National Traveller MABS
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National Traveller MABS |
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Arguments
against Interest from an historical non-Islamic Perspective
The
arguments against interest are universal in their bearings and are
applicable to all countries, societies and civilisations, and to all times,
(Qureshi:1991). This is evident
from an historical point of view when one looks at not only civilisations
that held strong beliefs against interest, but also prominent economists of
the past. The ancient Greeks forbade lending money at interest. Aristotle compared money to a barren hen which laid no eggs. His doctrine preached that a piece of money could not beget another piece. According to Aristotle, the object of money was to facilitate exchange and to satisfy human wants. Money he felt, could not be used as a source of accumulation, (Qureshi: 1991, Per Almgren: 1987). Interest was also forbidden in the early Roman empire, and was only gradually introduced with the expansion of the empire and the rise of the trading class. However severe restrictions were imposed on the rates of interest and the Romans were the first to introduce laws for the protection of borrowers, (Qureshi: 1991). The
Christian Bible warns, “If you lend money to any of My people who are poor
among you, you shall not be like a moneylender to him; you shall not charge
interest”, (Book of Exodus: 22.25). Clearly
Christians placed their initial objection to interest on such teachings.
However the end of the thirteenth century saw the decline in power of
the Church and the growth of trade which
increased the pro-interest lobby.
Nevertheless it was not until the 1830’s that the Catholic Church
ceased to condemn the charging of interest rates, (Douthwaite:1996,
Qureshi:1991). The Church’s opposition to the imposition of interest is
often viewed as mere religious dogma. However J.M. Keynes
argued in “The General Theory of Employment, Interest and Money” (1957 )
that such a teaching was based on not just moral but also economic grounds. I was brought up to believe the attitude of the medieval Church to the rate of interest was inherently absurd..… (but) now it seems clear that the disquisition’s of the schoolmen were directed towards the elucidation of a formula which could allow the schedule of the marginal efficiency of capital to be high, while using rule and custom and moral law to keep down the rate of interest. (Keynes as quoted in Qureshi:1991:7). Keynes
argued that an increase in the rate of interest simply served to reduce
borrowing and spending, causing
a stalemate, which would retard investment and ultimately reduce income and
eventually savings. Keynes
believed that one of the main causes of the world’s poverty of resources
was due to the high premium attached to money.
This premium as detailed in Chapter 1, causes capitalist societies to
treat money as a store of wealth and factor of production thereby
encouraging the hoarding of money, which further increases its value. In
Britain The Radcliff Committee of 1959, reported in their findings that
contrary to popular belief, most economists and specialists were of the view
that an increase in interest rates did not increase individual savings,
(Siddiqi:1985). This supported
Keynes’s belief that the
desire to accumulate interest was very minor in peoples motives for saving.
Rather, savings are affected by certain intrinsic factors such as
emergencies, saving for the future, for old age, for education, for a sense
of power and independence or for one’s heirs (Siddiqi:1988, Quershi:1991).
Thus the desire to save would be as prominent in an interest free
economy. The question therefore
arises as to whether interest provides for economic efficiency? Milton
Friedman, an eminent American economist, when asked in 1982, what accounted
for the erratic behaviour of the U.S economy, replied by saying, “The
answer that leaps to mind is the corresponding erratic behaviour of interest
rates”, (Chapra:1986:117). Thus
economists and religious leaders through the ages have identified how
interest stifles economic advancement and creates disequilibrium in society.
Does the Islamic argument prohibiting Interest or riba differ from
this? Let me now reflect on this question by looking at the ideological
argument put forth by Islam prohibiting interest or riba.
The
Islamic Ideological / Religious argument for the Prohibition of Interest
Although Islam is a religion it preaches not just on a spiritual way of life for its people but also on a secular one. It develops its ideological beliefs into a vision of how society should be organised. This is based on the Holy Qur’an, (The word of God), The Hadith, (The word of Mohammed), and the manner in which the first four Caliphs, (Muslim leaders) ruled the first Islamic society in the seventh century, (Masood Khan:1985). Islamic arguments against interest or riba are based on the concept of Tawhid, that is “that which exemplifies the unity of God and mans total submission to Him”, (Mannan:1990:7). Thus wealth does not actually belong to people, but rather people are simply entrusted with it to realise the objectives of God for socio-economic justice, (Chapra:1986).
