INTEREST IN CONVENTIONAL ECONOMICS AND IN ISLAM

INTEREST IN CONVENTIONAL ECONOMICS AND ISLAM

It is interesting to note the development in canon laws and civil laws about interest. Following extract from an article[1] by Hugh Montefiore, who was born in London in a famous Jewish family and converted to Anglican Christianity and became the Bishop of Birmingham from 1978 to 1987, is informative on the subject.

“In the ancient world, interest was generally permitted; although Plato and Aristotle objected, Roman Law permitted it, laying down a maximum of 12 per cent per annum. Among the Jews, interest was equated with robbing the poor. Interest was only permitted when dealing with Gentiles. Pharisees took elaborate steps to outlaw even ‘the dust of usury’, that is to say, stratagems which got found the law, such as a partnership with a fixed rate of return of the person who put up the capital.”

[Pharises were members of an ancient Jewish sect, who were distinguished by strict observance of the traditional and written law.]

Montefiore noted that the early fathers took the Old Testament veto on an interest very seriously. We may refer to the following verses from the Bible:

He does not put out his money at interest, Nor does he take a bribe against the innocent. He who does these things will never be shaken.       

[Psalm 15:5]

If you lend money to My people, to the poor among you, you are not to act as a creditor to him; you shall not charge him interest.

[Exodus 22:25]

….You shall not charge interest to your countrymen: interest on money, food, or anything that may be loaned at interest. You may charge interest to a foreigner, but to your countrymen, you shall not charge interest,….

[Deuteronomy 23:19-20]

And if you lend to those from whom you expect repayment, what credit is that to you? Even sinners lend to sinners, expecting to be repaid in full.  But love your enemies, do good to them, and lend to them without expecting to get anything back.

[Ezekiel 22:12]

But love your enemies, and do good, and lend, expecting nothing in return, then your reward will be great, and you will be children of the Highest, because he is kind to the ungrateful and wicked.

[Luke 6:34-35]

Hugh Montefiore further elaborates on the story of the changeover to the prevalent approach towards interest.

“Canon law of the Middle Ages prohibited all lending on interest. The Roman Catholic Church never formally promulgated a decree to make interest legal, although in the 1830s replies from the Holy Office admitted its lawfulness, while the recent transactions of Vatican finance have become notorious. Civil law had roughly followed canon law. Interest on loans at 5 per cent became legal in Germany in the 16th century, and interest in France was allowed in 1789 in England the law was seesawed in the regime of Henry VIII, Edward VI and Elizabeth.

“The old veto on all interest no longer holds today. John Calvin, [born Jehan Cauvin: (10 July 1509 – 27 May 1564), an influential French theologian and pastor during the Protestant Reformation] the Swiss reformer, was the first to see this. He marks a turning point in the history of usury. He realised that if a person lending money to a wealthy farmer to provide him with liquid capital to extend his farm he was losing the money he might have earned had he made the investment himself. He stresses the difference between a loan in kind and a business loan upholding the validity of the latter justice.”

The position as of date is that civil laws no longer consider any hesitation in accepting interest as just and legal. There is no stigma left with this. The Church and canon laws no longer express any horror on this and even if made to say anything they are satisfied with the following demarcation.

Low rate (Interest) and high rate (Usury)

Interest in Productive and non-Productive loan

Loan in kind and business loan

For them, one is acceptable while the other is abhorrent!

Economists justify interest in the name of usufruct of capital, considering capital as such a factor of production that needs to be repaid like wages and rent. They further talk about the opportunity cost of capital and the risk the creditor undertakes in providing the loan.

Obviously, for an economist or an accountant, there cannot be any difference between interest and usury as the latter term does not exist in their vocabulary, rather they are synonymous. 

THE ISLAMIC POSITION ON INTEREST

The Qur’an forbids interest. The following verses are explicit on the issue.

Those who devour interest will not stand except as stands one whom Satan by his touch has driven to madness. That is because they say: ‘‘trade is like interest’’, but Allah has permitted trade and has forbidden interest...Allah will deprive interest of all blessings, but will give an increase for deeds of charity: for He does not love any ungrateful sinner. [The Qur’an 2:275-276]

O you who believe! Fear Allah and give up what remains of your demand for interest if you are indeed believers. If you do not, take notice of war from Allah and his Messenger: but if you repent, you shall have your capital sum: deal not unjustly, and you shall not be dealt with unjustly. [The Qur’an 2:278-279]

O you who believe! Devour not interest doubled and multiplied; but fear Allah, that you may prosper. Fear the Fire, which is prepared for the disbelievers. [The Qur’an 3:130-131]

That they took interest, though they were forbidden; and they devoured people’s wealth wrongfully: We have prepared for those amongst them who reject faith a grievous punishment. [The Qur’an 4:161]

That which you lend on interest for increase through the property of people will have no increase with Allah: but that which you give for charity, seeking the countenance of Allah, it is these who will get a recompense multiplied. [The Qur’an 30:39]

Prophet Muhammad (peace and blessings of Allah be to him) has also declared an interest as forbidden. Several traditions may be cited. We, however, limit our citation to one as under:

Abdullah ibn Mas’ud (may Allah be pleased with him) narrated that the Apostle of Allah cursed the one who accepted Riba, the one who paid it, the witness to it, and the one who recorded it. [Sunan of Abu-Dawood]

