-
Efforts for Elimination of
Interest
-
The Failure and Its Causes
-
Real Solution of Problem of
Interest
-
Credit and Loans in Islamic
System
-
Banking and Insurance in Islamic
Economy
I- Efforts for Elimination of Interest
The greatest
challenge which the modern Muslim states face today is how to
eliminate interest from their economies particularly from the
banking sector. For the last three decades very serious efforts
are being made to meet this challenge. Islamic institutions,
universities, advisory bodies are making research and studies.
Many commissions and committees have been setup by the government
of Islamic countries to study various sectors of their economy
specially finance, banking and insurance and furnish reports
suggesting how to eliminate interest in order to Islamize the
economy. A number of books, articles and research papers have been
written and published by various Muslim scholars, economists and
study-groups. Some practical measures have also been taken to
abolish interest gradually from banking and financial sectors.
Attempts are being made to organise system of loan and credit free
of interest. Scores of Modarabah and leasing finance companies
have lately emerged in Islamic lands particularly in Pakistan who
claim to provide loans on profit and loss sharing basis in
accordance with principles of Modarabah and Shirkah. Of all the
Muslim countries, Pakistan has been in the forefront in Islamic
Jehad against ‘Riba’ (interest). Profit and loss sharing accounts
have been introduced by banks in Pakistan after 1980 for the
depositors, while loans are advanced by the banks on mark-up
system. Investment Corporation of Pakistan and National Investment
(unit) Trust and many other financial institutions in Pakistan
attract deposits from the middle class investors on the basis of
profit-loss sharing. The Federal Shariat Court of Pakistan, in its
historic judgement of November 1991, has declared all forms of
interest as ‘Riba’. Appeal against this judgement filed by the
Government of Pakistan is awaiting decision in the Supreme Court
of Pakistan.
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II- The Failure and Its Causes
But what is, after
all, the result of all these hectic efforts made by the Muslim
world particularly by Pakistan. Have we been successful, even
partly, in eliminating interest from our economies? The
categorical answer to this question is big No! We have only
succeeded in making cosmetic changes here and there and that too
in very few sectors of economy. The only success achieved by us so
far is the change of name of interest to profit, dividend,
mark-up, service charges, commission, fee, and use of Islamic
terminology like Modarabah, Shirkah, profit-loss sharing, etc.
Banks are paying interest to their depositors and charging
interest from their borrowers under various names. Modarabah and
leasing companies are providing capital to business and industry
on fixed and pre-determined interest under the garb of
lease-rental and lease-finance arrangements. In this whole
exercise only the rates of interest have gone up! No effort has
worked out and achieved the desired goal. Given the moral
standards and business ethics prevailing in the society, no person
or institution is prepared to take risk and provide finance on
profit-loss basis. It is, therefore, rightly said that efforts
made in the Islamic lands so far tantamount to protecting the
institution of interest rather than abolishing it.
The causes for this
historic failure of the Muslim world in eliminating ‘Riba’ from
economy are many. Firstly, the socio-economic changes brought in
Islamic lands by political domination of the West and industrial
revolution have weakened religious and moral values of the people.
The leaders, who in fact have mostly their own problem of
legitimacy, have failed to offer themselves as role models before
the citizens. Merely lip service is paid to Islamic values such as
honesty, truthfulness, trustworthiness, fair dealing,
fellow-feeling, justice and equity, fraternity and brotherhood,
moderation in consumption and standard of living, austerity and
simplicity, etc. Strict observance of these values is, however, a
condition precedent for Islamising economy. But the same is
unfortunately conspicuous by its absence in the Islamic society of
today. People are living beyond their means. Everybody is after
maximising his material comforts which can only be achieved
through money. So earning of wealth through fair or foul means has
become religion of today. As a consequence, no moral values and
code of business ethics exist these days. Nobody trusts any other
person at least in money matters and business dealings. In
business partnerships, brother cheats brother, son deceives
father, friend commits fraud with a friend. Therefore, every
person and institution is, justifiably, reluctant to participate
on profit-loss sharing basis. And to eliminate interest,
profit-loss basis is the only way for providing capital to
business and other economic development projects.