Islam essentially prohibits Riba or the setting in advance of a fixed
positive return on a loan as a reward for lending.
Nevertheless lending and borrowing per se are not prohibited, and
neither are returns on such lending. However
such a return, according to Islamic law, should not be fixed.
Rather it must be determined by the return the borrower receives from
the loan. Islam is against the
fixed return on investments and fixed payment on loans irrespective of the
profit margin of the borrower. This
is what Islam understands to be interest or riba.
Islamic economists see an interest free system as not only viable,
but also far superior to the traditionally based system, (Masood Khan:1989,
Siddiqi:1988).
Islam believes that charging interest promotes inequality, injustice,
oppression and exploitation by the demand of the lender to a reward, without
participating in risk and enterprise. Islamic
teaching requires equal distribution of income and wealth and stipulates
values of living that are in harmony with its goals, (Chapra:1986).
Thus Islam builds on the moral obligation of one to one’s brother
or sister. The consequence of a
rejection of this obligation is clearly spelt out in the Qur’an as quoted
by Masood Khan, (1985:23). Those who swallow Riba can’t rise up and save as he ariseth whom the devil has prostrated by touch. (II:
275) O, you who believe , keep your duty with Allah and relinquish what remains of Riba, if you are believers. (II:
278) The
Prophet Mohammed felt the charging of interest was so wrong that he equated
the taking of riba to committing adultery thirty six times or being guilty
of incest with ones own mother, (Chapra:1986:56).
Instead the Prophet preached exchanging “equal for equal, and hand
to hand; if the commodities differ, then you may sell as you wish, provided
that the exchange is hand-to-hand”, (as quoted in Chapra:1986:239).Thus
material prosperity within the framework of Islamic values can be obtained
only if it does not defraud other persons, but instead builds a society
based on a moral foundation, fostering socio-economic interaction based on
justice and co-operation. The
prohibition of riba in Islam is firmly rooted in the belief that economics
is tied firmly to moral values, social equity and justice.
Islam defends its position with an economic argument.
However before we look at this let us reflect some more on the
argument for equity and social fairness put forth by Islam in its
prohibition of riba. The
Islamic argument based on Social equity, against
Interest
Islamic
jurists have given several justifications for the prohibition of interest or
riba. Such prohibitions are
surrounded by the belief that human life and the
welfare of humankind remains as important in development as per
capita income. From an Islamic point of view, the quality, content,
composition and actual distribution of GNP
is therefore more indicative than the total size of output, (Chapra:1986,
Mannan:1990, Masood Khan:1988). Mannan
relates such a focus on the whole person; spiritual, material, welfare, and
happiness, to the teachings of Manfred Max-Neef, a Chilean economists,
(1990). Max-Neef classifies the hierarchy of human needs according to
physiological needs (food, clothes, shelter), social needs (meaningful
relationships and self esteem), and moral and spiritual needs (justice,
truth and religious perfection). Mannan
develops Max-Neef’s theories into a religious framework, believing such
needs can be satisfied through faith in the ideals of Allah’s teachings.
But how can such ideas be expanded to include not simply the
individual but society as a whole? Islam
teaches social equity through the promotion of a socio-economic system that
satisfies the needs of all. This
makes essential the equal distribution of income and wealth and the
promotion of the value of living in harmony.
The very act of lending money in order to charge riba, reflects the
fact that the lender only cares about the return on the lending,
irrespective of the circumstances of the borrower, (Masood Khan:1985,
Chapra:1986, Qureshi:1991). Therefore a situation arises where the interests
of individuals involved in such a contract become diametrically opposed.
