Interest or Riba
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.”
When money changes hand from one person (lending/loaned) to another person based on ‘time value of money’ concept an amount is charged for the usage of money for the said duration, which is called Interest or Riba.
In conventional banking money is treated as a commodity which has an intrinsic value which can be transacted as money buying more money (riba) or can be used to buy goods or services. In Islam money is not a commodity which can be utilised directly without exchanging it for some goods or service. Money was created to be a medium of exchange to buy goods or services not to buy more money with money!!
Riba as such has so completely been institutionalized and accepted in modern world economies that it is almost impossible for our minds to let alone comprehend the evils of riba and believe in the possibilities of a Riba free world. Lets now understand why riba is considered a social evil and prohibited in Islam. The prohibition of riba in Islam has more to do with social justice and productive use of resources.
The Qurán has prohibited riba in four different revelations, the first of which (30:39) was in Makkah, and the other three (4:161, 3:130-2 and 2:275-81) were in Madinah. The last of these (2:275-81) came near the end of the Prophet’s life, peace and blessings of God be on him. It severely censured those who took riba and declared them to be at war with God and His Prophet.
Rich becomes richer at the cost of the poor
The current world economic scenario based on riba favours the rich. Without any risk, without entering into any productive activity or lets say without even a drop of sweat money grows by itself !! Can we have any other commodity say gold or precious stones or metal where you can idly store it, sleep at home and can redeem a definite increase in value. Absolutely NO, right!!, but money somehow is attributed such a feature.
On the other hand consider an individual in debt, in their case the interest continues to grow, more and more of their overall earnings consumed by interest. Years and years of hard work if not a life time of an individual is used just to payoff the debt. Through debt the individual enters a vicious cycle of never ending life of struggle & anxiety. Not to forget many a cases where in spite of paying more than the borrowed principal amount, property or factories being claimed and forfeited by lenders.
Riba hampers economic activity
Riba leads to stagnation in economic activity. When the possibility to store money and earn an increase in value is available, that too risk free why would someone be encouraged to take productive economic activity. So the risk free returns from banks act as a threshold to employing money for productive cause. One will employ money in a factory or shop only if the profit is much higher than the risk free returns.
Contrary to this consider a riba free economy, people with money will seek productive economic activity and share profit or loss out of the activity rather than idling money at home!! The outcome will be stronger relationships, mutual trust & brotherhood.
Riba leads to price increase
As money has intrinsic value in conventional economy, it has a cost associated with it for change of hand. When someone has to borrow money for starting a shop he incurs riba to be paid, which adds to cost of operating the business. Naturally the shop owner has to pass on the cost to the consumers.
Each and every goods, service or activity that we buy has a riba cost component passed on to us.
Riba is a social evil
Due to the blind attraction to riba, people get hesitant to help someone in distress. Or even mercilessly charge a higher interest for supporting someone in need. World has come to a scenario where more the distress, inability and suffering, greater the opportunity to charge more riba.
The rich who have money, let them employ it on a poor say for a trade activity and instead of seeking riba or fixed interest let him share the profit or loss out of that trade activity. This would be an ideal social justice instead of oppressing the poor for riba.
Islam defends the poor by declaring riba as forbidden and that those who are taking and by eating riba, Allah is declaring war on them. When there is a deal based on riba all five persons who are cursed with regards to interest are; the one who gives it, the one who takes it, the two who witness it and the one who writes the contract.
Riba = Exploitation
It’s a transaction between two people, why should we care?” The reasons we should care is because microeconomic decisions can have macroeconomic impact. The debt servicing of lesser developed countries today is so great that they must sacrifice essential food safety, health and nutritional needs of their citizen. We cannot just close our eyes to the untold numbers of children dying daily in under developed countries due to the evil tool of modern capitalism: RIBA.
“ If you ask me what the worst thing in the world is, I will say it is compound interest”
“Upto 1985 Nigeria had borrowed around US$5 billion, and we have paid about US$16 billion. Yet we are still being told that we owe about US$28 billion. That US$28 billion came about because of the injustice in the foreign creditors’ interest rates”
Former Nigerian President, Olusegun Obasanjo (2000)
The rich gets to enjoy their life with exotic food, mansions, gas guzzling vehicles and gadgets. Add on to that the infinite search to immortality through advanced medical facilities. On the other hand a life saving surgery or for that matter a pain relieving medicine or a life support system can be denied for the poor, and that has scaringly has become ‘normal’ for today’s world. The very value of ‘life’ itself weighs heavily in favour of the rich!!
Many a poor who have pawned their agricultural land, house, shop or factory may have lost it to the financier due to the inability to keep up with the mounting debt burden. 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.
Riba demotivates risk sharing
Growth in money or say a trade activity need to be associated with risk. Conventional finance to an extent supports risk free returns and capital guarantee which demotivates risk sharing. A productive business activity requires capital to be employed and engage in an amount of risk to generate profits. When one finances a business activity with the intent of profit, then to a practical mind the question is , “how can that person be then shielded from the loss of that capital when loss arises in the activity”
Islamic financing involves a stronger relationship between the parties associated in the trade activity and greater clarity is sought in terms of the risk and nature of the activity. Here in case of any financing the loss sharing is as important as sharing of profit.
The world would be a much greater place to be in without Riba (an interest free world). The conventional economy based on riba has played its part for quite a while and the result ; depriving basic living for the poor, rich getting richer at the cost of the poor, widening gap between the rich & the poor, unaccountability for death by famine and apathy of the poor. Its time riba(interest) need to be set aside from the economy and let money be deployed on risk sharing basis profit for profit and loss for loss.
Let banks and finance institutions not be centres of riba (interest) but a facilitator where business opportunities are accessed, risk is evaluated and investor and businessmen are brought to a meet.
And for ‘Money’ it time to play its role of medium of exchange and not a commodity by itself !!