Secondly, the
Muslim scholars and economists have miserably failed so far to
provide a practical, simple, safe and workable substitute for
interest. The interest-no
doubt it has been prohibited by Islam (and also by Christianity
and Judaism) and there are many moral and socio-economic
justifications for this prohibition-provides
a very simple and practical mechanism to establish and govern the
relationship between the lender and the borrower. It assures the
lender the safety of his capital and profit on the one hand and it
frees the borrower on the other hand from many worries such as
maintenance of books of accounts to the satisfaction of the lender
and the lender’s constant interference in his business affairs
which generally leads to disputes, litigation and ultimate closure
of business. But the substitutes for interest given by the Muslims
scholars are many often vague, complicated and impracticable. The
substitute of profit-loss sharing hardly appeals to the lenders
and the borrowers who cannot work in partnership because they
strongly suspect each others’ motives in view of the low moral
standards and business ethics obtaining in the society. It is
brought to the notice of the common reader that the Qur’an and the
Sunnah have abolished interest but have not recommended any
substitute. Modarabah and Musharikah have not been referred to
anywhere in the Qur’an or the Hadith. These are actually forms of
business organisations whose rules and regulations were laid down
by classical Muslim jurists of middle ages. Even those classical
jurists did not introduce these concepts of Modarabah and
Musharikah as substitutes of interest. It is actually the scholars
of recent period who have taken fancy to Modarabah and Musharikah
and have set them up as Islamic substitutes of interest. But these
scholars have not yet been able to modify these concepts to the
changed socio-economic circumstances of modern age and the needs
of modern complex economies.
Thirdly, interest
has been prohibited by Islam to prevent exploitation.
Traditionally borrowers, being persons in need, were exploited by
few moneylenders who controlled substantial portion of wealth and
capital of the community and who charged exorbitant rates of
interest on their loans. But now the economic revolution brought
about by recent technical and scientific advancements has changed
the scenario. The introduction of the modern banking system has
inverted, in a sense, the traditional relationship between the
borrowers and the lenders. The lenders in these days are not a
small number of usurious money- lenders who monopolise wealth in
the society. They consist of millions of middle class individuals
who deposit their life savings in the banks to meet needs of their
families in a rainy day. Many of the borrowers on the other hand
are wealthy people and corporations who have setup industrial
empires. Therefore, it is now the lenders and not the borrowers
who need to be protected. However, the Muslim economists who
recommend Modarabah and other profit-loss sharing schemes for the
lenders as substitutes of interest have done nothing to protect
the interests of the lenders. It is a well-known fact that many
businesses do not give fair returns to their shareholders. Many
public companies do not declare dividends for years and the value
of their shares is much lower in the market than the equity
subscribed by the shareholders. Thus, if the banks resort to
financing in accordance with the Modarabah or Musharikah
arrangements, which are in fact similar to equity financing in
joint stock companies, it would lead to the mass deprivation of
the savings of the depositors. Some reasonably safe mechanism
needs to be evolved to check the malpractices of businessmen and
to ensure that false books of accounts are not maintained with a
view to declare heavy loss and thus deny the lenders their share
of profit and sometime even deprive them of their loan capital.
But unfortunately, the Muslim scholars have not yet evolved any
such mechanism.
Fourthly, the
scholars have not provided satisfactory solutions to the issues as
to how the government would be able to raise loans from internal
and external sources in the absence of interest. What would be the
incentive for the public to provide loans to the government
particularly when the government cannot give any profit on the
basis of profit-loss sharing as most of the ventures of the
government are not profit-generating
in the business sense? What would be the incentive for foreign
countries and international lending agencies to give loans to the
poor Muslim countries like Pakistan? How in the absence of
interest, international trade and other international dealings
would be transacted? The concept of global village is fastly
taking its shape and economic inter-dependence of countries of the
world on each other is increasing everyday. No country lives is
isolation these days. In this situation, how a poor country like
Pakistan or even all the Muslim countries put together can abolish
interest in international dealings when most of these countries
owe huge debts to non-Muslim countries and world agencies? These
are the questions to which we have paid little heed.
And lastly, the
major cause of our failure in elimination of interest is that we
are attempting to make impossible to happen. Not that interest
cannot be eliminated from economy. The fact is that it cannot be
eliminated from capitalistic system of economy. In every Islamic
state capitalistic system of economy with all its evils is in
vogue. Interest is the backbone of this system. It is like a
pillar on which the edifice of modern capitalist economy is
standing. If you want to keep this system, you cannot withdraw
this pillar as in that case the whole system would collapse. In
capitalism you will have to swallow this forbidden fruit of
interest under one name or the other. If you want to act upon
Islamic teachings and abolish interest then you will have to
abolish capitalistic form of economy root and branch from Islamic
lands and enforce instead a simple system of Islamic economy in
its pure and unadulterated form based on social justice and
concept of welfare state.
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III- Real Solution of Problem of Interest
Thus the real
solution of the problem of interest lies in the total enforcement
of whole Islamic economic system. Partial or piecemeal enforcement
of the Islamic economic system will not work. The Qur’an says : O
ye who believe ! Enter into Islam whole heartedly and follow not
the footsteps of the devil…… (2 : 208).
