Riba-free society

Published December 2, 2022

THIS is with reference to the report “‘Seismic shift’ to take interest out of banking sector” (Nov 10) which referred to the pledge by the government to take interest out of the banking system, and the editorial ‘Interest-free economy’ (Nov 11) which raised a few pertinent questions. I have often wondered how the concept of Riba applies in the age of fiat currency, which is inherently inflationary.

Inflation transfers wealth from the creditor to the debtor if inflation happens to be higher than the nominal interest rate, which, to me, is complete opposite of the concept of Riba.

If inflation, let us say, is 20 per cent, and the nominal interest rate is 15pc in real terms, it is a negative interest rate. The decision of the Federal Shariat Court (FSC), as I understand, assumes zero inflation, which hardly has any basis in today’s reality.

For example, if I borrow from someone today Rs10,000 and pay him back only principal amount after five years, unless inflation has remained zero, my creditor would be in loss, while I, being the borrower, will get a free ride as the purchasing power of Rs10,000 would be severely less in five years.

Today, let us suppose, I can buy four goats for Rs10,000, but after five years, I will be able to buy only one with that amount. Where has the value of the three remaining goats disappeared? That value has been consumed by me, the borrower. And who has lost it? The lender, of course. This is how inflation transfers wealth from the creditor to the debtor.

Many governments use it as tool to transfer wealth to themselves if their loan is denominated in local currency.

Now, let us take a look at the above example from another angle. The lender, rather than giving me Rs10,000, gives me four goats and asks me to pay him back four goats at the end of five years. With the increase in the price of a goat, I will end up spending Rs40,000 to buy the four goats that I, the borrower, have to give back to the lender.

Apparently, I would be paying back my creditor four times the money, but in terms of value I would be returning the same amount.

Riba is wrong, and there can be no doubt or debate on the matter. Period. Defining it in the age of fiat currency, however, is not as straightforward as many would like to believe.

Bringing the inflation down to zero by replacing fiat currency with another mode of exchange that does not inflate or deflate is the key to keeping the definition intact.

Even gold as the medium of exchange is no guarantee to zero inflation or deflation. Unless a country is economically and militarily so powerful that it can dictate its values on the world, changing things at home will be of little value.

I wish the International Monetary Fund (IMF) and other international financial institutions (IFIs) could give some importance to our standards, but the fact remains that they don’t. They just don’t.

Shakeel Nizamani
Alberta, Canada

Published in Dawn, December 2nd, 2022

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