> Why Riba was prohibited (Haram) in the divine law?

[Assad]

It is worth to present an example to start with the subject, a factual example from existing interest based banking methodology that is valid and current, which can be well understood by a common person. One should consider the following facts before going through the example. The facts are:

• Only Banks create money.
• The created money is then supplied in to the economy only in the form of loan at some specified interest.
• There are no other institutions that create money other than banks.

The example - an astonishing fact

As all the banks are creating money and supplying in to the economy on interest and without any doubt all of them are practicing the same technique, so let us consider there is only one bank in our example that creates some money and supply in to the people's economy.
Suppose Bank XYZ creates Dirhams 100,000 and supplies it at an interest rate of 10% per annum to several entrepreneurs and governmental units active in the economy, remember there is no money available in the economy from any other source. The bank has taken substantial collateral or guarantee as security of its money from each borrower. See in the following diagram - the borrowers intake loan and repayment liabilities at the end of the first year:

It is very simple and clear that at the end of the first year, a combined sum of Dirhams 110,000 is due on all borrowers to repay to the loaning bank.

But the money available in the economy is only Dirhams 100,000 as the bank is only supplier of money, so from where the rest 10,000 would come that is the difference in the borrowers intake and total repayment amount...... from NOWHERE. Yes, that is right from nowhere because that money does not exist in the economy.


Look at the scene, the bank is the only supplier of money, it creates and supplies 100,000 in the economy and that is the total money available in the economy, but as per loan agreements - these borrowers collectively have to pay back 110,000. How is that possible? There is no way. Don't you believe, it is 100% like this - no less. This is cheating and criminal foul play.
So what will happen, at least one or more of these borrowers would default on their loan(s) and would loose their personal assets or belonging that they had put as security to the bank for the repayment.
The money creator has designed a mechanism that would force few of the borrowers each year to default so that bank could forfeit the security assets and gain wealth by foul play.

This is an eye opening example for those who previously had no idea about the mechanism of banks as how they operate and cause artificial shortage (scarcity) of the money in the societies. This is happening every where in this world from USA to the smallest country on this beautiful planet. This artificial scarcity of money is the root cause of people's problems from hard struggle for surviving to the loss of happiness from their lives.

In a Riba (interest) based system, people are not aware of this foul play - borrowers think that they will manage to repay the principal plus Riba (interest) as they think it would be coming from some where else, but the fact is - every borrower would be in battle with others where some borrowers have to lose in order for others to win, some would fail to pay their loans in order for others to get the sum they need to pay off the Riba (Interest). When seen in totality, the supply side is always in deficit and the liability is always in excess due to Riba (interest), the total combined supply cannot discharge the liability.

After going through the above real example, I believe, now we are close to find out why Riba was declared Haram in Quran and Sunnah.

Let us begin with the economic reasoning of WHY:

1. The availability of each produce is limited, the liability cannot exceed the availability limit.
2. In any transaction, if a liability of produce "in excess" of "the produce available" is created, that extra liability would be artificial because excess quantity of produce does not exist.

This universal economic code applies to each and every type of produce; to further get in to the explanation of the rule, let us now identify what represents "the produce", "the transaction", and "extra liability":

The Produce

In its general expression "the produce" is any thing available to human beings for their use or consumption, but here specifically those produce that can be involved in a transaction, it is best to take historical standards of transactions which are based on produce like gold, silver, grains, currency etc. because throughout history all transactions are carried out in publicly acceptable produce only. These produce have served the societies as "medium of exchange", so it is more appropriate logically and historically to consider the produce as "the medium of exchange" which is again a general expression and can accommodate any other commodity/produce that may be used in a transaction.

The Transaction

In this universal economic principle, the transaction is based on a single produce and naturally it can only be a transaction of loan or exchange and nothing else. Although donations/grants also involve only one produce but that is not a transaction because a transaction means exchange of good(s) and/or service(s) either on spot or in any specified time frame involving one or more types of produce.

Extra Liability

Riba (interest, usury) is that extra liability created in excess of the produce available and that does not exist. Every liability is a demand in practice, the basic rule of economics known to every one is that to maintain economic equilibrium (stability) in the society, the supply side should be equal to the demand, if the demand is more than the supply - a shortage will occur. Creating an extra liability means creating an extra demand without increasing equal supply, this will start a never ending mechanism of perpetually increasing the shortage of that produce in the society.

