ANY community mired in confusion and contradictions can hardly make any progress. This explains the predicament of Muslim Ummah which for centuries at length has been debating the issues of interest and Riba, their equivalence and vice versa without reaching a consensus.
This debate reached a high level mark in the second half of the twentieth century when theologians and proponents of neo-Islamic economics throughout the Muslim world came up with esoteric models and innovative paradigms to register the equivalence of interest and Riba.
Mr. M. Abul Fazl has recently joined the bandwagon of Islamic economists, in his article titled “Interest, Riba and Capitalism” appearing in these columns on January 16, 2011 he presents a more detailed but a more convoluted version of his article of December 12, 2010. The writer deploys the tools of Marxism to underscore the equivalence of interest and Riba without appreciating that the Marxist philosophy has lost much of its appeal and lustre because of its inherent contradictory structure.
On the theoretical plane, Marx over-emphasised the mode of material production (or more broadly economic forces) as the principal determinant of social dynamics of communities. In this regard the views of W.W. Rostow as reflected in his well-known work The Stages of Economic Growth: A Non-Communist Manifesto, have much relevance in the contemporary world.
As Rostow puts it, “ …although the stages-of-growth are an economic way of looking at whole societies, they in no sense imply that the worlds of politics, social organisation, and of culture are a mere superstructure built upon and derived uniquely from the economy. On the contrary, we accept from the beginning the perception on which Marx, in the end, turned his back and which Engles was only willing to acknowledge whole-heartedly as a very old man; namely, that societies are interacting organisms. While it is true that economic change has political and social consequence, economic change is, itself, viewed here as the consequence of political and social as well as narrowly economic forces. And in terms of human motivation, many of the most profound economic changes are viewed as the consequence of non-economic human motives and aspirations. (Introduction P.2)
Whereas theory is heavily loaded against economic fundamentals underlying the Marxist doctrine, the verdict of history is equally weighed against the Marxist predictions. This has been established very clearly by Francis Fukuyama in his classic The End of History and the Last Man. Fukuyama’s central hypothesis that liberal democratic traditions and free enterprise capitalism are going to shape mankind’s future has been widely accepted. His deep analysis based on human psychology, philosophy, logic and political economy shows that communism is a transitory stage in the overall march of history.
However, at this stage it is extremely difficult to fully assess the merits and demerits of the two competing systems namely capitalism and communism but it can be reasonably argued, that Marxism as materialistic ideology aiming at creating a God-less, money-less and a class-less society has serious limitations to verify the common Muslim belief that interest and Riba are equivalent to each other.
In fact, by whatever criterion, yardstick or standard we may evaluate the twin concepts of interest and Riba, the equivalence between the two can’t be established. The contemporary efforts on proving their equivalence are apparently rooted in a gross misunderstanding of Quranic idea of Riba and a lack of adequate comprehension of the present-day concept of “interest”. The equivalence debate is primarily a debate about the definitions of interest and Riba.
Accordingly, some of the popular definitions of interest are presented below to highlight the diversity of uses to which the parameter of interest is applicable:
a) Interest, being the price paid for the use of capital in any market, tends towards an equilibrium level such that the aggregate demand for capital in that market, at that rate of interest, is equal to the aggregate stock forthcoming at that rate. (Marshall)
b) The yield of capital is the interest rate per annum, which is a pure percentage per unit of time — independent of dollar or other value unit. (Samuelson)
c) The rate of interest at any time, being the reward of for parting with liquidity, is a measure of the unwillingness of those who possess money to part with their liquid control over it. It is the ‘price’ which equilibrates the desire to hold wealth in the form of cash with the available quantity of cash. (Keynes)
d) Rate of interest is the percentage of premium paid on money at one date in terms of money to be in hand one year later. It is the bridge or link between income and capital. (Fisher)
These definitions, in brief, depict interest as price of capital or alternately as return, premium or reward for the use of capital especially the liquid assets.
Now a word about the definition of Riba, an important term of the Holy Quàan. An acceptable definition of this term requires an integrated approach at three tiers namely etymological, epistemological and heuristics. At the etymological level, the common meanings of the word Riba have to be traced from the basic lexiconic sources of the Arabic language. This has to be followed by the epistemological approach whereby the contextual significance and emphasis of these meanings have to be discovered by looking critically at each verse of the Quàan where the word Riba or its derivatives are used. Under heuristics criteria, the various micro-constituents of the meanings and interpretations accredited with the word Riba are put together to reach a common-sense synthesis and come up with a definition of Riba.
Using the above outlined three-tier approach and common interpretations provided in the classical sources of Arabic such as “Lisan-ul-Arab”, “Tajul Aroos”, “Mufardat-ul-Quàan”, “Tahzeab Abu Mansur-Al-Azhari”, “Kitab Muheetal-Muheet”, and lexiconic references such as “Advanced Learner Arabic-English Dictionary”, “Steingass Arabic-English Dictionary”, “Alqmoos-al-Asri”, and “Al-Faraidul-Durraya”, etc. Riba could be defined as “the sum total of excess charges, exploitative income and corruption-based earnings which one party realises at the cost of the other in trade, business and other activities”.
The vital yardstick for determining Riba in any transaction or an activity is the “surplus” or “excess” which is expropriated by one individual or a group from another individual or a community. Since this general definition of Riba is based on the synthesis of a wide range of interpretations and definitions expounded by the most influential and renowned Arabic scholars it is all-embracing and comprehensive.
This definition when applied specifically to financial transactions and the modes of lending or borrowing, Riba would be equal to the “excess” or “exploitative” rates of interest charged on the principal amount by the borrower to the lender. Heuristically speaking, therefore, Riba would only refer to the “usurious” rates of interest but not to “each” and “every” rate of interest which will have to be evaluated separately on merit to determine whether it reflects Riba or not.
The elements of Riba or “excess” in loan transactions would be determined by a large number of factors such as (a) the current and the expected rate of inflation, (b) the amount of the loan, (c) the repayment period involved, (d) risk profile of the loan, (e) security offered by the borrower, (f) the purpose for which the loan is utilised, (g) the marginal productivity of the capital, (h) resource position of the lender and the borrower, etc.
Of all these factors, the first factor, i.e. actual and expected rate of inflation could be called the primary determination of Riba or “excess” involved in the lending transaction. As the simplest example, an interest rate of 10 per cent per annum in nominal items would not imply any Riba, if inflation rate during the lending period is also equal to 10 per cent.
This suggests that Riba would be measured by changes in the purchasing power of the money involved and not by changes in “nominal” amounts transacted. The evaluation of “excess” or “surplus” by means of comparing the “real” amounts rather than the “nominal” sums involved is the very essence and the most significant feature of Riba estimation.
As the epilogue of the discussion, a few questions emerge which are to be addressed by the followers of the neo-Islamic economics. What are the potential macro-economic and micro-economic implications of eliminating interest from the social system? What could be the shape of the economy on the day when interest prohibition ordinance is imposed? Can an interest free economy survive or will it perish? Can Profit-loss Sharing (PLS), Mudharaba, Ijara or Istisna serve as the survival kit for such an economy?
The author holds a Ph.D degree in Economics from Boston University, USA and is a former Joint Chief Economist, Planning Commission of Pakistan.