Responses to Islamic Awareness

The Facts About Usury: Why Islam Is Against Lending Money At Interest


This article begins with a brief introduction by Dr. Saifullah. The text is from a position paper written by the Islamic Party of Britain. Usually, in the west, the term usury is used when excessive interest is charged on a loan. In this paper, all interest charges are called usury.

After the South-Asian economic tigers turned into paupers after the meltdown, it was realized that their economic model was no longer the one that needs to be emulated. The capital borrowed by these economies (at an interest, of course!) to fire up their economic engine was without any or little circumspection. But when the bubble bursted, the currency plunged, many banks went bankrupt and so did the people into hard times. The good old International Monetary Fund (IMF) came to rescue of many countries with loans with a high interest tag and sell out of the nations to hungry multi-nationals, euphemistically called as 'opening the economy'. Muslim majority countries like Malaysia and Indonesia suddenly turned towards the God and Qur'an for guidance. But still they are yet to realize that the economic mess which they are in, is their own doing. By following the disbelievers in their actions, they brought themselves into hardships.

First of all, the Asian economic "tigers" did not become paupers. Even after the meltdown, the citizens of these countries still enjoy a standard of living which is much better than they enjoyed a decade ago. The Asian "tigers" are not moving away from the capitalist model, in fact, they are liberalizing their economies further and economic recoveries are occurring in most of these nations.

Second, this is an overly simplified, as well as inaccurate, explanation of the Asian Economic crisis. Debt was a part of the problem, however, it was not the cause of the Asian financial meltdown. The financial crises in the east and south-east Asian economies could have been avoided had these economies been on flexible exchange rates. The problems in Thailand, as well as the other Asian countries, was the result of the fact that these countries DID NOT have fully convertible currencies. The official exchange rate policy of many Asian countries was one of pegging to the U.S. dollar. Hong Kong, for example, maintained parity tied to the US dollar. Other countries formally pegging their exchange rates to a basket of currencies; however, the effective weight of the US dollar in these baskets was so high that their policy can be characterized as an implicit peg to the US currency. In Malaysia, for instance, the currency moved in a 10% range of 2.7 to 2.5 ringitt to the US$ for most of the years between 1990 and the beginning of 1997.

The policy of pegging the exchange rate ensured the stability of the nominal exchange rate relative to the US currency, it also ensured that a change in the nominal and real value of the dollar relative to the Japanese Yen and the European currencies had the consequence of affecting the real exchange rate of the Asian currencies pegged to the US dollar. Specifically, the dollar was on a downward nominal trend relative to the yen and mark between 1991 and 1995 reaching a low of 80 yen per dollar in the spring of 1995. During that period, the Asian currencies pegged to the U.S. experienced a real depreciation of their currencies, as they were depreciating relative to the Japanese and European currencies. However, after the spring of 1995, the dollar started to rapidly appreciate relative to most world currencies (the yen/dollar rate went from 80 in the spring to 1995 to over 125 in the summer of 1997, a 56% appreciation). As a consequence, the Asian currencies that were tied in nominal terms to the dollar also experienced a very rapid real appreciation. By early 1997, several regional currencies, including the baht, were seriously overvalued and the overvaluation was a factor in the worsening of the current accounts of many countries in the region. Real depreciations appeared to be necessary to adjust the current account position of the deficit countries. To make matters worse, foreign investment poured in which prevented currency depreciations even if domestic inflation was higher than world inflation. This led to nominal currency appreciation; this, in turn led to a real appreciation that was partly the cause of the large and growing current account imbalances, and hence the collapse of these economies.

The Asia Homepage has a large selection of articles which go into the Asian meltdown in great detail.

It is true that Muslims have started 'monkeying' the Western values blindly in almost everything. This comes with the rejection of Islamic values which are considered to be 'old' and hence should be 'discarded'. The so-called 'Freedom', 'Human Rights', 'Democracy' and 'Women's Rights' in Europe and America is nothing short of a joke. It may impress uneducated people in so-called Third World countries, but anyone who has studied history knows that these things came about in spite of the Church, not because of it. Just think how the standards in a democracy change: Couple of decades or so ago, homosexuality was looked down-upon in many 'democratic' countries. Some people realized that the homosexuals were not getting a good deal in the society. Therefore, the virtues of Sodom were sung, movies were made to promote their cause (notably, the Oscar winning Philadephia!) and even the Church started singing God hates sin but loves sinner to attract the homosexuals to the Church (one wonders what did God do to the people of Sodom and Gomorrah!).

It is amazing how quickly Dr. Saifullah changes the subject from the Asian economic crisis to homosexuality! Also, are you suggesting that there were no money lenders in the Islamic world prior to the 'monkeying' of Western values?