Society becomes divided into borrowers and lenders, debtors and
creditors, where the loss of one becomes the gain of the other. According
to Qureshi, “debt cuts at the very root of ones honour and respect in
society” (1991:47). If
interest is permitted, he tells us, people borrow to satisfy not just need
but greed. Mutual sympathy and
human goodliness are often then eroded for self-interest, as difficulty in
repayments or bad debts cause what has now become socially accepted
hardships, allowing poverty to become an accepted
norm in society, (Qureshi: 1991). In
Islam the idea of taking another persons wealth without consideration of the
returns of the borrower is tantamount to exploitation.
Islam rejects such one way traffic where the lenders or creditors are
always assured of their return.
Interest rates hurt whether they are high or low.
They penalise the debtor thus acting as a deterrent to investment,
productivity and employment, (Chapra:1986).
Low interest rates penalise the small saver, promoting borrowing and
therefore inflationary pressures, (Chapra:1986).
High interest rates undermine the debtor.
Chapra talks about interest rates favouring the rich; the more credit
worthy people are, the less interest they pay.
As I discussed in Chapter 1, credit worthiness is based on previous
credit rating, the more credit, the better.
It is inevitable that big businesses tend to get a lower rate because
of a higher credit rating. Therefore
small businesses or individuals are at an immediate disadvantage.
Consequently in capitalist systems big businesses have become bigger, beyond
the economies of scale, thus contributing to monopoly power and not
necessarily efficiency. Interest
rates, as I considered in Chapter 1, by and large cause speculation which in
itself leads to instability and uncertainty for not just individuals but
society as a whole (Mannan:1990). Thus
interest or riba, according to Islamic economists contributes to
inefficiency, greed, inflation, unemployment and general social inequality.
In Islam, equity considerations are seen to be the motivation behind
economic development, where “effective need” and not “effective
greed” determine basic productivity, distribution and consumption
(Mannan:1990:14). Such an
economy is based on the idea of “Grassroot economics on a human scale”,
(Max-Neef:1992), where altruistic behaviour rather than individual
acquisitiveness is the driving force, and the development of not just the
whole person, (psychological, spiritual and economic) but the whole society
is essential for success in economic development. But how does such an
Islamic economy work and why does Islam
believe it to be more efficient than the interest bearing economy of
capitalism? The
Economic argument Islamic economists use against Interest
Economic
development initiated under an Islamic framework focuses not just on profit,
but also on spiritual and social satisfaction.
It therefore aims to bring about an improvement in the well-being of
people in their totality. However
as development is usually measured in GNP,
it falls on the Islamic economists to prove, using an economic argument,
that Islamic theory on the prohibition of interest really does have a place
in contemporary society. Islamic
economists such as Chapra (1986), Siddiqi (1988), Mannan (1990), Masood Khan
(1985) and Qureshi (1991), recognise the arguments of classical economists
but counteract it by detailing clearly the relationship between interest
rates, instability and unemployment. The classical school of economics
stressed the importance of savings for the accumulation of capital.
They argued that it was only by setting high interest rates that
people would save thus making more capital available for investment, thereby
promoting growth. Based on this
thesis they argued that the Islamic system prohibiting interest was not
workable in a modern community as people would not save, (Qureshi:1991).
However over the last half a century since such claims were made,
various economists, including Keynes as seen above, have argued against the
influence of interest rates on savings. The fallacy of it was notable during
World War II
when a 1% interest rate in the USA
recorded the highest savings to date, (Keynes:1957, Qureshi:1991). However
while the argument as to whether savings are or are not affected by interest
rates is ongoing, one thing has been proven: interest rates damage the
economy whether they are high or low, (Keynes:1957). They act as a deterrent to borrowers from investing.
This leads to inefficient productivity and unemployment,
(Qureshi:1991, Mannan:1990; Masood Khan:1985).
Although Keynes argues that interest rates do not effect savings,
according to Chapra, reducing interest rates lowers the gross savings ratio,
lowers quality of investments and creates capital shortages, which
transforms itself ultimately into a growth in unemployment through a lack of
investment, (1986). The result
of changes in interest rates are evident in the economies of the
industrialised North which have fluctuated radically from interest rate
changes, resulting in inflation, unemployment and price increases.
