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Interest and its Role in Economy and Life (part 1 of 7): An Introduction
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Description: An Islamic view of the role of interest in society today, with a historical and contemporary study. Part One: Why Muslims have implemented the prohibition of Interest in the face of Christian and Jewish secularists’ call for its legalization.
By Jamaal al-Din Zarabozo (© 2007 IslamReligion.com)
Published on 02 Apr 2007 - Last modified on 01 Nov 2009
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Introduction
Interest is defined in the Oxford English Dictionary
as, “Money paid for the use of money lent (the principal), or for forbearance
of a debt, according to a fixed ratio.”
Actually, individuals and the world as a whole probably
know too well the burden of interest, such that no one truly needs the above
definition. Interest is something that is known to anyone living in a
capitalist country. It has become so completely institutionalized and accepted
in modern economies that it is almost impossible to conceive that there are
some who completely oppose it and refuse any transactions that involve interest.
But there are devout Muslims who refuse to deal in interest.
The actual reason why such Muslims do not deal with
interest is that interest has been forbidden by the Islamic religion, as shall
be detailed shortly. At the same time, though, Muslims believe that God’s
guidance is based on His knowledge, wisdom and justice. In other words, God
does not forbid something from humans for no reason whatsoever. Hence, there
are definitely sound reasons—some of which we may be able to clearly
recognize—why God has forbidden this practice.
In today’s world, Muslims are constantly being bombarded
with arguments in support of dealing with interest. Many Muslims have succumbed
to such pressure and supposedly rational arguments, leading them to accept the
concept of interest.
Therefore, this short article is intended to discuss the
Islamic stance on interest as based on the basic texts of the faith as well as
enter into a rational discussion of interest to determine if the arguments
given in favor of interest are truly valid.
God’s Guidance for Mankind
Islam teaches that God has mercifully given guidance to
humankind for all aspects of life. This guidance covers not just acts of
worship but everything from economics and business ethics to marital relations,
international relations, ethics of warfare and so forth. It is one of the
distinguishing traits of Muslims today that they still believe in such guidance
from God while so many among humankind have discarded or preempted their
religious teachings when it comes to “secular” issues.
There are a number of reasons why many Muslims have not
followed the same path that, for example, numerous secular Jews and Christians
have followed. One of the most important reasons is that the Muslim can be
confident that the revelation which forms the basis of the Islamic religion has
not been tampered with or distorted since the time of its revelation. In other
words, there has been no human interference or distortion in the revelation.
Hence, there is no need for humans to come along now and fix the mistakes of
earlier humans, as secular Jews or Christians would argue. Indeed, the only
result for Muslims would be humans, by their interference, damaging the
revelation that has come from God.
Second, many Muslims believe that they have not been
shown any strong or convincing evidence that somehow their religion is out of
touch with reality or impractical in modern times. In Islam, for example, there
has never been a conflict between religion and science, leading to a breakdown
of trust in the church and a virtual revolt against the authority of religion
as experienced in the West. Many people,
even some Muslims, have called for many changes within Islam but, in reality,
the arguments that they have presented have been faulty and flimsy, to say the
least. The case of interest, this article’s topic, can be taken as an excellent
example of this nature.
Interestingly, although Islam has been in the media
quite often lately, it has been this author’s experience that many non-Muslims
are not aware of Islam’s stance on interest. Hence, this article also sheds
light on this important topic—a topic which is not a dead “medieval” topic but one
which has extreme relevance for the world today.
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Interest and its Role in Economy and Life (part 2 of 7): The Islamic Stance
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Description: An Islamic view of the role of interest in society today, with a historical and contemporary study. Part Two: A glimpse at some texts from the Quran and Sunnah which severely warn against the taking of interest.
By Jamaal al-Din Zarabozo (© 2007 IslamReligion.com)
Published on 02 Apr 2007 - Last modified on 20 Dec 2010
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The Islamic Texts on Interest
When one reads the Islamic texts concerning interest,
one is immediately taken by how stringent the warnings are against any
involvement in interest. Islam prohibits a number of immoral acts such as
fornication, adultery, homosexuality, consuming alcohol and murder. But the
variety of discussion and extent of warnings for these other acts is not of the
same level of those related to taking interest. This has led Sayyid Qutb to
write, “No other issue has been condemned and denounced so strongly in the Quran
as has usury.”
The Quran, for example, contains the following verses
concerning interest:
“O you who have believed, do not consume interest, doubled and
multiplied, but fear God that you may be successful. And fear the Fire, which
has been prepared for the disbelievers.” (Quran 3:130-131)
This rather strong warning towards the believers warns
of a fatal consequence: being thrown into the Hell-fire that has been prepared
for the disbelievers.
God also says:
“Those who consume interest cannot stand [on the Day of
Resurrection] except as one stands who is being beaten by Satan into insanity.
That is because they say, ‘Trade is [just] like interest.’ But God has
permitted trade and has forbidden interest. So whoever has received an
admonition from his Lord and desists may have what is past, and his affair
rests with God. But whoever returns [to dealing in interest or usury]—those are
the companions of the Fire; they will abide eternally therein. God destroys
interest and gives increase for charities. And God does not like every sinning
disbeliever.” (Quran 2:275-276)
These verses have many interesting points to them. Commenting
on the first portion of the verse, Maudoodi has written,
Just as an insane person, unconstrained by ordinary
reason, resorts to all kinds of immoderate acts, so does one who takes
interest. He pursues his craze for money as if he were insane. He is heedless
of the fact that interest cuts the very roots of human love, brotherhood and
fellow-feeling, and undermines the welfare and happiness of human society, and
that his enrichment is at the expense of the well-being of many other human
beings. This is the state of his “insanity” in this world: since a man will
rise in the Hereafter in the same state in which he dies in the present world,
he will be resurrected as a lunatic.
