Thoughts on Economics Vol. 24, No. 03 & 04

An Investigative Analysis on Trade Permissibility and Usury Prohibition by Islam

Fauzia Hamid*

Abstract: Both trade and usury practices are found to have been prevalent in human society since pre-historic period. While there is no controversy regarding legality of trade, legitimacy of usury practice has been all along at the centre of hot discussion. Almost all major religions of the world in some form or other prohibit usury. Moreover, whether money can be lent at interest for a guaranteed return is one of the oldest moral problems in the Western Civilization. The Holy Qur’an proclaims, ‘Allah (SWT) has permitted trade and forbidden usury.’(2:275). It also emphatically proclaims, ‘In this Holy Book, I have illustrated everything to men so that they realize.’(39:27). Definitely, then, in permitting trade and forbidding usury, there is intrinsic message for the mankind to realize. This paper, is, therefore, an attempt towards exploring the historical development pattern of these two practices, and tries to identify their socioeconomic consequences, to perceive the Qur’anic stand with respect to these two issues. Besides, exploring the theoretical advantages emerging from enhanced trading and general curses associated with the usury practice; the paper, on the basis of empirical evidence, attempts to show that higher trade involvement of countries is also associated with higher per capita GDP and higher HDI score. In the same breath, the study also attempts to prove that the recent worldwide financial crisis has its roots in the interest-based system now in operation in the name of free-market economy. The study, therefore, cannot help but emphasize on the issue of mankind to be reminded of the hadith that states: ‘The taker of usury and the giver of it and the writer of its papers and the witness to it, are equal in crime.’

1. IntroductionHistory of trading activities is assumed to be as old as the emergence of mankind on this earth. This is because, for their very sustenance, the ancient people also needed goods and services as it have been the requirement for the mankind throughout history down to modern times. They, therefore, naturally produced goods and services first, and, then, to facilitate consumption needed to exchange these among themselves. The concept of usury has a long historical life, throughout most of which it has

*Professor, Economics Discipline, Khulna University, Khulna.

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been understood to refer to the practice of charging financial interest in excess of the principal amount of a loan, although in some instances and more especially in more recent times, it has been interpreted as interest above the legal or socially acceptable rate. Accepting this broad definition for the moment, the practice of usury can be traced back approximately four thousand years1. In the pre-urban societies loans to farmers and interest were based on agricultural produce and were made in seed grains, animals and tools. Since, grain of seed could generate a plant; after the harvest, farmers could easily repay the grain with interest in grain. When animals were loaned interest was paid by sharing in any new animals born. Interest on tool loans was used to be paid in the produce which the tools had helped to create. That is, what was loaned had the power of generation, and interest was a sharing of the result.

2. BackgroundHistorically, religion played the key role in shaping both private and socioeconomic lives of the ancient people, as almost all spheres of their lives were under the purview of religious laws. Revealed religions of the time embedded rules and regulations suitably applicable to the needs of the people of the respective periods. In general, these religions propagated the message of freedom from oppression, kindness towards the weak, charity for the poor, honesty in action and thought, and above all, establishment of justice for the mankind. While there is no controversy regarding legality of trade, legitimacy of usury practice has been all along at the centre of hot discussion. Whether money can be lent at interest for a guaranteed return is one of the oldest moral problems in the Western Civilization. The Old Testament strictly forbade Jews from taking usury from their brothers (other Jews), and discouraged taking it from strangers. On the other hand, Hindu Law limited interest to the full amount of the loan. The Holy Qur’an totally forbids usury. Observing the bad effects, The Church condemned usury (1250-1261). It was noted that if usury were permitted rich people would prefer to put their money in a usurious loan rather than invest in agriculture. In that case, only the poor would do the farming, but they didn’t have the necessary equipments to do it. Hence, reduction in production may ultimately lead to famine. Moreover, usury helps concentrating money of the community into the hands of the few. By the early modern period the concept began to be secularized, but the issue

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of what usury is and when it occurs is still causing disputes in modern legal and theological systems2.In recent times, most nations continue to regulate usury, which is now, in the West, defined as contracting to charge interest on a loan without risk to the lender at an interest rate greater than that set by the law. However, moral arguments are still being made about whether or not contracting for any interest is permissible. As, the major religions of the world forbid usury, there will always be moral, as well as, social and economic reasons for arguing about the permissibility of lending at interest.

