Can we have an interest free economy?


Can there a possibility of having an economic system without give and take of interest, questions Nissar Ahmad Yatoo.

In modern secular economic systems, interest plays a very important role. People cannot think of any economic system without interest.  From a theoretical standpoint, interest has been a debatable subject among economic and political theorists. Economists have presented different interpretations of interest. Abu Saud defines interest as “the excess of money paid by the borrower to the lender over and above the principal for the use of the lender’s liquid money over a certain period of time”. Samuelson states that “Interest is the price of rental for the use of money.  Don Patinkin defines it as one of the forms of income from property, like dividends, rent and profit.  However, J.M. Keynes did not define interest but mentioned the rate of interest as “The percentage of excess of a sum of units of money contracted for forward units of time over the spot or cash price of the sum thus contracted for forward delivery.
 Most of the people even Muslims are treating interest and business one and the same thing. But there is a big difference between business and interest.  However, Muslim socialist and some capitalist economists have questioned these explanations on both theoretical and technical grounds.  In a business the individual invests money and gains profit in return. But merely investing his capital is not sufficient. The person involved in the business venture, be it agriculture or industry, has to work hard day and night even after investing huge sums of money. Finally, even after all this monetary risk and hard work there always exists a fear of loss in this venture. Contrary to this, in Interest dealings, the lender lends his money at a fixed rate of interest and collects a regular profit from the borrower in the form of interest without any physical effort or fear of loss. Islam strictly prohibits all kinds of interest dealings. The impact of interest on the lender as well as the debtor is highly disastrous. The lender becomes extremely materialistic and wild after his greed for money. He does not bother about the consequences of the system of interest on the society. He forgets human relationships and kindness. He becomes wealthy by pushing innumerable people into the darkness of poverty.
 An eminent Western economist, Roy Harrod, in his work on Economic Dynamics regards the abolition of interest is the only way to avert a collapse of capitalism.
 In Islam, interest comes under the category of “riba” or “usury”. A Muslim is not allowed to receive, pay or witness interest payments.  One should keep it in mind that Islam is a complete code of life which offers its own social, political and economic systems to guide human behavior in all spheres of life.  History has recorded that the economic system of Islam, for the first time in the world had established social and economic justice during the period of al-Khilafah al-Rashidah. In any ideal Muslim society, socio-economic justice is considered as one of the most significant characteristics for the social, political, and economic and other realms of human interaction.  Exploitation and any source of unjustified enrichment in Islam are prohibited.  The Holy Qur’an has emphatically instructed Muslims not to acquire each other’s property wrongfully.  Islam is not an ascetic religion.  It takes a positive view of life as the natural outcome of the belief that human beings are the vicegerents of Allah (swt). Charging of interest on loans taken for productive purposes is also prohibited because it is not an equitable form of transaction.  However, one of the socio-economic reforms made by Islam was the prohibition of riba (interest).  About the efficacy of the prohibition of interest in Islam, Muslim economists have tried to provide the juridical clarity and support based on reason, as opposed to mere belief. Since the Qur’an is the undisputed source of guidance in Islam for all Muslims, there is unanimous agreement on the fact that Islam has forbidden the practice of riba. The debate on whether interest is riba or not has been settled.  The ulama have made crystal clear that interest is riba.  The modern banking system is organized on the basis of a fixed payment called interest.  That is why the practices of the modern banking system are in conflict with the principles of Islam which strictly prohibit riba. 
 In several verses of the Holy Qur’an, Allah (swt) has declared prohibition of riba sequentially and mentioned its consequences as well.
In the Qur’an Allah (swt) says:
 “That which ye lay out for increase through the property of (other) people, will have no increase with Allah: But that which ye lay out for charity, seeking the countenance of Allah (will increase): it is these who will get a recompense multiplied”. (30:39) 
 “That they took riba (usury), through they were forbidden and that they devoured men’s substance wrongfully – We have prepared for those among men who reject faith a grievous punishment.” (4:161) 
 “O ye who believe! Devour not usury doubled and multiplied; but fear Allah, that ye may (really) prosper.” (3:140)   