Secondly, the verses make it quite clear that there is a
difference between legitimate business transactions and interest. The
difference between them is so glaring that the verse does not bother to explain
them, which is one of the stylistic aspects of the Quran. Thirdly, these verses
clearly state that God “destroys interest and gives
increase for charities.” This is one of God’s “laws” which humankind
cannot necessarily discover on its own. The ultimate and full negative effects
of interest on the individual, community and world as a whole in both this life
and the Hereafter are known only to God. However, a glimpse of some of those
negative effects, testifying to the truth of this verse, shall be given later
in this paper. In fact, perhaps highlighting the meaning of this verse, the
Prophet (peace and blessings of God be upon him) also said, “Interest– even it
is a large amount– in the end will result in a small amount.”
Undoubtedly, in the Hereafter when the individual meets God, all that he
amassed via such illegal means will be a source of his own destruction.
Shortly after the above verses, God further says,
“O you who have believed, fear God and give up what remains
[due to you] of interest, if you should be believers. And if you do not, then
be informed of a war [against you] from God and His Messenger. But if you
repent, you may have your principal—[thus] you do no wrong [to others], nor are
you wronged.” (Quran 2:278-279)
Who in his right mind would expose himself to a
declaration of war from God and His Messenger? Undoubtedly, a stronger threat
one will rarely find. At the end of the verse, God makes it very clear why
interest is forbidden: it is wrongdoing. The Arabic word for such is dhulm,
meaning a person has done wrong to, harmed or oppressed another person or his
own soul. This verse demonstrates that interest is not forbidden simply due to
some ruling of God without any rationale behind that ruling. Interest is
definitely harmful and therefore it has been forbidden.
In addition to the verses of the Quran, the Prophet
Muhammad (peace and blessings of God be upon him) also made many statements
concerning interest. For example, the following statement clearly demonstrates
the gravity of this action:
“Avoid the seven destructive sins: associating
partners with God, sorcery, killing a soul which God has forbidden– except
through due course of the law, devouring interest, devouring the wealth of
orphans, fleeing when the armies meet, and slandering chaste, believing,
innocent women.” (al-Bukhari and Muslim)
In fact, another statement of the Prophet (peace and
blessings of Allah be upon him) should be sufficient to keep any God-fearing
individual completely away from interest. The Prophet (peace and blessings of
Allah be upon him) said:
“One coin of interest that is knowingly consumed by
a person is worse in God’s sight than thirty-six acts of illegal sexual
intercourse.” (al-Tabarani and al-Hakim)
The Companion Jaabir narrated that the Messenger of
God (peace and blessings of God be upon him) cursed the one who takes interest,
the one who pays interest, the witnesses to it [that is, the interest
contracts] and the recorder of it. Then he said, “They are all the same.” (Muslim)
This is a basic principle in Islam. If something is
forbidden and wrong, a Muslim should not participate in it or support it in any
fashion. Thus, since interest is forbidden, it is also forbidden to be a
witness to such contracts, to record them and so on. The Prophet’s words also
explain that there is no difference between the one who pays interest and the
one who receives it. This is because they are both involved in a despicable
practice and, hence, they are equally culpable.
The Prophet Muhammad (peace and blessings of Allah be
upon him) also said,
“If illicit sexual relations and interest openly appear
in a town, they have opened themselves to the punishment of God.” (al-Tabarani
and al-Hakim)
This statement is a reference to one of God’s “societal
laws.” The punishment of God may come in different forms in this world or the
next.
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Interest and its Role in Economy and Life (part 3 of 7): Religion and Early Thinkers
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Description: Interest and Usury in the Bible (Judaism and Christianity) and according to early thinkers.
By Jamaal al-Din Zarabozo (© 2007 IslamReligion.com)
Published on 09 Apr 2007 - Last modified on 19 Feb 2008
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Islam, of course, is not the only religion that has
banned interest and considered it a despicable practice. The prohibition of
interest—at least to some extent—is a well-known law in both the Old and the
New Testaments of the Bible. In numerous places in the Old Testament, reference
has been made to “usury” or “interest.” (Again, usury and interest used to be
equivalent but only over time did usury begin to mean an exorbitant or illegal
amount of interest. Thus, as shall be noted below, the American Standard
Version of the Bible repeatedly changed the King James Version from
usury to interest.)
Deuteronomy 23:19-20 reads:
“Thou shalt not lend upon usury to thy brother;
usury of money, usury of victuals, usury of any thing that is lent upon usury:
Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt
not lend upon usury: that the LORD thy God may bless thee in all that thou
settest thine hand to in the land whither thou goest to possess it” (King
James Version).
Similarly, Exodus 22:25 states:
“If thou lend money to any of my people that is
poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay
upon him usury” (King James Version).
In Leviticus 25:37 one reads:
“Thou shalt not give him thy money upon usury, nor
lend him thy victuals for increase” (King James Version).
In Jeremiah 15:10, the Prophet complains that he is
being cursed although he has never done anything such as take interest, meaning
that such curses would be appropriate for him if he were someone who took
interest. Perhaps one of the harshest verses in the Old Testament concerning
interest is Ezekiel 18:13:
“Hath given forth upon interest, and hath taken
increase: shall he then live? he shall not live: he hath done all these
abominations; he shall surely die; his blood shall be upon him.”
