A Brief Look at Interest


Salman Ahmed Shaikh

Besides Islam, interest is also prohibited in all monotheist religions (See Exodus 22:25, Leviticus 25:35-36, Deuteronomy 23:20, Psalms 15:5, Proverbs 28:8, Nehemiah 5:7 and Ezakhiel 18:8,13,17 & 22:12). Even in secular literature, one finds criticism on interest. Aristotle (384-322 BC)in his book “Politics” criticized interest in following words “Of all modes of getting wealth, this is the most unnatural”.

Thomas Acquinas in “Summa Theologica” writes:

“To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice”.

He further explains that money was invented chiefly for the purpose of exchange and consequently, the proper and principal use of money is its consumption or alienation whereby it is sunk in exchange. Hence, by its very nature, it is 0unlawful to take payment for the use of money lent. He reasons that:

“Just as man is bound to restore ill-gotten goods, so is he bound to restore the money which he has taken in usury”.

In modern economics too, we find criticism on interest. Keynes (1936, p. 377) in his treatise “General Theory of Income, Employment, Interest and Money” stated:

“Interest to-day rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.” 

In one of his famous essay, Keynes (1932, p.358) argues:

“When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues … 

But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.”

In modern times, few scholars argued that there is a difference between interest and usury. Usury refers to the exorbitant rate of interest charged on consumption loans in olden times. Quranic reference to ‘Riba’ is condemnation of this ‘Usury’ which existed in those times. They further argue that the ‘interest rate’ is a competitively set price determined in the market with the consent of buyers and sellers for the use of financial capital and is different from usury.

However, the issue was clarified by the council of Islamic ideology’s report in 1980 and later; a historic judgment on interest was issued by the supreme court of Pakistan (Usmani, 2007). The council’s report stated:

“The term riba encompasses interest in all its manifestations irrespective of whether it relates to loans for consumption purposes or for productive purposes, whether the loans are of a personal nature or of a commercial type, whether the borrower is a government, a private individual or a concern, and whether the rate of interest is low or high” (Council’s Report, 1980, p.1).

References

Aristotle (384-322 BC). “Politics”, translated by Benjamin Jowett, with an introduction by Max Lerner, republished in 1943. New York: The Modern library.

Keynes, John M. (1936). “Theory of Income, Employment, Interest & Money”. New York: Polygraphic Company of America.

Keynes, John M. (1932). “Economic Future of our Grand Children”. Essays in Persuasion New York: Harcourt Brace.

St. Thomas Aquinas, Summa Theologica, trans. Fathers of the English Dominican Province, (London: R. T. Washburne, Ltd., 1918), pp. 330-340, reprinted in Roy C. Cave & Herbert H. Coulson, A Source Book for Medieval Economic History, (Milwaukee: The Bruce Publishing Co., 1936; reprint ed., New York: Biblo & Tannen, 1965), p. 182.

The Council of Islamic Ideology (1980), “Report on Elimination of Interest from the
Economy”,
Government of Pakistan.

Usmani, Muhammad Taqi (2007). “Historic Judgment on Interest”. Karachi: Maktaba Ma’ariful Quran.

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About Salman Ahmed Shaikh

PhD Economics. Author, Researcher, Teacher and Consultant. He can be contacted at: salman@siswa.ukm.edu.my
This entry was posted in Articles on Islamic Economics and tagged , , , , , . Bookmark the permalink.

4 Responses to A Brief Look at Interest

  1. HayatCanada says:

    Salam Oualikoum

    Everybody in this world know about the interest, but there is no mechanism to stop it.

    Like

  2. Empirical research is being carried out and, indeed, the current financial crisis and crises that happened in the last two decades are speaking for themselves.

    Like

  3. Johan Serre says:

    Talking about empirical research and interest, for those you who do not yet know, the IMF (International Monetary Fund) published a noteworthy report end 2010, to be consulted here:
    http://www.imf.org/external/pubs/ft/survey/so/2010/res100410a.htm.

    Like

  4. Pingback: What does Ribaa mean? Interest or Usury | SalaamNewZ.NET

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