In a gist, the values of a democratic society changes when a number of people decide to take a change (after all, democracy is by the people!). They can decide to support a dictator of a country one day and demonize him the other day. Presidents Saddam Hussein of Iraq and Suharto of Indonesia would be a good examples. It is also well known that 'Freedom', 'Human Rights', 'Democracy' and 'Women's Rights' take a back-seat when the economic interests are more important than anything else.

In gist, the values of an authoritarian state change when either the dictator changes his mind or when a new dictator replaces him. Democracies, at least, have constitutional law that protects basic (natural) rights regardless of what the majority desires.

Indonesia was one such example and now Algeria is a prime example of the Western hypocrisy. To the West, democracy did not matter when democratically elected party of Islamcists won; the elections were cancelled. Afterall, the Western companies have to get the lucrative business of newly discovered oil and gas reserves in Algeria.

China is an example of Islamic political hypocrisy. The "Islamic" Republics of Pakistan and Iran have extensive dealings (especially weapons) with the Chinese government while the Chinese Army abuses the human rights of the Muslim Siang Kiang Uighurs!

After working through this hypocrisy of the West, let us now take a look at the article. The article below on usury, which was published as a pamphlet by UK Islamic Mission Da'wah Centre, Birmingham, is definitely an eye-opener, inshallah, for people who do not realize what economies based on usury and speculation can lead to grave problems for the mankind.

Lastly, has anyone ever wondered why a third world country remains a third world with a perpetual budget deficit even after IMF has 'helped' them out of their economic problems?

A brief introduction is in order. The Islamic Party of Britain was founded in 1989 to promote the "Muslim" agenda in the United Kingdom. To date, they have not received much support from Muslim voters, nearly 90% of whom vote for Labour Party candidates. Now we turn to the article.

At times of economic hardship, when every good idea fails, just because "the money can't be found", when a decline in services is explained with the need "to reduce the deficit", when business can't afford new investment because of the "high cost of borrowing", when mortgage rates have gone up so much that it becomes diffcult to maintain a decent living standard, many small savers still think that high interest rates mean at least that they get the most out of their savings. The truth is, they pay more than they get.

Low interest rates are beneficial to the majority because these low rates enable producers, as well as consumers, to increase production, consumption, and capital formation, causing the economy to grow. As a result, personal income and the standard of living increases.

According to most govemments the only ways to control the deficit are to raise taxes or to cut govemment spending. However, considering that the deficit continues to grow simply because of the exorbitant amounts of compound interest added to the original debt, one of the most effective ways to reduce the deficit would be to reduce interest rates.

Lower interest rates = lower deficit

Actually, most governments, especially in the developing world, attempt to use seignorage (also known as "printing lots of money") to fund their deficits. Government deficits are an economic fact of life. The timing of government receipts and expenditures do not coincide, therefore, even if a government has a "balanced budget" at the end of its fiscal year, there will be deficits and surplus at different points of time throughout the year.

Low interest rates reduce the government deficit in two ways. First, as mentioned in this article, it costs the government less to service (pay interest) on its outstanding debt. Second, and most important, is the government receives higher tax revenues, when the interest rate is low, because the citizens of the country are producing, consuming, and investing more because the economy is growing. Government expenditures are lower because the need for social programs decreases as the economy grows and creates jobs.

In fact, at zero interest, the debt would not grow at all, and the large amounts of money spent in servicing the debt could be used to pay it off.

Wrong. At a zero interest rate (real or nominal), there is no incentive for anyone to buy the government debt (hold bonds). The government could not continue to fund its debt under these conditions.

Now consider what the Qur'an has to say on the subject of usury, that is lending money at interest:

Those who devour usury will not stand except as stands one whom the devil by his touch has driven to madness. That is because they say: Trade is like usury: but Allah has permitted trade and forbidden usury....

Sounds like situational ethics to me!

Allah will deprive usury of all blessing, but will give increase for deeds of charity, for He loves not any ungrateful sinner.... O you who believe, fear Allah and give up what remains of your demand for usury, if you are indeed believers. If you do it not, take notice of war from Allah and His messenger, but if you repent you shall have your capital sums; deal not unjustly, and you shall not be dealt with unjustly. And if the debtor is in difficulty, grant him time tin it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew. [Surah al Baqarah, verse 275-280].

How urgently is this message needed in a world where the "debt crisis" threatens to destroy and annihilate our civilisation, were open warfare is increasingly the consequence of the anxiety and suffering that spring from third world debt. Politicians have seldom looked at money-lending at interest as the cause of widespread poverty in the midst of plenty, because whilst this practice was once forbidden by Judaism, Christianity and Islam alike, it has become universally accepted in the modern world of secularism.