There are yet other verses of the Old Testament that
indicate the prohibition of interest but what has been presented above should
suffice.
Easton’s Bible Dictionary has summarized the Mosaic Law
concerning interest in the following passage:
The Mosaic law required that when an Israelite needed
to borrow, what he asked was to be freely lent to him, and no interest was to
be charged, although interest might be taken of a foreigner (Exodus 22:25; Deuteronomy
23:19,20; Leviticus 25:35-38). At the end of seven years
all debts were remitted. Of a foreigner the loan might, however, be exacted. At
a later period of the Hebrew commonwealth, when commerce increased, the
practice of exacting usury or interest on loans, and of suretiship in the
commercial sense, grew up. Yet the exaction of it from a Hebrew was regarded as
discreditable (Psalms 15:5; Proverbs 6:1,4; 11:15; 17:18;
20:16;
27:13;
Jeremiah
15:10).
Unfortunately, as is often the case on practical issues,
the New Testament is somewhat vague on the issue of interest. According to The
Encyclopedia of Religion and Ethics, “there are no direct precepts [concerning
interest] to guide the Christian conscience.”
However, in the teachings attributed to Jesus in the New Testament, there are some
passages that seem to be clearly against the practice of interest. In one
passage, Jesus is reported to have said:
“But love ye your enemies, and do good, and lend,
hoping for nothing again; and your reward shall be great, and ye shall be the
children of the Highest: for he is kind unto the unthankful and to the evil”
(Luke 6:35).
In this passage, Christians are actually told to lend
out money without hoping to receive the principal again. This may be considered
one of the “hard sayings” and, as is well-known, Christian scholars differ as
to how such passages are to be interpreted and implemented.
In Matthew 25:14-28, there is a lengthy parable wherein
God gives different amounts of coins (called “talents”) to various servants. Some
of them invest the money and bring back more to God than what God gave them.
However, the person to whom God only gave one such coin is described in verse
18:
“But he that had received one went and digged in
the earth, and hid his lord's money.”
When God calls back His
servants and asks about what they did with the money, the one who received only
one talent stated to God:
“Then he which had received the one talent came and
said, Lord, I knew thee that thou art an hard man, reaping where thou hast not
sown, and gathering where thou hast not strowed: And I was afraid, and went and
hid thy talent in the earth: lo, there thou hast that is thine” (Matthew
25:24-25).
The Lord then sternly replies
to him:
“His lord answered and said unto him, Thou wicked
and slothful servant, thou knewest that I reap where I sowed not, and gather
where I have not strowed: Thou oughtest therefore to have put my money to the
exchangers, and then at my coming I should have received mine own with usury.
Take therefore the talent from him, and give it unto him which hath ten
talents” (Matthew 25:26-28).
Commenting on this passage,
the Geneva Study Bible states,
Bankers who have their shops or tables set up abroad,
where they lend money at interest. Usury or loaning money at interest is strictly
forbidden by the Bible, (Exodus 22:25-27; Deuteronomy 23:19,20).
Even a rate as low as one per cent interest was disallowed, (Nehemiah 5:11). This
servant had already told two lies. First he said the master was an austere or
harsh man. This is a lie for the Lord is merciful and gracious. Next he called
his master a thief because he reaped where he did not sow. Finally the master
said to him sarcastically why did you not add insult to injury and loan the
money out at interest so you could call your master a "usurer" too!
If the servant had done this, his master would have been responsible for his
servant’s actions and guilty of usury.
Based on the Old and New Testaments, the early Church
Councils disallowed interest. Eventually all Christians were prohibited from
indulging in interest, not simply the clergy. Christian fathers, such as St.
Thomas Aquinas,
dealt with the issue of interest in some detail. “In the Decree of Gratian, as
subsequently at the Third Lateran Council (1179), a canon ordained that
‘manifest usurers shall not be admitted to communion, nor, if they die in their
sin, receive Christian burial.’” The Fourth
Lateran Council of 1215 condemned the practice but allowed it for the Jews.
Catholics remained firmly against interest until the 19th Century.
Martin Luther of the 16th Century, the Protestant leader, also
condemned usury but, it is claimed, he allowed on it on a plea of human
weakness.
Calvin, more than anyone else, was the beginning of a softer view concerning
interest among Christian leaders. Slowly civil legislation freed itself from
Canon Law and interest began to be institutionalized over time.
It was not only those of the Judeo-Christian thinking that
condemned interest. In fact, the Greek philosophers also took a very negative
view of interest. Aristotle and other leading Greek scholars condemned
interest. The famed Austrian economist, Eugen von Böhm von Bawerk (also known
as Boehm-Bawerk), wrote in his important work, Capital and Interest,
The hostile expressions of the ancient world, not few
in number, consist, in part, of a number of legislative acts forbidding
the taking of interest and in part accidental
utterance of philosophers such as Plato, Aristotle, the two Catos,
Cicero, Seneca and Pantus etc. Greek philosophers regarded money
as nothing but a medium of exchange and, therefore, they denied the
productivity of money loans. A piece of money cannot beget another piece was
the doctrine of Aristotle. The obvious conclusion was that interest is
unjust.
Initially, the Roman Empire as well prohibited the
charging of interest. With the rise of trading classes, this was lessened a bit
but there were still severe restrictions on interest lending as well as laws to
protect debtors.