Riba (Interest) Defined

The Qur’an and the traditions of the Prophet use the expression ‘riba’ for interest.  As a result of the clear commandments of the Qur’an and related traditions of the Prophet, there has not been any debate amongst Muslims about the prohibition of riba. However, some scholars in recent years, probably affected by the related discourses in the Western world, discussed that all forms of interest are not riba. In their opinion riba, which is banned, amounts to usury, the high-rated compound interest meant for consumption. So this viewpoint accepts the opinion that found currency in the Christian thoughts, as discussed above, that interest on a loan meant for productive purposes is not forbidden. This opinion could not become popular and it has been refuted and rejected by the overwhelming majority of scholars and almost all Muslim populace.

The famous Maliki scholar Abu Bakar Ibnul Arabi in his commentary of the Qur’an has described riba as under.

والربا في اللغة هو الزيادة ، والمراد به في الآية كل زيادة لم يقابلها عوض  ...

 “The meaning of Riba in the dictionary is excess and in the verse [of the Qur’an] it means an excess that has no counter value.”[2]

To understand Riba in the present context we may refer to the opinion of Dr Mahmood Ahmad Ghazi which he expressed in a lecture on the subject.

“Riba means any increase over and above the principal amount payable in any transaction which is not covered by any corresponding labour, expertise, risk or commodity.”[3]

The beauty of this recent definition is that it links to contemporary transactions, on one hand, and encompasses the niceties of the deliberations of earlier scholars on the subject. Another interesting aspect is that this approach delineates what is meant by the expression “counter value” (عوض). Ghazi explains that it amounts to labour, expertise, risk or commodity. So, any increase in the principal amount that is not justified by these counter values is forbidden as riba (interest) in Islam.

CONVENTIONAL ECONOMICS ON INTEREST

Conventional economics considers money as a commodity that can be traded. So, corresponding rent/usufruct for money utilised as capital/loan is justified. This rent/usufruct for money is termed as interest. Considering capital as a factor of production interest is taken as a payment of the same. Another aspect that is put forward is that like all other commodities capital too has an opportunity cost. The creditor has several uses for his funds and once he commits himself to one such use he loses the opportunity of applying it for any other purpose. So this opportunity entails a cost that requires to be, at least, reimbursed.

The approach of socialists and that of capitalists towards interest differ on one basic point. Who has the benefit of taking the fruits of capital, the capital itself or labour? For a socialist, productivity is produced by labour so all benefits should go to them, as the capitalists are themselves, usurpers and robbers. For a capitalist capital is productive and it has every right to share and consume the consequent benefits.[4]

ISLAMIC ECONOMICS ON INTEREST

A discussion on how Islamic economics addresses, or shall address, the contemporary deliberations relating to interest is required. As far as a believer is concerned the commandment in the Qur’an and their reflections on the traditions of Prophet Muhammad (peace and blessings of Allah be to him) shall suffice. For him, interest is prohibited and that is all! But this form of deliberation ends where it begins. In case the debate about interest and any deliberation on Islamic economics have to be taken forward then the need for theorisation in the current parlance is the need of the hour. The following salient features of an Islamic economy may help in this task.

Money is not tradeable as it is a medium of exchange and not a commodity itself.

Every currency is a separate genus. Hence, although it is not permissible to exchange monies between the same currencies by charging a premium, it is permissible to conduct a similar transaction between two different currencies. For example, hundred Indian Rupees can be exchanged for the currency of the same amount as it is the same genus. But a price may be fixed between Indian Rupee and US dollar as they are different genera.[5]

Capital is not separable from the entrepreneur as its provision is part of its function. So no separate payment or reward or rent or usufruct or opportunity cost for capital is needed. The profit accruing to the entrepreneur encompasses the risk he takes, the effort he does and the capital he provides. It may be said that capital is not an independent factor of production under the discourse of Islamic economics as it is a sub-function of entrepreneurship.

Justification of profit for an entrepreneur is linked to the risk he bears, the capital he provides and the effort/labour he undertakes. Prophet Muhammad (peace and blessings of Allah be to him) simply described this principle. He said, “Right to earn is linked with risk-bearing” (“Al kharāj bi’ldhamān”).[6]

Justification for rent and wages comes from their usufruct. The right to use (usu) them and take benefit out of them (fruct) instead of payments of wages/rent is justified.  It is interesting to note that the Arabic word ujrat for wages and ijara for rent comes from the same root comprising ‘a’, ‘j’ and ‘r.’[7]

A clear demarcation between usage and consumption is done under Islamic economics. This is its characteristic feature. While no extra payment (rent or reward) for any item consumed is permissible, the same is admissible in the case of things used[8]. If a car is rented for eight hours and is returned thereafter, rent for the use of the car is payable. But if one litre of petrol is borrowed from someone for consumption, no rental is permissible under Islamic economics. One litre of petrol or its price is returnable. Any extra quantity/payment will be riba (interest). This is a primary logic of the inadmissibility of any additional payment against the money lent or provided as capital. Money originally provided as debt is consumed and its repayment is done out of fresh money generated. This distinction between “use” and ‘consumption is a characteristic feature of Islamic economics.

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