Riba: a confusion of concepts

January 23, 2011


THERE is a lively debate continuing on interest and Riba in this space. It appears that there is confusion about the basic concepts of the subject. Those who support interest, as opposed to Riba, seem to view it in the context of the prevailing economic system, which is governed by capitalism and take it as a gospel, whereas the prohibition of Riba in Islam is part and parcel of a unique comprehensive economic system.

The two are quite opposed to each other. Capitalism is based on the trinity of individualism, materialism and utilitarianism. According to capitalism, a person is supposed to earn his living by the sweat of his brow and is its sole master. Economic welfare is identified with material wealth, the more the better. Every effort should be made to maximise the benefit, the consumer seeking maximum utility and producer maximum profit. There is no ethical constraint for the pursuit.

Selfishness and greed are not only tolerated but promoted.

In capitalism, the main emphasis is on production for which concentration of wealth is promoted because of higher propensity of the rich to save and invest.

Equitable distribution of income and wealth is the least concern. The stress on “poverty alleviation” is more motivated by the enlightened self-interest of the rich for law and order to pursue their economic objectives than welfare of the poor. Microfinance institutions, instead of helping, exploit them through high rates of interest.

In sharp contrast, in Islam Allah is the Provider. The Quran says, “And there is no creature on the earth but it is for Allah to provide it with sustenance.” (11:7) “Allah enlarges His provision for whomsoever He pleases and straitens it for whomsoever He pleases.” (13:27) Effort is a necessary condition but not a sufficient one and this is provided by Allah’s bounty. “So that Allah may give them the best reward of their deeds, and give them increase out of His bounty. And Allah does provide for whomsoever He pleases without measure.” (24:39) Earning livelihood is to seek the bounty of Allah. ”And when the Prayer is finished, then disperse in the land seek of Allah’s bounty and remember Allah much, that you may prosper.” (52:11) The enlargement and straitening of provision means that in the former case the result is out of proportion to effort whereas in the latter case it is restricted to effort and exposed to all sorts of risks and not enjoying Divine protection. The rationale for scarcity is explained, “And if Allah should enlarge the provision for His servants, they would rebel in the earth; but He sends down according to a proper measure as He pleases.” (42:28) Economic conduct is governed by Islamic values of which taqwa-fear of Allah is of basic importance and it assures economic welfare. ”And he who fears Allah, He will make for him a way out. And will provide for him from where he expects not. And he who puts his trust in Allah-He is sufficient for him.” (65:3) Allah says, “O ye who believe! Fear Allah and relinquish what remains of interest, if you are believers.“ (2:276) Wealth is a trial in Islam. “Do they think that by the wealth and children with which We help them, We hasten to do them good? Nay, but they understand not.” (23:56) “And know that your possessions and children are but a trial and it is Allah with Whom is a great reward.” (8:29) “You shall surely be tried in your possessions and in your persons.” (3:187) The Holy Prophet (PBUH) used to pray, “I seek Thy protection from the trials and torments of the Fire and from the evils of wealth and privation.” (Tirmidhi) Production being in the lap of Allah, the greatest emphasis in Islam is on distribution and a very comprehensive system is provided, which includes compulsory levy like the Zakat, a system of widespread distribution of inheritance and practically unlimited voluntary charity. The basic guiding principle is “That it (wealth) may not circulate only among those of you who are rich.”(59:8) ”And in their wealth was the share of those who asked for and for one who could not.”

(51:20) This is the perspective for Riba or interest and the purpose of prohibition, among other things, is to prevent concentration of wealth.

There is also confusion about some modern economic concepts. A rejoinder published in this section on January 9, 2011 says, “The economists label the price of capital as “interest”. … To abolish interest from the economic system would invariably require the destruction of all capital stock from the economy wherever and whatever form it exists.” This is a gross oversimplification. Interest is not the price of capital but of “loanable funds”. Capital is a much wider term and includes real capital, which is one of four factors of production and consists of tools, machinery, buildings and other physical infrastructure.

The term interest cannot be applied to its price. Financial capital consists of equity capital and loan capital and it is only the latter that deserves the term. In financing business, they are combined and this is indicated by debt\equity ratio which may be observed either as a tradition or in compliance with legal obligations. Abolition of interest may affect loan capital but certainly not other forms of capital. In this situation, the business need not be liquidated as the burden of financing will be entirely on equity capital. This is what Islam seeks by abolishing interest and allowing musharka and mudarba or public limited companies. This is indeed a radical shift.

Today the world is in the grip of a serious economic crisis being dubbed as the Great Recession 2007-09. It was triggered in the US by sub-prime mortgages. The way it became a global economic crisis is an eloquent proof of failure of interest-driven capitalism. In this, there are many lessons for those who may care to see. akarim001@gmail.com