FINANCIAL WISDOM BEHIND PROHIBITION OF INTEREST

It must be kept in mind that it is not only Islam that prohibits interest but all revealed divine religions and famous societal thinkers condemned the charging of interest.

All Divine Religions Abhor Riba

The reasons why all divine religions, especially Islam, have given such severe verdict against Riba are that the basic teachings of all religions are to develop human equality, harmony, and pleasure in all mankind.

Islamic as well as other scholars have explained similar views on the prohibition of Riba. Islamic condemnation of Riba may explain as followings:

1. Riba reinforces the tendency for wealth to accumulate in the hands of a few and thereby diminishes human beings’ concern for their fellow men.
2. Islam does not allow gain from financial activity unless the beneficiary is also subject to the risk of potential loss.
3. Islam regards the accumulation of wealth through interest or usury as selfish compared with accumulation through hard work and physical activities.

Some very common and severe effects of Riba on the behavior of individuals, society, and the economy can be summarized as followings:

Riba Deflects Money from its Basic Functions

The primary functions of money are the medium of exchange, store, and measure of value.

Money is not created to earn money. If a person is permitted to sell or exchange money with money, either in the present or future, then such transaction will become his goal, and as a result money will be hoarded like anything, i. e. money could not perform its basic function of a measure of value, stock of value and medium of exchange.

The Riba-based System may Result in Exploitation

The amount payable on interest-based loans doubles and redoubles after specific periods and this geometric multiplication continues. According to recent IMF reports the number of people below the poverty line is increasing and many poor countries have already been trapped in the interest-based debt trap.

Since it is not assured that the GDP of a country will grow equal to the rate of interest of that country, if the growth rate is less than the interest rate, then the lender of money will get an extra gain that will be unjustified.

Inflation is co-related with Riba

An increase in the rate of inflation (I) reduces the real interest (R), which results in a decrease in the demand for money. Money supplier, to ensure that the real interest does not fall, raises the nominal interest rate.

This act will result in an increase in the inflation rate. Thus, the rate of inflation rise as the rate of interest rises.

This process ultimately results in a decrease in money demand due to an increase in interest rates.

The increase in interest rates results in a decrease in the GDP, while no physical objects (goods or services) were produced.

Debt Slavery: One Cause is Riba

Human Development Report 1992 brings to focus the glaring reality that the rich have grown richer and the poor become poorer at the end of three decades of so-called universal development effort.

There is now a net transfer of resources from the poor to the rich countries (peoples) of the world.

Poor countries (people in debt in rich countries) are becoming poorer, for every $1 that is received in the form of new loans and aid by the developed countries they are paying back $11.1. If this is not debt slavery then it should be called.

Another way to explain this dilemma can be as followings:

The amount of debt is massively increasing throughout the world. This is a direct result of the authorization creation of money (plus the addition of Riba) by the banking system because, in order to pay the Riba overall, more and more debt has to be created i. e. the money supply must be continually increased in the condition of productive stagnation. Continuing inflation is the inevitable result.

Thus, today, throughout the advanced countries, consumer credit (on the basis of Riba) is encouraged for anybody because the system requires the creation of more and more debt (based on Riba), and, in a very fundamental way, it is now incapable of caring about the consequences.

Interest Exerts Disastrous Effects on Human Behavior and Society

Interest brings to bear terrible effects on the morals and humanity of society by reinforcing the tendency of wealth accumulation in fewer hands.

It leads to ever-increased risk-free capital vis-à-vis risk-based equity capital, resulting in business failures, unemployment, and ultimately gross inequalities of income and wealth that are bound to end up in social trouble and economic chaos.

Pre-determined Rate of Return on the Investment is Not Justified

Money, while invested in a business the quantum of profit that may occur, is not known beforehand and there is also the possibility of a loss.

Therefore, charging a fixed and predetermined rate of return on investment cannot be morally justified.

Justice demands that the provider of capital should share the risk with the entrepreneur if he wishes to earn profit.

Interest is Not Rent on Capital

Unlike other physical things, ‘Capital’ does not suffer wear and tear, nor does it face depreciation in value. Capital by itself does not earn profit.

The combined force of management, labor and many other factors plays an active role and contributes to their efforts to run a business.

Even then, sometimes, business does not yield profit. Now how can it be considered rational that the lender’s money should produce a fixed amount of return?

Conclusion

The principal reason why all divine religions have delivered such a harsh verdict against Riba or interest is that all religions wish to establish an economic system where all kinds of injustice are eliminated and all forms of exploitation are controlled.

All divine religions, especially Islam, particularly do not allow the injustice perpetrated in the form of financer being assured of a positive return without doing any work or sharing in the risk, while the entrepreneur, in spite of his management and hard work, is not assured of any return.

Islam wishes to establish justice between the money holder and the entrepreneur. The Quranic prohibition of Riba aims at eliminating exploitation, oppression, and inequality.

It is, therefore, obvious that there is enough justification for the prohibition of interest, which suits the human mind, and looks like an unbiased mind after freeing from pre-convinced notations.

After understanding the above explanations it is difficult to agree with anyone who justifies interest in the society, especially in an Islamic society.