Reflecting on such changes it becomes clear that the key issue
surrounding interest rates is that of instability and insecurity on the part
of the entrepreneur or the borrower. Such
insecurity leads to speculation and further instability, which breeds
uncertainty and has adverse effects on overall development, productivity and
efficiency in the economy as entrepreneurs reduce investments,
(Chapra:1986). Therefore are
such interest based economies necessarily better for society, or are they,
in the words of Qureshi simply acting “as a hindrance in the better
development of the world”? (1991:35). One
of the main arguments cited by Islamic economists against interest is the
fact that it guarantees a fixed return to the lender with no risk involved.
Capitalist economists see money as not just a means of exchange but
also as a factor of production. Money
has therefore become a commodity and the hoarding of it acceptable.
Capitalist argue that if the borrower of the money is able to earn an
income then why not the lender also, but correspondingly it could be said
that if the borrower makes a loss, then should the lender too not incur it?
(Qureshi:1991). The fact that creditors invest both their time and money on
lending means they are not contributing efficiently to productivity.
They are in essence a partner without any personal labour or risk and
yet are guaranteed a fixed return. As
such a return is fixed, concern with efficiency and viability of the
enterprise is limited, and investments are often made in malproductive
ventures. It is the security of
a fixed return, and the consequential investment without thought to the
viability of a project that particularly concerns Islam, (Mannan:1990,
Chapra:1986, Douthwaite:1996). Islam
argues with particular force that by charging a fixed interest rate, the
security of a higher return is given more precedence over the return on more
socially aware or productive investments.
Money today has become a commodity.
Creditors, banks and speculators use it to obtain the highest rate of
return for themselves. Thus if
given a choice of whether to invest in an irrigation project at 2% return,
which would lend to growth within a community or, lend to a businessman who
wishes to build a mansion at 4% return, the creditor will choose the latter.
Thus investment is determined by the rate of return on money and not
the productivity. Any
method of earning a living needs to be sustainable. As interest bearing loans convert money from a means of
exchange into a factor of production, it stands to reason that it is in the
interest of the “producers” of such money, that is creditors, to
maintain the debt for a long as is possible.
The easiest people to do this with are the less advantaged.
By insisting on debt repayment without any considerations to other
factors in peoples lives, it is
inevitable that businesses which may have succeeded under lesser hardships
will ultimately fail. This
leads to a surplus of labour, which in essence is an indication of the
misappropriation of resources in the economy and the malproductivity of
society. As I mentioned in
Chapter 1, the constant grip of The World Bank on Africa is an obvious
example of this. The pivotal
cycle of indebtedness of these nations, acts as a source of income for the
richer nations, the lenders of the world.
No account is taken of the overall effects such debt has on the
productivity of individuals and countries.
The sole aim is repayment or a
return on the investment of money, and not on productivity and the well
being of the people, (Onimode:1989, El-Tom:1994). Islamic
Alternatives
Islam sees the use of
money as a store of wealth and means of production as wrong.
It sees interest rates as a cause of instability and inequality in
society, where the creditor is liable to choose an investment of higher
return rather than higher productivity and optimum satisfaction to society,
and where they hold a vested interest in maintaining the balance of power in
the relationship through the maintenance of debt.
Islam argues that money should be first and foremost a medium of
exchange, where the creditor and debtor, or banker and entrepreneur, become
partners, sharing the risk of profit or loss.
