Most of the material in this article has been taken from the lecture on Riba (Interest) delivered by Mufti Taqi Usmani in England.
After the world has experienced the two conflicting economic ideologies (i.e. Capitalism and Socialism) without any success (as they have failed to provide a just and equitable economic system for the whole humankind), it is time to come back to the economic system provided by Allah Almighty in his last and final revelation, the Holy Quran.
The Prophet Muhammad (peace be upon him) has told us that earning halal is obligatory upon us after five time prayers. So, a lot of importance has been attached to the economic activity by the Holy Prophet (peace be upon him). But at the same time, Allah has told us in the Holy Quran that economic pursuit should not be the ultimate goal of a Muslim. Economic activities are the means and not the end in itself. The main aim of a person is to be successful in the life hereafter. Nevertheless economic activities are a means to achieve this objective. Therefore, Islam has laid down some rules regarding our economics and Muslims are required to abide by them.
One of those principles is related to Interest (or Riba) and Allah Says “But Allah has permitted trade and has forbidden interest” [Al Quran, 2:275]. Trading and interest are different and not the same as some try their level best to prove.
This prohibition has become so evident in this day and age that it has never been the case in the recorded history. The horrors brought by interest based economy were unimaginable some centuries ago.
The banks make most of their money through interest. All the people deposit their money into the banks, and thus the banks have the wealth of the entire nation (plus they create money by fractional reserve banking). Now who benefits from this wealth in the banks? If you analyse, you will find that if a poor person goes to a bank to borrow money (for a business venture even if his idea is feasible) he will be kicked out of the bank. The reason being, unless he has collateral he cannot be given any money. The loan is only offered to the rich people (basically meaning that banks give business loans to those who can show that they do not need it). These rich people who obtain loans from the banks are of very small percentage of the total population. According to the statistics of 1997 from the State Bank of Pakistan, it was only 0.06% of all the depositors who borrowed this money from the banks. This means that the wealth of the whole nation is being utilised by a handful of people.
These entrepreneurs invest this wealth into profitable projects. Sometimes they earn huge profits out of their investments, and this occasionally reaches 100%. Taking an extreme example, if an industrialist has earned 100% profit, he will pass only a small amount of interest to the bank, and the bank after deducting its own share will pass the rest to the depositors. The layman is very happy that he deposited e.g. Rs.1000 and got back Rs.1050 in one year. But the poor person does not know that his wealth was utilised by the capitalist and he has earned enormous profits out of it (i.e. Rs.1000 in the above example). The Rs.50 which the depositor has earned is again taken back by the industrialist community, because whenever a borrower takes a loan from the bank, whatever interest he pays is included in the cost of his product. Thus, the prices of commodities that are sold in the market include the rate of interest that has to be paid to the banks. So when this poor person (who has earned Rs.50 on his Rs.1000) goes to the market and buys stuff, he pays this Rs.50 back to the industrialist community who used his money to earn Rs.1000 of profit. In reality, the depositors earn nothing. The whole profit has gone into the pocket of the entrepreneur.
On the other hand, if there is a loss, and if you take an extreme example, banks sometimes go bankrupt. So, then the money invested by the businessman was only 10% or 20%. It will be the depositors who will lose their entire wealth. In other words, if there is a profit, the whole earnings go to the capitalist, but if there is a loss, the depositors will have to bear the brunt of it.
There are other destructive aspects of Interest, and if anyone is interested, he or she can read the book “The Problem with Interest” by Tarek El Diwany (this book can be purchased from http://www.theproblemwithinterest.com/).
In addition, please read "The Web of Debt" By Ellen Hodgson Brown" (http://www.webofdebt.com/)
The interest based economic system was not so damaging in the past, but now its effects have engulfed the entire world. Some of the effects of the modern interest based economy are shown by the following statistics:
225 people own more wealth than the poorest 2.5 billion people (UNDP Human Development Report 1998).
24000 people die every single day because they are unable to obtain life sustaining food (UN World Food Programme, 2003).
Relieved of their annual debt repayments, the severely indebted countries could use the funds for investments that in Africa alone would save the lives of about 21 million children by 2000 and provide 90 million girls and women with access to basic education (UNDP Human Development Report 1997, p. 93).
According to the United Kingdom's Department for International Development in 2000, 1.2 billion people live in "abject poverty", meaning that they have no basic medical care, nutrition or housing. In the sub-Sahara, 48% of people go without health services, 48% of people are without safe water and 42% are illiterate, whilst in south-Asia the corresponding figures are 22%, 18% and 49.5%. Measured in 1987 US Dollars, GDP per capita in sub Sahara was $520 and in South Asia $521, whilst in the Industrialised Countries it was $12,764 (1995 figures compiled in (UNDP Human Development Report, 1998 ).
The income ratio of the one-fifth of the world's population in the wealthiest countries to the one-fifth in the poorest went from 30 to 1 in 1960 to 74 to 1 in 1995 (UN Human Development Report, 1999).
Now the meaning of the verse in the Quran has become crystal clear: Allah says “O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal – [thus] you do no wrong, nor are you wronged” [Al Quran, 2: 278-279].
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