Interest, Riba and capitalism

January 15, 2011

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DR AQDAS Ali Kazmi opens his article, published in this space on January 9, 2011, with a statement that the debate about the concepts of interest and Riba is irresolvable. But he goes on to add that the “new genre of Islamic thinking violates and distorts the fundamental economic principles” in order to prove the prohibition of interest in Islam. By “economic principles,” he means bourgeois economics, of which he gives an elegant expose, holding it as some sort of eternal truth, although the political economy of an era is little more than the economic ideology of its ruling class.

The first attempt in the Muslim world to justify the interest doctrinally came in the 19th century, when it was recognised that modernism meant capitalism and that could not work without interest. Europe was making big strides forward and its way of life was so obviously superior and more promising than the system prevailing in the Muslim countries. In fact, capitalism seemed to be the only avenue to progress, and interest was a very important element in it. But it was said to be banned by the Quran. Now, Islam could not possibly have meant to close the path to progress to its followers. So Islam, it was argued, must have banned something different from the capitalist interest.

Jamaluddin Afghani’s Egyptian disciple, Abdou, who was Mufti of Egypt from 1899 to 1905, distinguished between usury and interest, calling the latter “dividends” and saying that income from it should not be more than 2.5 per cent of the capital. Ahmed Ali Mohadiss of Lahore gave a fatwa in 1908, justifying bank deposits and accepting of commission upon them.

Actually, these fatwas only followed the prevailing practice, not only on the part of the Muslim people but also the governments of Muslim countries. Whatever Muslim states were there at the time took loans from the western banks on interest and an Osmanli farman of 1851-52 regulating the rate of interest in the Empire took no note of the Sharia viewpoint on the subject.

The question is what is the nature of interest? Wages, rent and profit are all transfers of value. They depend upon some sort of advantage that the receiver has over the giver — the capitalist’s need of workers in order to make his capital productive, the ability of the landlord to deny access to land to those who need it and of the capitalist to deny the workers access to the instruments of production.

These are categories of bourgeois economics but transfers somewhat analogous to them existed in some pre-capitalist class societies as well. Interest is also a transfer of value, being a payment for access of one person to the money of another. But old societies have been reluctant to accept this particular transfer as legitimate. This has something to do with the resentment of the pre-commodity societies at the advent of money itself. Moreover, taking of interest was seen as a negation of mutual-aid, a principle central to the societies where man lived perpetually on the brink of disaster.

Bourgeois society reduced all relations to money relations, to the extent of even turning the human ability to labour into a commodity, governed by the same laws of exchange as other commodities. Today’s Muslim societies are all capitalist. There may be pre-capitalist sectors among them. But they are dominated by the capitalist sector, with which their relations are governed by the laws of capitalism. Finally this ensemble forms a part of the world capitalist market and operates according to its requirements. But all these Muslim societies have been brought into the world market by the European countries, which conquered them and modified their economies to suit the operations of that market. Being the objects of history, so to say, instead of its subjects, as are the societies which attained capitalism earlier and were integrally transformed by it, the Muslim societies find the connection unsatisfactory.

Proponents of Islamic economics do not reject capitalism as such. They do not object either to the existence of capital or to a certain kind of relationship between the capital and the labour in the process of production. They actually propose a measure of distributive justice and claim that once the “interest is eliminated”, a modern capitalist economy will become Islamic. Dr Shahid Hasan Siddiqui says “Islam wants that the lender must also assume the risk of loss, if he wants to share in the profit earned by the entrepreneur from the use of borrowed money through his (borrower’s) skill and hard work”. (Islamic Banking, Royal Book Co. 1994 — p24). “The Islamic system, therefore seeks to abolish these uncertainties and injustices by prohibiting interest and replacing it with profit and loss sharing system of financing which ensures an equitable distribution to all parties.”

This means that the lender would still be participating in the enterprise solely through his capital. So the return to him would still be interest. The only modification suggested here is that it should vary with the rate of profit, instead of being fixed. Even in the present system the rate of interest varies with the rate of profit but over a period of time. Dr Siddiqui suggests variation at each point of time.