Shakespeare’s character Shylock in The Merchant of
Venice (written just prior to the year 1600) demonstrates just how despised
moneylenders who dealt in interest were. The obvious question arises as to how
interest went from being a despised and forbidden act to a socially acceptable
and institutionalized practice in the West.
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Interest and its Role in Economy and Life (part 4 of 7): Prohibition to Justification
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Description: How something so despised such as interest could be justified and even institutionalized as a standard.
By Jamaal al-Din Zarabozo (© 2007 IslamReligion.com)
Published on 09 Apr 2007 - Last modified on 19 Feb 2008
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Over time, it was considered that the prohibition of
interest was nothing more than a religious dogma that needed to be done away
with. Religion could no longer be allowed to run economics. This was certainly
the sentiment expressed by famed economist historian Richard Tawney when he
stated, “The whole scheme of medieval thought attempted to treat economic
affairs as a part of hierarchy of values embracing all interest and
activities of which the apex was religion.” At
the same time, though, it seems that the change in attitude that took place was
not based on purely economic reasons. Lawrence Dennis stated,
Aristotle, the Roman Catholic Canonists,
the Jewish Torah. . . all forbade loans at interest, or denounced
interest as usury. Lending at interest took its rise in the medieval
centuries largely as a matter of accommodating princes who needed and
could not raise enough money for war and other public
purposes. Contrary to current ideas, lending was not originally developed
as a way of financing commerce. The Venetians, Dutch, Henseatic,
British and other merchants up to the seventeenth century financed
their operations with partners’ capital contributions.
Dennis further states,
The Catholic Canonists did not disapprove
of profits on commercial ventures, rent for the use of land or the
sale of the fruits of the land or other capital. They disapproved of money
interest on money lent. During the Reformation Period, interest came
to be rationalized mainly by the Protestants in a way to get around
Canonist objections. The Catholic Church never abandoned its attitude
towards usury, but it acquiesced in, or tolerated loans on, the
basis of certain assumptions. This moral acquiescence by the Catholic
Church and positive endorsement by the Calvinist traders came to be
embodied in laws and thoughts and behaviour patterns of modern societies.
The rationalizations Dennis is referring to can be seen
in a number of commentaries on the Bible. Even though the Old Testament texts
are very clear in their condemnation of interest, this did not keep later
scholars from virtually ignoring or seemingly distorting this prohibition.
For example, the Henry’s Concise Commentary to Leviticus 25:37 states:
And thus far this law binds still, but could never be
thought binding where money is borrowed for purchase of lands, trade, or other
improvements; for there it is reasonable that the lender share with the
borrower in the profit. The law here is plainly intended for the relief of the
poor, to whom it is sometimes as great a charity to lend freely as to give.
This explanation is refutable
on its face as interest has never been about the lender sharing with the
borrower in the profit. If that were the case, many of the evils of interest
would be removed. Similarly, in the Jameison-Fausset-Brown commentary it
states:
“Usury was severely condemned (Psalms 15:5, Ezekiel
18:8,17), but the prohibition cannot be considered as applicable to
the modern practice of men in business, borrowing and lending at legal rates of
interest.”
How did the act go from
severely condemned to not possibly being applicable to the “modern practice of
men in business”? No logic or proof is offered for such a leap. Similarly, in
their commentary on Deuteronomy 23:19-20, the
Jameison-Fausset-Brown commentary states:
“Thou shalt not lend upon usury to thy
brother . . . Unto a stranger thou mayest lend upon usury--The Israelites
lived in a simple state of society, and hence they were encouraged to lend to
each other in a friendly way without any hope of gain. But the case was
different with foreigners, who, engaged in trade and commerce, borrowed to enlarge their
capital, and might reasonably be expected to pay interest on their loans.”
Again, no evidence is given for
their proposition. (There, however, seems to be attitude that the sacred texts
are not able to express themselves properly.) In fact, even a famed economist was
willing to provide Biblical commentary: Paul Samuelson wrote in his classic
textbook on economics, “The Biblical utterances against interest and
usury clearly refer to loans made for consumption rather than investment
purposes.”
With the removal of “scholastic” objections, it then
became the role of the budding science of economics to justify the paying of
interest. This, it turns out, is much more difficult than it sounds. Haberler
was certainly correct when he stated,
The theory of interest has for a long time been a
weak spot in the science of economics, and the explanation and the determination of
the interest rate still gives rise to more disagreement amongst
economists than any other branch of
general economic theory.
In reality, among economists, “There is not a single
adequate and generally accepted theory of interest which can give a sound explanation
of the origin and the cause of interest.”
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Interest and its Role in Economy and Life (part 5 of 7): Explanations and Theories
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Description: The various ways in which thinkers in the past have tried to conjure explanations for the existence of interest.
By Jamaal al-Din Zarabozo (© 2007 IslamReligion.com)
Published on 16 Apr 2007 - Last modified on 19 Feb 2008
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_001.jpg) The mere plethora of opinions attempting to explain the
existence of interest and justify its payment—accompanied by the credible
critiques of all of these views by noted and respected economists
—should be a sign to everyone that something is not quite right. In the
history of economic thought, one can find the following theories justifying
interest (among others):
(1) The “Colorless” Theories (as Boehm-Bawerk
calls them): These were advanced by Adam Smith, Ricardo and other early
economists. This theory has many flaws, including confusing interest with
gross profit on capital. Ricardo further traced all value of capital back to
labor—but somehow he failed to note that it was never labor that was receiving
the payment for said value.