According to Islamic economists, in order for a community, country
and indeed any economy to develop, the financial sector must be seen to
cooperate wholeheartedly on an equal basis with industry, (Mannan:1990,
Qureshi:1991) Therefore
Islamic economists propose an alternative to the present system in the form
of business partnerships based on the socio-economic beliefs laid out in the
Koran and Hadith. Such partnerships are based on equity, are economically
viable and are, according to the teachings of the Prophet Mohammed,
ideologically correct. As such
the standing of Islamic banks in relation to customers is that of partner,
investor and trader. Islamic
banks therefore use various techniques of investment based on profit and
loss sharing and built on the grounds of “stability, allocative
efficiency, growth and distributive justice”, (Mannan:1990:59). Basically
there are three types of profit-sharing contracts presented by Islamic
jurisprudence for the replacement of interest or riba orientated
transactions. They are Murabahah,
Mudarabah, and Musharaka, all
three of which are based on the belief of profit-sharing, that is the
employment of a variable rather than a fixed rate of return on investment. The
first type of profit-sharing contract, Murabahah,
is based on the principle of “cost plus” (Mannan:1990:52). The bank or
financier purchases a certain commodity set to the specifications laid out
by its client, and sells it to them at an agreed mark up price.
Payment is undertaken in installments over a period of time and does
not compound, (Chapra:1986, Mannan:1990). Both
Mudarabah and Musharakah are built on a foundation of partnership rather than on a
relationship of lender and borrower. Thus
a fixed rate of return on investment is replaced by a variable one dependent
on profit. The main difference
between the two is that Mudarabah brings together a partnership whereby one
person (or group of people) contributes capital, while the other person (or
group of people) contributes labour. Musharakah is a partnership of people
(or institutions) where all contribute capital or financial resources.
In both, profits may be shared in any prior equitably agreed
proportion. However it is advised that profits should be shared in
proportion to the capital invested or risks taken, as is the case when
losses occur, (Mannan:1990, Chapra:1986). Mudarabah,
can be implemented for either long or short term projects.
An example of a short-term project could be an investment where
profits or losses need only be shared out once.
Such is the case when a builder enters a contract with a financier to
build and sell a house. Likewise
in the case of a long-term project, a builder may choose to continue
building and selling houses and the financier may agree to continue this
partnership, sharing profits in a prearranged, equitable fashion,
(Chapra:1986, Mannan:1990). Musharakah
may also be implemented in the short or long-term. For example a business
person may enter an agreement with a bank (or financier) for a specific
period of time and agree to pay profits in proportion to capital invested,
while at the same time agree that in time, as the partnership yields
profits, the business person may buy the bank (or financier) out of the
partnership, thus reducing the latter’s share of the profit.
For example, if the bank (or financier) contributes £10,000 to a
venture worth £40,000, they may on agreement gain one quarter of the
profit, that is, their percentage of capital invested.
Should however, the business person return £5,000 of the banks (or
financiers) investment to them, the latter’s share of the profit will fall
to one eighth. This share can
continue to fall until the bank has received its principle back in full.
Alternatively in Musharakah, the agreed partnership may be viewed
long-term, with a group of financiers sharing both profits and losses in
proportion to capital invested. Among
these financiers some may also be contributing labour, as is the case of an
entrepreneur entering into an agreement with a bank. This is where the distinction between Mudarabah, and
Musharakah becomes hard to define. Thus
the basic principles of Mudarabah and Musharakah are the same. This has led Chapra, to comment that it is possible that in
today’s world, Islamic financing may be a combination of both, where all
parties contribute to the capital, but not to the management and running of
the investment, (1986). It is
upon this less defined set of criteria, that I propose to base my argument
for an interest free system of credit and savings. The
above set of criteria for Islamic financing is clear to see from the
writings of Mohammed Uzair, who
explains that interest free banking involves three parties, a)The actual user of capital or the entrepreneur. b)The bank which servers as a partial user of these funds and as an intermediary.
c)The suppliers of funds, that
is the depositors, (Masood Khan:1985). Therefore
two contracts are required in order to implement such a system. From these
we can see how such a system may incorporate elements of both Mudarabah and
Musharakah. 1)
The bank receives deposits from the public on the basis of, sharing profit
and losses with depositors of certain mutually agreed terms.
This is in essence a form of dividend. 2) Banks then use these deposits to advance loans to entrepreneurs on the same principle of profit-sharing. Such profit-sharing may take the form of fully financing a project (Mudarabah) or part financing it (Musharakah). The
Interest free bank will then proceed to share profit and losses with
investors and with depositors. All
shares will have been set by prior mutual agreement.