 “Those who devour usury will not stand except as stands one whom the evil one by his touch hath driven to madness.  That is because they say: ‘Trade is like usury.’  But Allah hath permitted trade and forbidden usury.  Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge).  But those who repeat (the offence) are companions of the fire, they will abide therein (forever)” (2:275) 
 “O you who have attained faith! Remain conscious of God, and give up all outstanding gains from Usury, if you are (truly) believers” (2: 278)
 Riba or usury is also prohibited and condemned by tradition of Prophet Muhammad (saw) in following Hadith.
 Jabir reported: The Prophet (saw), cursed the receiver and the payer of interest, the one who records it (the contract) and the two witnesses to the transaction and said, “they are all alike (in guilt).”  
 Jabir ibn Abdullah, giving a report on the Prophet’s farewell pilgrimage, said: The Prophet (saw), addressed the people and said, “All the riba al-jahiliyyah is annulled, the first riba htat I annulled is our riba, accruing to al-Abbas ibn Abdul Mutalib (the Prophet’s uncle).”
 Abu Hurayrah (ra) narrated that the Prophet (saw), said: “riba has seventy segments, the least serous is equivalent to a man committing incest with his own mother.” 
 Abu Hurayrah (ra) narrated that the Prophet (saw) said: “”God would not allow four persons to enter paradise or to taste its blessings: he who drinks wine, he who takes riba, he who usurps an orphan’s property without right and he who is undutiful to his parents.” 
 The word riba has been used in the Holy Qur’an on several occasions.  So it is necessary to know what it means or what it really stands for.  Riba has been extracted from Raba.  It means addition, increase.  So, riba literally means to increase, to grow to rise, to add, to swell.  It is, however, not every increase or growth which has been prohibited by Islam.  In the Shari’ah, “riba” technically refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity.  In this sense riba has the same meaning as interest in accordance with the consensus of all jurists without any exception.  So the Holy Qur’an and the Hadith do not make any such difference between usury and interest. Interest and usury both are taken as synonymous for the Arabic word riba.  
 Interest-free banking attracted more attention, partly because of the political interest and partly because of the emergence of young Muslim economists like Muhammad Uzair (1955), Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974). Early seventies saw the institutional involvement. Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, First International Conference on Islamic Economics in Mecca in 1976, International Economic Conference in London in 1977 were the result of such involvement. The involvement of institutions and governments led to the application of theory to practice and resulted in the establishment of the first interest-free banks. The Islamic Development Bank, an inter-governmental bank established in 1975, was born of this process.
 The first private interest-free bank, the Dubai Islamic Bank, was also set up in 1975 by a group of Muslim businessmen from several countries. Two more private banks were founded in 1977 under the name of Faisal Islamic Bank in Egypt and the Sudan. In the same year the Kuwaiti government set up the Kuwait Finance House. In Malaysia Nasser Social Bank was established in 1972.  Though the bank is still active, its objectives are more social than commercial.
 In the ten years since the establishment of the first private commercial bank in Dubai, more than 50 interest-free banks have come into being.
 The subject matter of writings and conferences in the eighties have changed from the concepts and possibilities of interest-free banking to the evaluation of their performance and their impact on the rest of the economy and the world. Their very titles bear testimony to this and the places indicate the world-wide interest in the subject. Conference on Islamic Banking: Its impact on world financial and commercial practices held in London in September 1984, Workshop on Industrial Financing Activities of Islamic Banks held in Vienna in June 1986, International Conference on Islamic Banking held in Tehran in June 1986, International Conference on Islamic Banking and Finance: Current issues and future prospects held in Washington, D.C. in September 1986, Islamic Banking Conference held in Geneva in October 1986, and Conference ‘Into the 1990’s with Islamic Banking’ held in London in 1988 belong to this category. The most recent one is the Workshop on the Elimination of Riba from the Economy held in Islamabad in April 1992. This year 2009 in India the state finance minster of kerala- Dr TM Thomas Issac has begun the procedures for opening the interest free financial institutions.

[Author has done his Masters in Finance and Control from Department of Commerce, Kashmir University]