(2) The Abstinence Theories: These kinds of
theories have popped up every now and then. Economists discovered that “abstinence”
may not be a good word to use and would
often change it to other terms, such as “waiting” (a la Marshall). Interest
is, in essence, the wage one receives for “waiting” or “abstaining” from
immediate consumption. This theory failed because it seems to think that
savings are solely a function of interest, which has been found not to be true.
(3) Productivity Theories: The proponents of this
theory see productivity as being inherent in capital and therefore interest is
simply the payment for that productivity. The theory, as put forward by Say,
assumes that capital produces surplus value but, again, there is no proof to
support that claim. The most that one can claim is that some value has been
created, which is a payment to capital, but one cannot prove that excess or
surplus value has been created, which is the essence of their claim that
interest is justified. Of course, these theories also complete ignore the
monetary factors when analyzing interest.
(4) Use Theories: “Boehm rejected the validity of
the assumption that there was beside each capital good a ‘use’ thereof
which was an independent economic good possessing independent value. He
further emphasized that ‘in the first place, there simply is no such thing
as an independent use of capital,’ and, consequently, it can not have
independent value, nor by its participation give rise to the ‘phenomenon
of excess value.’ To assume such a use is to create an unwarrantable
fiction that contravenes all fact.”
(5) Remuneration Theories: This group of
economists sees interest as the remuneration of “labor performed” by the
capitalist. Although supported by English, French and German economists, perhaps
this view needs no comment.
(6) The Eclectic (combination of earlier theories,
such as Productivity and Abstinence) Theories: Afzal-ur-Rahman writes:
This line of thought seems to reveal a symptom of
dissatisfaction with the doctrine of interest as presented
and discussed by the economists of the past and the present. And, as
no single theory on the subject is in itself considered
satisfactory, people have tried to find a combination of elements from
several theories in order to find a satisfactory solution of the problem.
(7) Modern Fructification Theory: Henry George was
the developer of this theory but it never carried enough weight to have many,
if any, followers.
(8) Modified Abstinence Theory: Yet another unique
theory, proposed by Schellwien; it never had much impact.
(9) The Austrian Theory (The Agio
or Time-Preference Theory): This is the view that Boehm-Bawerk himself
endorses. According to this theory, interest arises “from a difference in
value between present and future goods.” Cassel has critiqued this theory in
detail. It boils down to being a fancy “waiting” theory.
(10) Monetary Theories (the Loanable Funds
Theory, the Liquidity Preference Theory, the Stocks and Flows Theory, the Assets-Preference
Approach): More recently, economists have tried to introduce and emphasize the
influence of monetary factors into the issue of interest. In reality, though,
the emphasis here begins to be switched from why interest is paid to what
determines the prevailing rate of interest. “According to Robertson, interest
in liquidity preference theory is reduced to nothing more than a risk-premium
against fluctuations about which we are not certain. It leaves
interest suspended, so to speak in a void, there being interest
because there is interest.” Similar
critiques have been made of the other views in this family of theories.
(11) Exploitation theory: Incidentally,
socialist economists have always considered interest as nothing but
exploitation. It should be recalled that the “founding fathers” of capitalist
theory, Adam Smith and Ricardo, believed that the source of all value is nothing
but labor. If that is true, then all payments should be made to labor and
interest is nothing but exploitation.
In a couple of places, Afzal-ur-Rahman has provided
excellent conclusions concerning these different theories of interest. He
stated:
A critical
study of the historical development of the phenomenon of interest
has shown that interest is paid to an independent factor of production,
which may be called either waiting or postponement or abstinence
or use etc. But all these theories have failed to answer or to prove as
to why interest is paid or should be paid to this factor. Some point to
the necessity of waiting; others to the necessity of abstinence of
postponement; but none of these explanations answer the question. Neither
mere necessity of waiting or postponement or abstinence nor mere use
or productivity of capital is enough to prove that interest is a necessary
payment for the employment of capital in production. Besides, these
theories have failed to answer how a variable factor can
possibly determine a fixed factor like the rate of interest? How could
such a theory be valid or tenable?
Later he writes:
The monetary
theories, like marginal productivity theories, have made no attempt to
answer the question: why should interest be paid? Or why interest is
paid? They have simply ignored this question and have sought refuge in
the theory of value. They say, like all other things, the price of
capital is determined by the demand for and supply of money. But it seems
that they have forgotten the basic difference between the two problems;
the theory of value is a problem of exchange, while theory of interest is
a problem of distribution. Both loanable funds and liquidity preference
theories are basically supply and demand theories of interest and explain it
with reference to supply of and demand for loanable funds and money
respectively. But they do not give any justification for the phenomenon
of interest. Even if capital has a right to proper compensation as a
reward for its contribution to the creation of wealth, “it can only draw
its share from the increase of national wealth only to the extent of its
contribution to it. It cannot be allowed to run away with its pound of
flesh, determined in advance, and unrelated to the actualities
of production.” According
to Boehm Bawerk, the study of all these theories” reveals the development of
three essentially divergent basic conceptions of the interest problem.” One
group, the representatives of the productivity theory, treats the
interest problem as a problem of production. The socialist-exponents
of the exploitation theories treat the interest problem as purely a problem of distribution;
while the third group, the supporters of the monetary theories, seeks in
the theory of interest, the problem of value. There is no doubt that all these
theorists, having been confused by the very magnanimity and pervasiveness of
the phenomenon of interest, have avoided the main issue as to why interest
should be paid? They have, indeed, spent all their energies in solving
the problem either of waiting or abstinence or productivity or “labour
value” or “the determination of value” and have not said anything about
the origin or the justification of the institution of interest.