So enter in Islam
fully and establish Islamic economic system in full. We have
already outlined the structure of this system in this book and
have elaborated its various elements. To recapitulate, it will
suffice to submit that Islamic economic system, in brief, is based
upon the following five pillars or articles which are its
essential constituents or components :
1.
Discrimination between Halal (permitted things
being lawful) and Haram (forbidden things being unlawful).
2.
Equitable distribution of wealth through Zakat,
Sadaqat and laws of inheritance (Social Justice).
3.
Provision of basic necessities of life for every
citizen (Social Security).
4.
Prohibition of hoarding of wealth and promotion of
its circulation in productive channels.
5.
Elimination of interest.
Thus the Islamic
economic system should be completely established as one package of
which the abolition of interest is the last item. We cannot
enforce the last item ignoring the first four. It should be kept
in mind that verses regarding prohibition of interest were
revealed last of all, much after the verses relating to
establishment of system of Zakat and Sadaqat, laws of inheritance,
distinction between Halal and Haram, circulation of wealth,
establishment of prayer, Hajj and fasting, and enforcement of
moral and social code, had been revealed.
The establishment
of complete Islamic economic system whole-heartedly will, by the
grace of God, usher a new economic era for the now-impoverished
and backward Islamic Ummah. A general level of prosperity would
prevail in Islamic society in which none would be hungry or naked
and none would be shelterless. Due to Islamic social justice and
wide network of social security system, every citizen living
anywhere in Islamic world would get his due share in national
wealth. He would enjoy a reasonable standard of living much above
subsistence level. He would not only get his basic necessities of
life fulfilled but also he would get employment, healthcare and
education for his children. History is witness to the fact that in
the time of Caliph Umar-bin-Abdul Aziz if someone wanted to give
his Zakat he could not easily find some needy person who would
accept it. The same situation would be revived.
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IV- Credit and Loans in Islamic System
In this atmosphere
of happiness and bliss, anybody would hardly need loan for
personal needs. And if anybody does, he would be provided the same
without interest by his relatives and friends who are
comparatively in easy circumstances. In case they cannot do so,
public treasury (BaitulMal) would step in and provide
Qard-e-Hasanah (loan without interest) to such needy person.
So far as loan for
business is concerned the people would hardly feel such need
because of their simple and austere living which does not require
earning of too much wealth. The people would do their business
with whatever capital and economic sources they have and they
would not be generally too ambitious to expand it with borrowed
capital. Since the exceptions are there and some more ambitious
and more enterprising people try to earn more, so such people
would contact Islamic banks to fulfil their needs for capital
which would, of course, be supplied to them on profit-loss
sharing. A foolproof mechanism would be evolved to ensure that
those who borrow capital from banks honestly maintain accurate
accounts to provide legitimate profits to the lenders. Generally
individuals and small private sector enterprises will be
discouraged to launch big industrial or business ventures.
However, cooperative societies and joint stock companies shall be
allowed to operate capital-intensive big ventures in the field of
industry, agriculture, transport, communications, etc. with
borrowed funds. But basically big projects in the fields of
health, education, defence, irrigation, communication, science and
technology, infrastructure, social welfare and economic
development would be in public sector and would be operated by the
government of the Islamic welfare state for the general benefit of
the entire populace.
Islamic state would
be rich due to its vast collection of Zakat, Sadaqat, taxes and
other compulsory and voluntary contributions and also on account
of its earnings from its properties and projects. As already
discussed by us in the chapter on public expenditure, the state
would exercise moderation and would make balanced budgets avoiding
extravagance which results into budget deficits. Therefore, there
would be no public or national debt as the state would not incur
any loan. But if in emergency situations or national crisis caused
by war or natural calamities, it needs finance, the same would be
raised through extra taxes or printing of currency provided these
extra ordinary measures are discontinued as soon as the crisis is
over. In case of a grave emergency, the government can issue an
appeal to the nation for donations and voluntary contributions.
History is witness to the fact that followers of Islam do not
hesitate to make big sacrifices for a national cause. We know that
on appeal of the Holy Prophet at the time of Tabuk expedition, the
Muslims surrendered all or considerable portion of their
belongings to help the noble cause of Jihad. Even today, if
properly motivated by Islamic government in which the people have
confidence, the people can surrender the whole of their surplus
wealth to help the government in national emergencies. Thus the
state would need hardly any loans-internal or external – in any
situation howsoever untoward it may be. But if the state fails to
raise funds through the above mentioned measure and the emergency
is grave and the need is dire, it can resort to borrowing.
However, the borrowing should be restricted to need only (not a
single penny should be borrowed more than need) and loans should
be raised preferrably from internal sources and free of interest.
