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.
3.
Zakah3
“ Zakah” it is one of the basic duties of
islam every muslim who have sufficient wealth must pay the fixed rate of zakah
to the Islamic state.
http://en.wikipedia.org/wiki/Zakah
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