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Interest and its Role in Economy and Life (part 6 of 7): The Ills of Interest I
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Description: The various ways in which interest has harmed society.
By Jamaal al-Din Zarabozo (© 2007 IslamReligion.com)
Published on 23 Apr 2007 - Last modified on 19 Feb 2008
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Category: Articles
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The Ills of Interest
Economists can attempt to come up with numerous
justifications for the payment of interest but the real test is to study the
affects that interest has. It is important to note that when something is
prohibited by God, this does not mean that there is absolutely nothing
beneficial in the prohibited item or practice. Indeed, one may be able to find
something beneficial even in prohibited items. For example, God says in the
Quran about alcohol:
“They ask you [O Muhammad] concerning wine and gambling. Say:
‘In them is great sin, and some benefit for people; but the sin of them is
greater than the benefit…’” (Quran 2:219)
Thus, the essential point is not whether there is
anything beneficial in something but whether the harm of something outweighs
its benefit. Thus, economists may be able to find a hint of a justification
for paying interest but this definitely would not outweigh the harms that
interest can be shown to cause, as shall be discussed in this section.
Even if interest is considered some kind of payment to a
factor of production, it has some unique characteristics that set it apart from
payments to any other factor of production. Due to its unique nature, it leads
to some very disturbing results.
First, interest leads to an inequitable distribution of
income. This can be seen by taking an example of three people. Suppose there
are three people who consume of all of their income in a given year yet one of
them starts with $1,000 in savings, a second with $100 and a third with zero. At
10% interest per annum, by the end of the year, the first person will have
$1,100, the second $110 and the third person zero in their accounts. If the
same scenario follows in the next year, the first person will have $1,210, the
second $121 and the third will have zero. Already, one can see how the
distribution between them grows every year, even between the one who has some
savings of his own. This scenario will be made even worse if the richest
person will also to be able to add savings. Suppose he adds one thousand at
the end of each year. He will have 1,100 at the end of the first year, he adds
$1,000 and continues with his 10% interest and he will have $2,310 at the end
of the second year, and so on. Now it is one thing if this money paid was
actually due to some positive factor of production but in reality one cannot
make that argument in this case. The money that the people are making via interest
may have been squandered, lost or even stolen by the people who borrowed it,
but one still has to be pay the interest. It may have been invested in a
completely losing project and therefore it actually did not produce anything. But
all of that does not matter, it has to be paid regardless of whether that
“factor of production” produces anything or not. This is simply one of the
unique aspects of money and payments to money. No one can argue that this is
just and therefore its results are an inequitable distribution of money.
Furthermore, the distribution of income becomes more and
more skewed over time. One can imagine some individuals dealing in millions
while others are dealing in hundreds or thousands. The disparity in their
interest incomes will indeed be great and growing every year. In other words,
as one hears often, it will lead to a situation where the rich keep getting
richer while the poor keep getting relatively poorer. Note that those in debt,
paying interest that grows every year, have not been added to the equation. In
their case, as interest continues to grow, more and more of their overall
income is consumed by interest, further exacerbating the skewed distribution of
income.
Someone could ask as to whether an inequitable
distribution of income should be considered a major issue. Besides the
psychological effects on the poor, especially given mass media advertising that
emphasizes the good life and the need to consume, there are very important
effects on the market as a whole. In a market economy, production will be
geared towards those who have the money to pay for the output, regardless of
how necessary other goods may be for society. If the rich desire, demand and
are willing to pay a lot of money for SUVs and gas-guzzling vehicles, those
will be produced (regardless of how much conservationists may complain). As
the income distribution becomes more and more skewed, more and more resources
will be devoted to the demands of the richer classes. Since resources are
somewhat “fixed,” this means that less and less will be devoted to the needs of
the poorer classes. Furthermore, the lesser resources devoted to the goods that
the poor consume reduces supply and drives up the prices of those goods,
further harming the poor people’s overall economic situation. For example, one
can find numerous medical clinics catering to the rich (those who can afford
such treatments), even if they are far from necessary, such as numerous places
for cosmetic surgery and the like. At the same time, one may find it very
difficult to find clinics catering to the poor and meeting their basic needs. If
they could pay more for those essential services, in a market driven economy,
one would definitely find more of those types of clinics, more resources
devoted to those needs and a cheaper price in the long-run for what they need.
(In addition, this skewed distribution also has strong implications for the
health of democracy; however, that discussion is beyond the scope of this
paper.)
In addition, the burden of interest upon the poor who
fall into debt puts them into a situation where they cannot advance socially or
economically, widening the gap between the rich and the poor. Debt itself is a
difficult situation for any individual. However, it is interest payments that
make one’s debt a moving target, many times one that an individual simply
cannot keep up with. Again, it is a bogus factor of production but it works to
allow the rich to get richer while putting a great burden upon those who fall
into debt. Perhaps all the readers are familiar with how much of a debtor
society the United States, the richest country in the world, has become. This
has afflicted not only the lower classes but many of the middle class as well.
