Economic System in Islam- Prohibitions of Riba (Interest) III

Summary of 8.13 “Prohibitions of Riba (Interest) II”
In the previous program we described the two different types of interest that were common before Islam.’ We said that one was clearly prohibited in Islam and the other many jurists believe to be prohibited by analogy.’ We discussed the rare opinions of those who made and error in the interpretation of the prohibition of interest.’ We indicated that some of these people kept quite or changed their mind after the majority of jurists pointed out the difficulty with their interpretation.’ We discussed the reasons behind the prohibition of interest dealings in a purely Islamic society.’ We discussed some of the harms caused by interest dealing as it effects the character of the individual, that nature of society, the social structure, the political process and in some cases it causes economic harm.’ We made the distinction between taking a loan with interest verses partnerships which is different because partnerships share in profit and loss.’ We clarified that dealing with interest is not an imperative in order to establish an economic system.’ There are so many acceptable (within Islamic legislation) alternatives which include things like buying common stocks, mutual funds, partnerships and a variety of ways to invest which meet the needs of different people depending on the term of investment they want and the degree of risk they wish to take.

8.14” Prohibitions of Riba ‘Interest’ III/Distribution

Host:’ Even though there are alternatives the elimination of interest reduces those alternatives by one; how do you respond to that?

Jamal Badawi:

I had a discussion with a colleagues and economist at St. Mary’s University and his basic argument is that when we speak in economics about maximization and we have to explore all possible options and then determine what maximizes one’s benefit.’ He said that if an individual in his own thought feels that dealing in interest maximizes his benefits then by prohibiting it one is arbitrarily restricting those alternatives and as such not achieving maximization.’ My response was that in a purely economic system it is not a matter of a dictator or ruler saying that no one is going to deal in interest.’ This is a matter which is based on the teachings of God and the conviction of members of that community or society that interest dealing is contrary to Islam and the will of God and if we take the individual as the judge for maximization then the individual in that community will not consider interest to be an alternative and as such there is no problem with maximization.’ So in this case interest is outside of their range by their own commitment and there is no problem with maximization and efficiency and he agreed.

Even maximization which looks like an attractive concept we must remember that maximization is not ideal in everything.’ For example in teaching in the area of union management relations if a union maximizes its gain regardless of managements ability to pay they might cause management to go bankrupt and they would lose their jobs.’ If management maximizes their benefit by giving very low wages they might lose their skilled workers.’ In the long term they are the losers.’ Maximization is not always the ideal situation for everything.’ Maximization is not purely mathematical or economic because it can not be divorced from values and possible harms and benefits to society.’ A person can maximize his wealth by theft, cheating or extortion.’ So maximization is not something to be worshiped and must be considered in the light of the total benefit of society.

Host:’ Why is it ethically wrong to get guarantied interest but it is ok to get guarantied wage or gallery regardless of the employers gains or losses?

Jamal Badawi:

A colleague of mine in the of management who has an interest in the area of profit sharing also raised this issue.’ If one is going to say that it is ethically wrong to take interest regardless of profit or loss why is not unethical for you to take a specific wage without knowing if the company is going to gain or lose.’ If one is going to pursue this and mix between borrowing and hiring labor as a factor of production one is going to make chaos in society.’ The same thing applies to buying power: why should one pay the power company a given rate before waiting to see if the company is making profit and then in view of that profit determine what you should pay the power company.’ The difficulty here aside from the fact that it is totally unpractical to apply it in these areas is that when we talk about investment the money is not a factor of production.’ The money can not produce products or services but is only a medium and measure of value.’ It is only when equipment is bought with this money when one can start getting concrete out of production.’ Whereas labor is a concrete contribution to the productive process. When one buys labor one is buying units of effort at the going price or buying units of power at the going rate.’ One does not say I will pay you when I find out if I am making profit.’ This is the kind of risk that is taken in business.’ This is not much different from getting a share because of your contribution to capital.’ Even the notion of tying payment of labor wages and salary to profit is also possible under two circumstances.’ One is the sleeping partnership where one contributes capital and the other contributes labor and then each gets a percentage of the profit.’ A second possibility is a scheme of profit sharing where one is paid a certain minimum salary but in addition to that one gets a bonus depending on how well the company does.’ This is something that is gaining popularity and would help bring about a degree of justice and equity in wage payments.

Host:’ In an Islamic Economic System would there be any banking institutions?

Jamal Badawi:

When we say that in an ideal Islamic situation there should not be any interest dealing it doesn’t mean that there shouldn’t be any banks.’ The functions of a bank may change.’ For example a bank has safe deposit boxes, under an Islamic system nothing would be wrong with that, it is an institution providing a service that one pays a fee for.’ Second, if one wishes to keep their money in a current account one may or may not authorize the bank to use the money for short term projects, but in any case one may pay a fee to receive those services.’ This is not contrary to Islam because this is a service.’ If one wishes to invest the money in a project through the bank this would undertake this task on behalf of many investors and then they get profit or loss depending on the performance of that project or group of projects.’ Finally even short term deposits can be put in a bank but not for fixed interest but with the idea that the bank would use these funds in Islamically acceptable investments where at the end of the year the money is evenly distributed so that one gets their share of investment.’ There are many ways of doing this while sticking to the main idea that Banks would not deal with interest as their roles include services or invests.

Host:’ What is Islam’s view on consumption loans if there is no interest being charged on them?

