider money as a commodity such that there should be price for its use. Money is medium of exchange in asset oriented economy and a store of value. It has made clear distinction between trade and Riba; where trading is welcomed and riba is prohibited. Trade is that the business risk in trading is allocated more evenly among all the parties involved, where as in Riba operations the business risk lies heavily, if not solely on the borrower.
Flaws in the Theory of Interest-The root cause of the crisis
The present global economic crisis as a result of interest rates; from the American recession in 2008-09 to the crisis in south East Asia and Euro debt crisis at present.
Huge budgetary imbalances, excessive monetary expansion, large balance of payment deficits, insufficient foreign aid and in adequate international cooperation can all be related to the flaws in the mechanism of theories of rate of interest and its working, which also the root cause of the crisis.
The demand for Economic growth as parallel to inflated interest rates and global economic crisis. Most countries which make the transition to a market economy had developed some kind of crisis in the early stages .Inflation often occurs as a result of a fast growing economy, hence contracting monetary policy is must to offset inflation. Increase in interest rates would only add to the unemployment level. Keynesian school has emphasized the problem of high interest as contribution to unemployment. Therefore, stressing the need of reducing interest rates to the lowest possible. But now the question is what the optimal rate of interest is? Or should exit?
Forbidden things in trade and commerce in Islam:-
Muslims are not allowed to pay or receive interest. The Holy Quran Says, “God-has permitted for you trade and Prohibited interest” (2:275).Where depositors in an Islamic Bank would be treated as like share holders, would receive dividends when the bank makes a profit, and would lose capital when it suffers a loss.
Prohibition of fixed interest flows from Islam’s concern for social justice. If a person goes to Islamic bank for a loan to purchase a house then the Islamic financing company or bank buys the house. The house is leased back to you for a fixed period of time; you pay the finance group the rent value plus an additional amount for the house purchase. The value or the lease home will be reassessed every year, and the rent will be adjusted accordingly. Since Islamic banking is asset based financing.
Interest is neither a trade nor a profit. It is a means of exploitation and concentration of wealth. The Quran says: “O you, who believe, do not take interest, doubling and multiplying, and keep your duty to Allah, so that you may prosper”. (3:130)
Interest (riba) is an integral part of modern free market economics. Unlike Zakah3 which distributes wealth from the rich to the poor, interest takes wealth from the poor to the rich. Modern economics depends upon interest, it is assumed to be impossible to leave without it, this falls assumption is challenged by the successful interest free facilities offered by Islamic banks and Investment companies throughout the world, including the UK.
Islamic economics an alternative to the current system:- Its Mechanism
Islam suggests an interest free system that heavily relays on profit sharing i.e. Mudarabah2. Here profits are the substitutes for the interest. But one might ask, how banks would have the capital i.e. necessary to lend, when banks do not pay interest for savings A/c’s or capital providers.
There is a triangle or three way systems where all participants are mutually beneficial.
Those are 1. Bank
2. The supplier of savings or funds
3. The actual user of capital of the Entrepreneur
Now it is clear that not only banks and entrepreneurs are exposed to risk but also the supplier of funds.
The lender would be a venture capitalist who is interested in profit sharing, where as banks can study applications of borrowers and hence extend credit, offer portfolio investment for lenders and undertake forgone services.
Conclusion:-
a)Finally a interest free system would work and provide unlimited prosperity but certainly does not work under the current system, the whole economic system should be altered and changed in order for the Islamic frame work to success. This system can survive only in Christian, Jewish or Islamic economy that abolishes interest.
b) A fully-fledged interest free economy is not yet a reality it is a complex situation nevertheless we should work towards an interest free economy to ensure social justice and equal access to opportunities for everyone in the world and interest free economy is only possible when an Islamic government carefully and systematically plans and implements the economic system of Islam, political or state authority is essential to implement an Islamic economic system.
c) Can incorporate Islamic Banking in the present Indian banking system as a single window.
A solution to the debt crisis can avoid the farmer’s suicide and other consequences in failure to repay the debt with interest.
References:-
1. Riba1 (Arabic: ربا, [rɪbæː]) means one of the senses of "usury. Riba is forbidden in Islamic economic jurisprudence and considered as a major sin. Simply, unjust gains in trade or business, generally through exploitation.
2. Mudarabah2
"Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The capital investment comes from the first partner, who is called the "rabb-ul-mal", while the management and work is the exclusive responsibility of the other party, who is called the "mudarib".
The Mudarabah (Profit Sharing) is a contract, with one party providing 100 percent of the capital and the other party providing its specialist knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. Compared to Musharaka, in a Mudaraba only the lender of the money ("rabb-ul-mal") may incur a loss.