Some sorry individuals do not realize that if they pay only the minimum on
their credit card bills, for example, they will virtually never clear their
balance. But, of
course, it is the poorest that are hardest hit. In fact, the system is stacked
against them as the poorer an individual is, the worst his credit rating and
the higher the interest rate he will be forced to pay. Mirza Shahjahan’s Income,
Debt and the Quest for Rich America: The Economic Tale of Small and Mid-Sized
US Cities is a study of how debt and its corresponding interest burden has
afflicted much of “middle America.” The plight
of small-scale farmers forced to borrow due to dropping prices on their output
has been well-documented. Many of them have pawned their precious belongings
or lost their farms that have been in their families for generations simply due
to interest payments that they could not keep up with. Shahjahan found that
some of the poor pay over 15% of their yearly income on interest payments alone
(with most paying between 8% and 12%)—not to mention the burden of calls and
threats from creditors that the poor often receive. In Shahjahan’s
conclusions, he states:
Both the monetary and real burdens of debt have kept
many debtors in a lifelong struggle to service their debts. The average size
of the debt of indebted households for the 1990-1993 period was $32,493,
equaling almost 100% of these households’ income. Our estimate of per capita
household debt for 1990-1993 amounts to $12,571. Debt of this magnitude,
combined with a temporary job and low income, can be depressing and produce
overwhelming psychological conditions…
Some households’ interest payments exceed 15% of their income. This high
interest cost has been a source of significant erosion of household income…
Most households – millions in number – in mid-sized
cities struggle day in and day out to meet their basic needs of life. Thousands
of them fail to provide a decent life for their families or support the higher
education of their children. They live in debt and die in debt. This
situation makes them feel that they live less than a full life…
These households are caught in a situation of economic
servitude where the most obvious escape routes are blocked by institutional
forces. Acquiring skills or higher education could be the key that opens the
way to real opportunity, but higher education is expensive and beyond the reach
of most of the households in these cities. These households have no
opportunity to excel and find themselves passed over for the positions they had
hoped for. This is the nature of the plight of the working class families in
the small and mid-sized cities of our nation.
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Interest and its Role in Economy and Life (part 7 of 8): The Ills of Interest II
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Description: The various ways in which interest has harmed society. Part 2: The devastating ills of interest on an international level.
By Jamaal al-Din Zarabozo (© 2007 IslamReligion.com)
Published on 30 Apr 2007 - Last modified on 19 Feb 2008
Viewed: 10787 (daily average: 6) - Rating: 5 out of 5 - Rated by: 1
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Category: Articles
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> Economy
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On an international level, the situation is much more devastating
and dangerous. There is no question that when looked at from an international
perspective, interest kills people. The debt servicing of lesser developed
countries today is so great that they must sacrifice essential health and
nutritional needs. It is dumbfounding to think that untold numbers of children
are dying daily in lesser-developed countries due to the “tool” of modern
capitalism: interest. Some African governments are forced to spend more on
debt servicing than they spend on health or education.
In this context, the UNDP (1998) predicted that if the
external debt of the 20 poorest countries of the world was written off, it
could save the lives of 20 million people before the year 2000. In other
words, it means that uncancelled debt was responsible for the deaths of 130,000
children a week up until the year 2000.
Ken Livingston, Mayor of London, claimed that global
capitalism kills more people each year then were killed by Adolf Hitler. He
blamed the IMF and World Bank for deaths of millions due to their refusal to
ease the debt burden. Susan George stated that every year since 1981 between
15 and 20 million people died unnecessarily due to debt burden “because Third World governments have had to cut back on clean water and health programs to meet
their repayments.”
Debt, with its increasing amount of interest compounded
upon it, is dangerous for any nation because it means loss of sovereignty and
control. This
aspect, incidentally, is no accident. Lesser developed countries—especially
their elites and corrupt rulers—are not free of guilt when it comes to the
issue of the debt that they have accumulated. At the same time, if they did
not borrow and get in debt, pressure would definitely be put on them to do so.
Caufield noted:
Thus it has
been with the World Bank; refunding operations have become more and more of the
total of its lending. The result has been an accumulation of debt by the
Bank’s borrowers—and a gradual loss of sovereignty as well. No creditor is
willing to keep refunding forever without asserting some control over the way
the debtor conducts business. In earlier times, the great powers did not
hesitate to use military force to bend recalcitrant debtors to their will. In
his classic essay, “Public Debts,” published in 1887, the American economist
Henry Carter Adams wrote that “the granting of foreign credits is the first
step toward the establishment of an aggressive foreign policy, and under
certain conditions, leads inevitably to conquest and occupation.”
The Bank’s approach to its debtors is not so crude. Instead
of sending in the Marines, it offers advice on how countries should manage
their finances, make their laws, provide services to their people, and conduct
themselves in the international market. Its powers of persuasion are great,
due to the universal conviction that, should it decide to ostracize a borrower,
all other major national and international powers will follow its lead. Thus,
by the excessive lending—born of an underlying inconsistency its mission—the
Bank has added to its own power and depleted that of its borrowers.
John Perkins’
now famous Confessions of an Economic Hit Man
details contemporary economic intrigues. While describing his job of
evaluating projects, he wrote:
The unspoken aspect of every one of these projects was
that they were intended to create large profits for the contractors, and to
make a handful of wealthy and influential families in the receiving countries
very happy, while assuring the long-term financial dependence and therefore the
political loyalty of governments around the world. The larger the loan, the
better. The fact that the debt burden placed on a country would deprive its
poorest citizens of health, education, and other social services for decades to
come was not taken into consideration.
Perkins’ work has now been followed up by A Game as
Old as Empire: The Secret World of Economic Hit Men and the Web of
Global Corruption edited by Steven Hiatt.Hiatt writes,
Debt keeps Third World countries under control. Dependent on aid, loan reschedulings, and debt
rollovers to survive—never mind actually develop— they have been forced to
restructure their economies and rewrite their laws to meet conditions laid down
in IMF structural adjustment programs and World Bank conditionalities.