Jamal Badawi:

It depends on the motives behind the consumption loans.’ If one is talking about a person who is borrowing to meet basic needs; under an Islamic Society this person should not have to borrow in order to live but Zakah (institutionalized charity) would take care of this.’ There are some consumers who may wish to borrow in order to meet different types of needs.’ Emergency needs (people who face disaster or unexpected loss) may qualify for Zakah.’ It could be a temporary situation and then the person would be able to pay it back in which case it would be reasonable that a loan could be provided from a bank or Zakah interest free.’ If a person wishes to buy something that is not essential then the bank would have to investigate all the applications and it would be be a matter of application between the person and whoever is selling him the item provided that there is no interest involved.’ It is preferable for him to have the sufficient funds to buy things without having to take loans.’ It is ethically appropriate not to overspend beyond one’s own means and not to depend on borrowing.’ It is better to try to live within ones means as many problems faced in many families today is this availability of this temptation.

Host:’ Would this have any application on the macro level or government level and public debt?

Jamal Badawi:

Why does the government need to borrow money?’ Let us remember the easy access of money to governments by way of bonds and interest many times leads to a great deal of inefficiency which I will leave to politicians and economists.’ We know about the inefficiencies of government expenditures from the Government of North America and the availability of these funds may not work in favor of the tax payer.’ It is after all the tax payer who will pay for this debt.’ If we look into the budget of any municipal, state, provincial or federal government we will find a sizable percent of the budget goes to finance debt.’ There may be cases where it is necessary for the government to obtain funds (not borrow) in order to meet certain emergencies.’ In the case where a country is under attack and needs funds in order to defend themselves as the defense budget could be quite expensive and Islam has two approaches.’ First of all they can get the funds from Zakah.’ Second, in Islamic Law a just government may impose additional taxes on those who are able to afford it (not on the poor) to satisfy needs.’ Why in the case of war do we expect people to sacrifice their lives and we don’t expect the rich to sacrifice their lives.’ One of the main problems that face the United States was the debt which was incurred during the war which continued for decades with its compound interest.’ This is unfair because the rich became richer, during the war, because the industrial complex that supported the war.’ Young people sacrificed their lives-and again how do we expect people to sacrifice their lives and not expect those who gain from the state of war to pay their fair share.

If there is need for other projects such as public utilities which the government wishes to take over.’ Again they can invite people to invest in those projects instead of lending them the money.’ The question of public debt can be dealt with without interest in Islam.’ Under Islamic rule which extended for hundreds of years there was no need to resort to interest as the economy was very prosperous and there was no problem with consumer loans and things were going so well that the Zakah couldn’t find enough poor to help.’ We don’t have this during the 20th century now do we?

Host:’ Does Islam allow for the free determination of prices in the market place?

Jamal Badawi:

The basic rule is to let there be freedom of pricing.’ Basically, this lets the forces of supply and demand determine the prices.’ The source for this statement is the saying by Prophet Muhammad (PBUH) when at one time prices were going up so the companions came to him and asked why he didn’t set the prices and his reply was ‘God determines the prices.” What he meant by this was that there are natural forces of supply and demand which result in the determination of prices.’ He continued saying ‘I fear that I will meet God on The Day of Judgement with someone complain that I caused injustice by stepping in and dictating a price.” This rule should not be taken to mean that under no circumstances a just Muslim ruler is not allowed to interfere in the market.’ Many economists, even Chamberlain in as early as the 30s, indicated that the old notion of Adam Smith known as the Invisible Hand is not totally correct.’ Many times there are imbalances and disequilibrium which require some interference on the part of the government.’ This rule should not mean that in rare situations where the need arises, when there is social interest and justice at stake that the government can not interfere in prices.

An example not from Islamic History but from what happened here in North America.’ Some may remember when the price of sugar was artificially high.’ It reached around $7.50 for 2 Kilos or something like that and it was discovered later that there were artificial shortages and manipulation of the market to make these quick gains.’ I think that people would agree that in a cases where artificial shortages are made for basic necessities we can not just respect individual freedom and let people starve.’ In cases like that the government could step in and determine a fair price.’ There are cases where the government may take a strong role in the matter when absolutely necessary and not in an arbitrary way on the basis of mutual consultation.’ A famous jurist by the name of Ibn Taymiyyah said that higher prices can be caused by one of two things.’ On that there is more demand than supply and if some one is forcing you to sell at a given price which is less than cost.’ Two prices could go up because someone somewhere is exploiting the necessities and creating an artificially high price in which case the interference would be called for.

Host:’ What happens if a merchant has needed materials that he refuses to sell?

Jamal Badawi:

Like in the question of price determination the basic rule again is the respect of individual freedom.’ An individual is free to sell or not to sell.’ Again if one doesn’t have that freedom any dictator can just impose anything on everyone.’ The basic rule is that one is free to sell what one wishes to sell or withhold what you want.’ This is a serious case because it is where individual freedom comes in conflict with social needs and the two must be balanced.’ This is a principle that we all recognize in all laws, in various aspects we have to balance both needs.’ In this type of case Islam doesn’t let people starve and if a person fails to sell at a fair price Islam doesn’t rule out forcing the person to sell the basic needs.’ Actually forcing to sell is a principle that is applied in the most capitalist economy.’ For example if one doesn’t pay taxes on their home they could be forced to sell it in order to pay for it.’ If one has debts to others and one fails to pay them then one’s property can be sold against your will.’ This should not be an arbitrary matter but should be fair and as needed.

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