It has been argued that money is a "producer good" and that the lender should receive a share of the extra wealth that these goods produce.

Absolutely, the lender should receive at least the time value of his or her money. Why would anyone loan money for free? Think about it!

Yet this is illogical on several points. The only true producer of wealth (i.e. goods and services) is Labour when it is applied to either Land or Capital.

This is the "Labor Theory" of value which was first formulated by David Ricardo and then used by Karl Marx. This theory calls Capital "stored up labor". Therefore, my savings are labor that I provided my employer at an earlier date.

Unlike Land, Money is infinite when not artificially restricted, which it often is. Money is man-made out of nothing and at tiny real cost.

The nominal value of money may be unrestricted, however, the market will most definitely determine the real value of money.

This credit creation confers enormous economic power and influence on those usually private institutions who have secured for themselves monopoly rights in this money issue.

A society which does not have financial institutions would be in even worse shape. In this case, those who have money would very powerful and could lend money at very high rates. This is the situation in many rural regions or India and Pakistan where money lenders (and yes, there are Muslim moneylenders) often charge as much as 120% interest PER DAY!

That private banks create money out of nothing is a fact too little known amongst the public. Our national debt stands at over 200 billion pounds, and that of other industrialised countries is of similar magnitude. Have you ever asked yourself who is that fabulous lender who always seems to have all the money which the government does not have? Whom does the nation owe the national debt?

Public debt is "owned" by various government agencies (intergovernmental debt), pension and mutual funds, and private citizens.

The truth is that when banks create money (as cheque-money or blips on computer screens) they lend what they have not got to reap where they did not sow. Their loans are not backed by any real wealth on their behalf. Nor do they lend out depositors' money (or when did the bank last tell you that you can't take out money from your account, because it has been lent to someone else?). When you give your house or business as guarantee for their money, this money is not backed by gold, silver or tangible wealth.

Banks are intermediaries. There are people in society who have accumulated wealth and there are also people who have ideas and ambition, but no funds. The banks link these people together for the mutual benefit of each.

Another issue is the question of "tangible"wealth. Money, as well as gold and silver, are valuable because we attach value to them. They have no inherent worth. In fact, I remember when gold was around $900 an once and silver was around $55 and once - both are worth a fraction of that today.

It is an empty promise except for the fact that the govenment, with the central bank as lender of the last resort, is ready to bail out the banks should a run on their money occur. Bank-created credit is based on the nation's capacity to produce and consume in the sense that whilst it is not issued nor backed by the government, the government - being the largest debtor - guarantees a certain return in debt service payments from its revenue. An increasing part of local and national government taxation today is raised for the purpose of servicing the interest payments on local and national govemment debt. So whether you personaily borrow or not, you pay the interest on that fictitious rnoney. Likewise, when you take a bank loan, you pay at least twice: you give a guarantee of real wealth in case of default, and you pay a penalty (as interest) for accepting money as a loan which costs the lender nothing and did not exist until it was created as a loan to you. Heads you lose, tails you lose again...

I disagree. The banking system in particular and market capitalism in general has improved the lives of many people throughout history and has lifted many out of poverty. I am glad that the bank loaned me money to buy a house. I could never accumulate enough money to buy a house without a loan, especially when a large portion of my income would go to a landlord in the form of rent - which I would have to pay for my entire lifetime under your system!

As should be evident by now, to base an economy on interest is a pretty stupid way of servicing a nation's need to produce, consume and trade. It results in the evils of inflation, unemployment, decline of services, trading war, and finally, shooting-wars. Using interest rates as a means to control the problems of a nation's economy is futile, as these problems were created by interest in the first place. Only when a government creates its own money supply free of charge to the nation to facilitate production, consumption and trade, instead of authorising private banks to create the nation's money and then holding the nation at ransom by breaking its back under the ensuing interest debt, only when we get back to a system where the usurer is not being rewarded for taking advantage of others' difficulties, will we achieve real prosperity.

Once again, history indicates that banking is far from "stupid" but, along with the free market, is the most effective means of improving a nation's economy and the lives of its citizens.

Islam, often laughed at for sticking to its principles and not "moving with the times", has never given in to the demands of the money-lenders to change its tough stance on interest. Naturally, Islam has increasingly been attacked by the financial interests behind today's media and politics. Looking at the evidence with an open mind, however, it should not take you long to realise that Islam makes sense, and interest doesn't.

I find it interesting that "Islamic Banking" does not charge interest, however, they do charge a "User fee" for borrowing. What is the difference?

Andrew Vargo

Responses to Islamic Awareness
Answering Islam Home Page