Conclusion:

Riba was prohibited just to prevent the creation of "extra liability/demand" because that is fake and "does not exist" physically, this artificial "extra liability/demand" creates scarcity of the produce in the society and unjustly accumulation of the produce in few hands. Riba (interest, usury) is a mechanism and dangerous weapon that has a power to get hold of assets/properties of individuals, enterprises, and nations deceitfully. This is unfair and against the nature, so ALLAH (SWT) banned Riba (interest, usury) very strictly to stop this criminal action.
Nature is the Limit in Islam; any thing not natural is prohibited, stopped, and declared illegal. The above economic reasons are the only base for the prohibition of Riba, ALLAH (SWT) has allowed everything that is natural but given its strict judgment to stop any behavior, agreement, and practice that is not natural.




SOURCE : http://www.hazariba.com/WhyRiba.shtml

[Assad]

The wisdom behind the prohibition of interest

The strict prohibition of interest in Islam is a result of its deep concern for the moral, social, and economic welfare of mankind. Muslim scholars have sound arguments explaining the wisdom of this prohibition, and recent studies have confirmed their opinions, with some additions and extensions of their arguments.
We confine ourselves to what Imam al-Razi says in his tafsirof the Qur’an:

• First: The taking of interest implies appropriating another person’s property without giving him anything in exchange, because one who lends one dirham for two dirhams gets the extra dirham for nothing. Now, a man’s property is for (the purpose of) fulfilling his needs and it has great sanctity, according to the hadith, “A man’s property is as sacred as his blood.” (Reported by Abu Na’eem) This means that taking it from him without giving him something in exchange is haram.
• Second: Dependence on interest prevents people from working to earn money, since the person with dirhams can earn an extra dirham through interest, either in advance or at a later date, without working for it. The value of work will consequently be reduced in his estimation, and he will not bother to take the trouble of running a business or risking his money in trade or industry. This will lead to depriving people of benefits, and the business of the world cannot go on without industries, trade and commerce, building and construction, all of which need capital at risk. This, from an economic point of view, is unquestionably a weighty argument.
• Third: Permitting the taking of interest discourages people from doing good to one another, as is required by Islam. If interest is prohibited in a society, people will lend to each other with good will, expecting back no more than what they have loaned, while if interest is made permissible the needy person will be required to pay back more on loans (than he has borrowed), weakening his feelings of good will and friendliness toward the lender. (This is the moral aspect of the prohibition of interest.)
• Fourth: The lender is very likely to be wealthy and the borrower poor. If interest is allowed, the rich will exploit the poor, and this is against the spirit of mercy and charity. (This is the social aspect of the prohibition of interest.) (Tafsir by al-Fakhr al-Deen al-Razi, vol. 7, p. 4.)

Thus, in a society in which interest is lawful, the strong benefit from the suffering of the weak. As a result, the rich become richer and the poor poorer, creating socio-economic classes in the society separated by wide gulfs. Naturally, this generates envy and hatred among the poor toward the rich, and contempt and callousness among the rich toward the poor. Conflicts arise, the socio-economic fabric is rent, revolutions are born, and social order is threatened. Recent history amply illustrates the dangers to the peace and stability of nations inherent in interest-based economies.”


Source: http://islamicbanking.worldmuslimmedia.com/ (modified)

[Abdul-Fattah]

Selam aleykum
There is a much more global wisdom behind the prohibition of riba. If you look at the economy, not just on an individual level, not just at the effect of the lender, and the borrower, but at the whole society, and the economic system and the banking system.
Then it becomes obvious that riba creates wealth that isn't there. The total sum of money that exists in a society cannot increase artificially by loans only. But yet that is what happens with riba. An added amount of wealth is introduced artificially. That creates a bubble, a vacuum. And this bubble needs to be filled or it will burst.

Most of the time the bubble is filled by shifting existing wealth into it, the few possessions of the poor, or of the unlucky ones. But this is an artificial solution to an artificial problem. You create artificial wealth, and then you drain existing wealth into it to compensate. But what if the balance gets lost? Well they've set up a whole bunch of tricks to minimise damage to the economy. Like they play with the interest ratio, to stimulate the artificial build and artificial drain in the right direction. Or they set up inflation, to cope with a growing number of money, still representing the same amount of gold in the vaults. But these cause additional problems in society. They create an environment where buisnesses are forced to constantly grow and expand, in order to make a profit. And how can they do that? Well they need to invest, and to invest, they take a loan, and the circle is closed, with no apparent door leading us away from this sickening economy. Either you take part of it, and then you're part of the problem in a way, or you don't take part of it, and you are victimised by the system.
But what if all these artificial coping-mechanisms fail us? Is that possible? Yes, certainly!
That is what happened last year, a crash, banks going bankrupt, allot of poverty, allot of people losing their money, loosing their houses, loosing their jobs.