Otherwise the loans may be raised from brother Muslim countries
free of interest. In any case loans should be repaid as soon as
possible because prolonged or habitual indebtedness is undesirable
being repugnant to national interest.
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V- Banking and Insurance in Islamic Economy
It is not without
interest to say a few words about banking and insurance in Islamic
economy. Some people are apprehensive that banks and insurance
companies would cease to function in Islamic economy. No doubt the
present working of banks and insurance companies is contrary to
Islamic teachings and thus in the present form these institutions
will not be allowed to function in the event of complete
enforcement of Islamic system. However, banking and insurance are
very vital to any modern economy and so the same cannot be banned.
Therefore, they would be radically reformed and modified in
accordance with Islamic teachings by a body of seasoned economists
appointed for this purpose. A brief picture, as envisaged by the
writer, of banking and insurance sector which would operate in the
Islamic economy, is discussed as under:
The main function
of banks in the modern society can be summed up in one sentence :
The banks borrow to lend. They borrow in the form of deposits
which are of three types : Saving Bank Deposits; Current Deposits,
and Fixed Deposits. They basically lend in three ways : On open
account or overdraft facility; loans on cash credit basis, and
discounting of bills. Besides this main function, the banks
perform a lot of other services for the people. They help in the
transfer of funds from one place to another and from one person to
another through the use of cheques. Some banks accept bills on
behalf of their clients and thus make them more easily negotiable.
They supply information and advice to their clients on matters
relating to investment. In addition, they perform miscellaneous
services like taking charge of valuables and securities, acting as
agents, trustees and bailees of their customers, purchasing and
selling stocks and shares on their behalf, paying subscriptions to
clubs and charitable institutions at regular intervals, and so on.
The above mentioned
services performed by the banking system are so essential and
useful for the modern society that the society cannot make any
progress in economic sector without banking. But unfortunately the
whole system of modern banking is built upon the institution of
‘Riba’ or interest which is banned by Islam. Thus the right
approach for the Muslim community is to adopt banking with its
good and useful things and to benefit from it without involving
interest. Therefore, Islamic banking would be based on the
principle of partnership. In Islamic banking, the shareholders,
the depositors and the borrowers-all would participate on
profit-loss sharing basis. The mechanism and the ways and means
regarding working of the partnership system will have to be
evolved in the light of Islamic tenets. Consequently, in the
Islamic economy the banks would continue performing their
functions of borrowing and lending on the basis of profit-loss
sharing instead of earning and giving interest, whereas for their
other services they would charge reasonable fee.
Those who think
that in the absence of incentive of interest people would stop
saving, and if at all they save they would keep their savings
hoarded with them and thus the flow of money into banks would
cease, are not correct. In fact, it has been established by modern
economists like Lord Keynes that interest hardly influences
savings. Practically, rate of investment and level of income
determines the rate of savings in a society. In Islamic society
the rate of savings would be rather boosted because of simple and
austere living of the people who avoid luxurious living and shun
expenses on social evils like drinking, adultery and gambling. The
fear that without incentive of interest the people would keep
their savings in hoarded form is again not genuine. Zakat
penalises those who keep their money idle as regular payment of it
every year would diminish such idle money. So the savers would be
forced to bring their money into investment or deposit it into
banks with prospects of earning profit in participation with
banks.
The convertion of
interest-based banking to interest-free banking in the Islamic
state would do a great good to the economy. In the present system,
some shrewd persons arrange huge capital by borrowing on interest
from banks and thus build up big industrial empires which cause
concentration of wealth in few hands. In the Islamic system which
is based on profit-loss sharing instead of interest, capital would
be available on equity basis and not on loan basis and, therefore,
it would be impossible to establish industrial empires. This would
help growth of small and medium size enterprises which, as proved
by modern economic theory, go a long way to promote economic
development of a nation.
It is
unanimously held by the Muslim jurists that presence of riba
(interest), maisir (gambling), garar (risk or uncertainty) and
juhala (unknown) in any business contract or transaction makes it
unlawful. Whenever any of these four elements is found in any
transaction or deal that renders it void in the sight of Islam. If
you analyse the contract of modern insurance, you will find that
almost all these four unlawful elements are present in it in
sufficient degree so as to make it illegal in Islam. Therefore,
when Islamic economic system is enforced, modern commercial
insurance will have no place in Islamic lands. Muslim economists
and insurance experts, however, suggest that insurance needs of
Islamic society will be met by organising insurance on the
principle of mutuality and co-operation. In other words,
co-operative and mutual insurance in which the policy holders are
themselves the insurers as well as the insurees is acceptable to
Islam with suitable modifications so that no tenet of Islam is
violated otherwise.
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