He even calls his system of interest, together with the suggestion of an economically activist state, a third way between communism and capitalism. But he does not explain how the substitution of a variable rate of interest for a fixed one will change the nature of capitalism, in the continued presence of capital. The “activist state” proposed by him is not antithetical to capitalism either, as capitalism has never functioned without the active support of the state.

A seminar organised by the Institute of Policy Studies in April, 1992 on the subject, makes basically the same recommendation on the question of the rate of interest (Elimination of Riba, edited by Khurshid Ahmad, Institute of Policy Studies, 1995). So does M. Umer Chapra in his Towards a Just Monetary System (The Islamic Foundation, Leicester, 1986). Thus whereas Abdou and other modernists of the 19th century were only trying to find justifications in the Islamic doctrine for the capitalist practices, which they considered highly desirable, today the Islamic doctrine is being called upon to prove that interest is not essential to the operation of a modern capitalist economy.

The Muslim economists discussing the question are divided basically into two groups. One believes that the modern interest is not riba prohibited by the Quran. Another group claims that interest is riba but that a modern capitalist economy can be run without a fixed rate of interest being charged on loans.

An economist, Iftikhar Hussain, insists that the system of deposits and loans is really profit and loss-sharing. Therefore, it is not un-Islamic. (Dawn, 14 January, 1994). Khawaja Amjad Saeed says the interest charged and paid by banks is profit not riba, therefore legitimate. Ameen Akhtar, who participated in a seminar on the subject organised by the National Bank of Pakistan in April 1979, agrees with him (Ecnomic System of Islam, Seminar, 1980). So does another participant Mian M. Nazeer Mohammad Uzair. He says that “capital is only an instrument of physical manifestation of the factor of production, known as enterprise”. Therefore, when it appears as part of enterprise, it runs a risk and its earning is legitimate. I suppose he means if the entrepreneur invests his own capital, part of his profits would be payment for this factor, which would be legitimate.

Dr Israr Ahmed says Islam has two economic systems, moral and legal. While legal system permits earning through investment of capital, this is frowned upon morally, after a certain level of revenue is reached. He also believes that exploitation is the result of the separation of labour from capital. (Jang, January 21, 1994).

Thus the economists on both sides agree that any income accruing to money capital without its running a risk is inadmissible in Islam. All partners in a venture should share not only profits but also losses.

It may further be noted that this debate, starting with Abdou in the 19th century, has not attempted to transcend the limits of capitalism. The capitalist system, in spite of being criticised for exploitation, is considered to be almost natural, only requiring some modification on the distributive side. All the categories of bourgeois economics are accepted in the sense in which they are used by the bourgeois economists and it is assumed that the only possible social system is capitalism. These economists are so steeped in bourgeois economic culture that they automatically define the instruments of production as capital and take the wage relationship as the only natural one between the labour and the conditions of production. So, capitalism is extra-polated backwards into eternity. “Exploitation” is only a charge exceeding the legally prescribed rate at a point of time.

Dr Murad Hofmann, an erudite German Muslim, while explaining the Islamic teachings to the West (Islam — An Alternative, Garnet Publishing, 1993), says that the Quran “has a great deal to say on the subject of the economic activity of the Muslims, but little on their economic system.” That does not prevent him from adding that Islamic economic doctrine has some permanent attributes, such as private ownership of means of production, presumably including land, free formation of prices through market and opposition to levelling of incomes, though it prohibits interest. He concludes that such an economy should correspond in essence to the social market economy of the western model (p. 101). So Islam is not only confined to the parameters of capitalism, it has to correspond to one particular form of that mode of production. What happens if capitalism, which has assumed so many forms since the 15th century, moves on?

However, we proceed from the premise that neither Islam nor its economic elements are prisoners of any particular organisation of the economy.

As to interest, contrary to what Abdou and many, who came after him, say, the Quran does not distinguish between interest and usury. Neither does it distinguish between loans for consumption or for production. It uses only one word Riba, which means growth, exactly like the Greek word “tokos”, condemned by Aristotle. And riba is condemned, whether the growth is “doubled and trebled” or not.