Borrowers have limited liability, that is to say, should a loss occur
in investment, the individual’s total loss will not exceed their total
deposits or capital contributions, (Chapra:1986, Masood Khan:1985,
Siddiqi:1988). By implementing a system of Musharakah or Mudarabah, risks
are distributed more widely, and financing of equity rather than debt
occurs, with all parties holding a vested interest in economic success,
(Masood Khan:1985, Chapra:1986, Siddiqi:1988, Quershi: 1991, Douthwaite:
1996). The
replacement of a fixed with a variable rate of return on investment,
increases efficiency as all parties hold a personal stake in the venture’s
success, thus encouraging creditors to investigate beforehand the viability
of the project. By turning
savers, the banks suppliers of funds, into entrepreneurs, the risk of
business is spread more equitably with partners sharing both profits and
losses and all parties holding a vested interest in the well being of their
partners. The risk of
instability that accompanies interest bearing loans is further eliminated
thereby encouraging more investment and growth, (Chapra:1986, Siddiqi:1988,
Qureshi:1991). Reflecting
on some arguments against an interest free banking system
Four immediate arguments against an interest free bank may be raised by critiques studying its viability; 1) Attracting savings for investment in production, 2) The cost of investigating the profitability of a production loan, 3) Managing the repayment of credit and
4) Consumption loans. The
problem of attracting savings for investment in production is argued to be
one of the main failings of an interest free system of banking.
Many mainstream economists argue that a profit-sharing economy would
seriously weaken people’s desire to save, thus causing a shortage of
capital for investment. Islamic
economists have recognised the necessity to address this issue. Chapra,
recognises that savers may initially be discouraged by the variable rate of
return on savings, (1986). However,
both he and Masood Khan, feel this can be overcome once savers realise they
are partners with not just the bank but also with borrowers, and that their
profit-share and ability to borrow depends on the return of investments of
the bank, (1985). Chapra
believes education to be a key factor in developing a sense of partnership
within this system. He also
proposes a deposit insurance to guarantee the safety of demand from any
losses that banks may suffer from unsuccessful ventures.
Siddiqi discusses the level of ability the bank has of controlling
savings, (1988). He details how
in times of high demand for capital, entrepreneurs will offer the
profit-sharing bank an increase
in their profit-share on investments. The
bank in turn can then increase the dividends paid to account holders,
effectively attracting them to deposit more capital. Likewise if there is a fall in demand for capital, banks can
reduce the profit-share they expect from business partnerships.
In doing so they reduce the profit they share out
to shareholders, which in turn will reduce savings.
Thus both the supply of capital and savings can be controlled by the
profit-share. The
cost involved in both time and money of investigating the profitability of
interest free production loans is a criticism levied against the supporters
of an interest free banking system. Careful investigation of possible
investment ventures is an essential element of the Mudarabah and Musharakah
banking system which survives on profitability. Chapra, argues that an
interest free system would in the long- term become more efficient than an
interest based one, as prospective profit-sharing investors undertake much
more careful investigation of a potential investment than interest
orientated lenders who are assured of a return, (1986). Islamic economists
are adamant that if credit is made available on the basis of profitability,
then not only will banks be more careful and rational in evaluating
projects, but also small and large businesses would have equal access, with
the rate of profitability being the determining factor to securing funds.