And people complain, and point fingers at the banks, for abusing their thrust. And point fingers at the politicians, for not preventing this, and point fingers at the economists for not warning them (enough?). But the true culprit, the true cause of this was riba. Because with riba, such a crash is inevitable sooner or later. It happened before, people knew it was going to happen again, and it did happen again, and as long as we will continue with this system it will happen in the future again, and again and again.

[Assad]

JazakAllah khair for your profound reply.

You said that such economy crashes have happened in past , happened now and will continue to do so until the system changes, so why do people dont accept the change?

Do you think that the effect of the current financial crash is gonna last for more years? Or has the worst already happened?

Also, I think that the creation of artificial wealth could be understood if we understand how the system of interest works.

[Abdul-Fattah]

Originally Posted by Assad

JazakAllah khair for your profound reply.

You said that such economy crashes have happened in past , happened now and will continue to do so until the system changes, so why do people dont accept the change?

Not everybody understands the connection between interest and these crashes. Not everybody understands how these crashes are intrinsic to the economical system. As for those who do understand, I think in general most of them profit to much out of it to want to change. Some might also believe that it is an unavoidable necessity, and that no plausible alternative exists. And yet some others might simply be in no position to make a difference, or have no power or influence over the system. So in conclusion, different reasons for different people.

Do you think that the effect of the current financial crash is gonna last for more years? Or has the worst already happened?

Depends on what you mean by "effect". As for "the worst having happened" different sectors of business progress in different speeds, so it's hard to pin-point "beginning, middle and end". Many people seem to be under the impression that the worst is over, and that we can only go up from here. Quite frankly I have no idea what the future brings.

[al-boriqee]

1. Abdul fattah is right
there is a greater international interest in the prohibition of ribaa
Assads post was strictly within a personal level

2. Assad. Did you right this treatise yourself or did you get it from somewhere else.

Asalamu alaikum

[salman]

actually, the whole modern system of loan and borrowing is nothing but a big vaccum bubble where money is created from nothing and in fact that monetary value does not exist in reality. Let me give you an example of how the money and bank loan system works: Let's say I have $100 and I deposit that $100 in a bank. The bank has its pre-defined ratio to determine how much money I would generally need to withdraw and how much it would normally remain in my account. So based on this ratio, they would say we are going to lend out X amount of money from this $100 to other borrowers. Let's say X = $80; so, the bank decides to loan out $80 from my $100 to other borrowers for some cost of borrowing (interest rate). So when the bank loans out this $80, the money in circle now is $100 + $80 = $180 but in reality there are only $100. As the times goes the bank further divides these $80 to loan out other people and this cycle continues. Hence, at the end of the day, there is more money in circle then what actually exists. Now, if every single person, the depositor and the borrower, goes to bank to withdraw their money, the bank is in trouble because it does not have that amount since it never existed to being with: it was only $100. So what they do is print more money (if they have the right to) or borrow on some cost from other financial institutes. However, this does not normally happen (everyone is withdrawing the money they are entitled to) so the system is working.

this whole economical system is nothing but modern version of slavery. since the introduction of paper money everything has changed drastically: the living conditions, the moral values. the people behind the system introduced good looking notions (freedom of rights, good living conditions, technological advancements, etc.) to control and enslave lower and middle class. this is the worst kind of zlum in our time because people are following the agendas of men behind the scene willingly and completely trapped.

may Allah Azz wa Jal protect us from this fitnah and raise someone from the people of the Sunnah to get rid of this zulm, ameen

[Assad]

Originally Posted by al boriqee

2. Assad. Did you right this treatise yourself or did you get it from somewhere else.

I bought it from websites, as you can see its referenced. I am trying to build a database relating to economics and how Islamic Finance can provide solutions (if any).


@ Salman: You have given a good example of how banks work. To see this system at the higher economic level you can refer to my post here. This shows how this system is based on slavery.

I dunno, but Islamic Finance do make some sense but we need to study it well since there are various propaganda against it and some people/institutions try to make it appear as just the same system with a different name.

[Assad]

A new entry has been added to Downloads

Description: Why Islam has prohibited Interest

By Sufyan Ismael, CEO , 1st Ethical Ltd

To check it out, rate it or add comments, visit Why Islam has prohibited Interest
The comments you make there will appear in the posts below.

[Assad]

You can find various research papers related to the Islamic Finance and economics on this website:

Research Papers : 1st Ethical