The current debt situation, with the major role that
interest is playing in it, is potentially very devastating for the world as a
whole. In Global Trends 2015, the Central Intelligence Agency (CIA) recognized:
The rising
tide of the global economy will create many economic winners, but it will not
lift all boats. [It will] spawn conflicts at home and abroad ensuring an
ever-wider gap between regional winners and losers than exists today. [Globalization’s]
evolution will be rocky, marked by chronic financial volatility and a widening
economic divide. Regions, countries and groups feeling left behind will face
deepening economic stagnation, political instability and cultural alienation. They
will foster political, ethnic, ideological and religious extremism, along with
the violence that often accompanies it.
Noreena Hertz has an excellent chapter in her work, The
Debt Threat: How debt is destroying the developing world… and threatening us
all, delineating many of the dangers that the massive debt—and, again,
which would not be as massive without the ever-growing aspect of interest—poses
for the world today. She details the dangers of extremism, terrorism,
depletion of the world’s natural resources, and more. To cite just one aspect,
she writes:
Debt’s ugly
progeny—poverty, inequality, and injustice—are also called upon to justify, and
even legitimize, acts of the greatest violence. Only a few weeks after the
World Trade Center was attacked, leading African commentator Michael Fortin
wrote: “We have to recognize that this deplorable act of aggression may have
been, at least in part, an act of revenge on the part of desperate and
humiliated people, crushed by the weight of the economic oppression practiced
by the peoples of the West.” Fortin’s language—“crushed,” “oppression,”
“desperate,” “humiliated”—is deliberately evocative. And it is manifestly
clear that there is an audience with whom such words powerfully resonate.
In reality, there are yet other ills related to interest
that could be discussed but the above should suffice for the purposes here.
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Interest and its Role in Economy and Life (part 8 of 8): The Islamic Solution
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Description: An Islamic solution to the interest model, and how economy can still thrive without interest.
By Jamaal al-Din Zarabozo (© 2007 IslamReligion.com)
Published on 07 May 2007 - Last modified on 19 Feb 2008
Viewed: 11814 (daily average: 7) - Rating: 3 out of 5 - Rated by: 2
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Category: Articles
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The Islamic Solution
The Islamic solution to the issue of interest rests upon
two basic principles:
(1) If an individual wishes to lend money to
another in order to help the latter, this act must be based on “brotherly
principles” and it is absolutely unacceptable to charge any interest in such a
case. It is not helping another individual to put him into a cycle of debt
where he has to pay more than what they borrowed. This principle applies as
well to Islamic international relations. If this important principle were
applied today, countries would truly give “aid” and assistance to other
countries, rather than sucking them into a pattern of dependency and debt
burden.
(2) If an individual wishes to use his money to
make more money, then he must be willing to put his money at risk. In other
words, he cannot guarantee for himself a fixed return (whose amount keeps
growing over time) regardless of the result of the investment that his money is
used for. If he puts his money at risk, he is deserving of some share of the
profits. However, this also means that he must accept losses if losses occur.
This is a system that is based on justice. It also has numerous benefits to it.
The one who invests becomes concerned about the results of his investment and
cannot demand his “pound of flesh” regardless of what may occur to the debtor.
This Islamic solution works for individuals as well as
for society as a whole. Banks are essentially financial intermediaries. They
take money from those who have excess money (savings) and turn it over to those
who need money for investment purposes. Interest is not necessary for such a
system to work. The bank and its depositors (shareholders) invest, rather than
simply loan, their holdings. The money is put at risk and the return to the
depositors will be based on the amount of profits made in the respective
investments. Under normal circumstances of a growing economy, if the bank is
big enough and it diversifies its portfolio, the bank is virtually “guaranteed”
a positive return on its total investments. Thus, those who invest their money
with the bank will also receive a positive return on their money without it
being guaranteed or fixed ahead of time.
Numerous “Islamic” financial institutions have been set
up throughout the world today. They have been established on the principle of
avoiding interest and some of them have flourished.
Conclusions
For the most part, “modern civilization” has decided to
turn its back on Divine Guidance (mostly due to the experience in the West with
Christianity) and have attempted to construct their own economic systems,
political systems, international laws and so on. When doing so, though, they
have to admit that they are attempting something that is beyond their means. The
social sciences are very different from the physical sciences. There are no
labs in which humans can be entered to determine what may be the best results
under different scenarios (and even that would have to assume that humans will
always react the same under the same circumstances).
In the realm of economics, the first thing that may come
to mind is the collapse of the theories of socialism and communism. One
should, though, also take a closer look at capitalism and how far its reality
is from what it is supposed to be. The early capitalist theorists envisioned a
theory that would lead to “the best of all possible worlds.” However, their
theories were based on assumptions that never were and will never be fulfilled.
They assumed perfect competition, perfect knowledge, free trade and so forth. Once
these assumptions are violated, which they inevitably are, they do not lead to
the “best of all possible worlds.” Instead, they easily lead to a world of
exploitation, wherein the rich get richer and the poor get poorer. One of the
diving forces behind this system is the institutionalization of interest.
God has blessed humans with the guidance of the Quran—a
book that has been minutely preserved since its revelation. This book contains
the guidance that humankind needs to lead a successful life in both this world
and the Hereafter. It is therefore no surprise that this book absolutely
prohibits and condemns interest in the strongest fashion.
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