Such investigation would also help build
a sense of security and social obligation among members,
(Qureshi:1991, Douthwaite:1996, Chapra:1986). However as such concepts are
new to many creditors and as their results are not so visible in output in
the short term, it may be simply a matter of creditors familiarising
themselves with the idea and the knowledge that long term advantages are
more beneficial to all. A
fear also exists that the absence of interest rates may encourage people to
renege on their debt. However by detailing the consequences of such an act
before the loan is secured (for example the confiscation of consumer goods,
or the refusal of future loans), and by encouraging a sense of community and
social awareness, such defaulting can be minimised, (Qureshi:1991). In the
case of genuine hardship where debtors fall into trouble, loans can be
renegotiated. This is contrary to many interest bearing banks who do not
have a social obligation to the borrower. In such cases, the borrower very
often becomes so indebted with accruals of interest, that they renege on the
debt altogether Thus, what may
have become a bad debt in an interest based economy, simply becomes a second
chance under Mudarabah. Thus zero interest rates encourage greater stability
as in essence all investors may renegotiate in time of hardship and what may
have become human and material waste left over from bankruptcy is avoided,
(Douthwaite:1996, Qureshi:1991). Douthwaite reports that even The
Economist Supplement of August 1994, identifies the qualities of
Islam’s Theoretical Framework for a zero interest economy, and quotes
as a “terrible pity” that fact that the “West’s banks did not
have that incentive in so many of their lending decisions in the 1970’s
and 1980’s”, (1996:159). Had this occurred, the article argues, many
investors may not have gone bankrupt. The
issue of consumption loans is a challenging one for all proponents of
interest free banking. Consumption loans as opposed to production loans are
used for the cost of everyday living, and do not directly generate further
income. Masood Khan tells us how S.M. Ahmed and Henry Simon believe such
loans should be provided free of charge, as do many Islamic economists who
would tend to see such loans as "Qard Hasan", or welfare loans,
(1985). Uzair however does not
see this as viable and instead suggests a service charge, although Masood
Khan disagrees with this solution likening the fixed rate of a service
charge, to interest or riba. To overcome this problem Qureshi proposes that
the cost of consumption loans be covered by the profits made from production
loans while A.M Ahmed makes a suggestion of a tax on each consumption loan
to cover costs, (1991). Mannan proposes the setting up of “Peoples Credit
Cooperatives” where members purchase shares and the money received is then
loaned for consumption, (1990). However, as Khan has pointed out, the
problem of attracting savers then occurs. Will people be attracted to such a
cooperative in the hope that they may one day need a consumption loan? Arising
from the absence of interest on consumption loans, is the problem of excess
demand over supply. This is an area I looked at with regard to production
loans above and was overcome by changing the profit-share to attract or
detract savings. However as this can not be implemented with consumption
loans, suffice it to say that in a cooperative which loans particularly for
non-profit making purposes, and therefore receives no profit, the issue of
excess demand may have to be dealt with on a first come, first serve basis,
as is done in the instance of some revolving fund schemes. Concluding
remarks
The
abolition of interest and its replacement by a system of profit-sharing
would reduce one of the major sources of uncertainty and thus instability in
the economic world today. It
would also help create a more just system of competition, thereby assisting
investment and growth. By
turning savers into entrepreneurs, participation is liable to increase and
with it the self-worth of people. As participation takes place, the emphasis
of “survival of the fittest”, evident in the interest based capitalist
system, will diminish as people recognise the benefit of working together in
order to maximise profits for all. The Islamic system allows entrepreneurs
with “talent, drive and innovation” who have not yet proven themselves,
to do so, (Douthwaite: 1996:158). It allows for a much fairer society, where
resources are not only utilised efficiently but are also equitably
distributed. In
the above chapter I explored arguments against the use of interest. Such
arguments are fundamentally based on Islamic literature. However while Islam
may prohibit interest for religious reasons, Islamic and non-Islamic
economists have developed the theory further by arguing on its necessity
from a socio-cultural stance and its viability, institutionally, financially
and economically. Such economists develop the idea of the possibility of
interest free credit schemes within non-Islamic communities world-wide. The
main elements of the discussion lie in the granting of loans for production
and consumption purposes. While the idea of profit-sharing carries great
weight in the consideration surrounding production loans, with regard to
consumption loans the argument is more complex. Some promoters argue for a
tax to cover consumption loan costs, while others feel they should be
administered on a more social footing and carry no extra charges. However
both Islamic and non-Islamic promoters of this form of credit all stress the
necessity for a strong sense of unity and honesty to be present within
communities to enable the enhancement of all. This leads me on to Chapter 4,
where I present 2 case studies of interest free credit schemes.
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