3. Main Objective of the Study Regarding trade and usury, one of the most cited ayah of Holy Qur’an goes as, ‘Allah (SWT) has permitted trade and forbidden usury.’(2:275). And, one of the significant proclamations of The Holy Qur’an is, ‘This day I have perfected your religion for you, completed my favour upon you, and have chosen for you Islam as your religion.’(5:3). It also proclaims, ‘In this Holy Book, I have illustrated everything to men so that they realize.’(39:27). Definitely, then, in permitting trade and forbidding usury, there is intrinsic message for the mankind to realize. Historically, both these two practices have been prevalent in human society. Hence, tracing out the pattern of historical development of these two practices is necessary to find out how these activities took deep root in human life. This paper is, therefore, an attempt towards exploring this development pattern, and tries to identify their socioeconomic consequences, to perceive the Qur’anic stand with respect to these two issues.

4. Historical Development of Trading Activity4.1 Pre-historic and Ancient Trade

Historically, the original form of trade was barter, that is, exchange of commodities against other goods and services. Later, one side of the barter transformed from commodity to commodity money to ordinary metals to precious metals to coins to paper money to present time non-physical money. Long-distance trade started with the emergence of communication. History of long-distance commerce dates back as early as 150,000 years ago3; and, archaeological evidence of the first trade is from China dated about 2700 BC4.

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4.2 Trade during Medieval Period From the beginning of Greek civilization until the fall of the Roman Empire in the 5th century, a financially lucrative trade brought valuable spice to Europe from the Far East, including India and China. The fall of the Roman Empire, and the succeeding ‘Dark Ages’ brought instability to Western Europe and a near collapse of the trade network in the western world. During the middle Ages, Central Asia was the economic center of the world. Vasco-da Gama pioneered the European Spice trade in 1498 when he reached Calicut5.4.3 Twentieth Century Development During the ‘Great Depression’ which ran from 1929 to the late 1930s; there was a great drop in trade along with other economic indicators. In 1944, forty-four countries signed the Breton Woods Agreement, with the intention to prevent national trade barriers and in 1947, twenty-three countries agreed to the General Agreement on Tariffs and Trade to promote free trade. 4.4 Current Trend: Doha RoundThe Doha round of World Trade Organization negotiations aims to lower barriers to trade around the world, with a focus on making trade fairer for developing countries. Talks have been hung over a divide between the rich developed countries, represented by the G20, and the major developing countries. Agricultural subsidies are the most significant issue upon which agreement has been hardest to negotiate. By contrast, there was much agreement on trade facilitation and capacity building. Starting from Doha Round, negotiations have subsequently continued in Cancun, Geneva, Paris, and Hong Kong. 5. Justifying Trade 5.1 Adam Smith Scottish economist, Adam Smith, developed the classical theory of absolute advantage6. He believed that different countries possessed absolute advantages in the production of certain goods; which implies the ability of a country to produce a good using fewer productive inputs than is possible anywhere else in the world. Hence, when trade starts, international division of labour occurs which, causes increase in total world output. 5.2 David RicardoDavid Ricardo expanded Adam Smith’s theory by showing that even a country did not have an absolute advantage in any good, it and all other countries

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would still benefit from international trade7. This would be the case if countries specialized in the production of those goods with which they had the greatest absolute advantage or the least absolute disadvantage. This is known as the law of comparative advantage.

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5.3 J. S. Mill J. S. Mill’s law of reciprocal demand sets the mechanism of determining the prices at which goods are traded between countries8. The international price is determined through the process of reciprocal demand. It settles down at that level where trade flows are balanced. 5.4 Gottfried Haberler It was left for Gottfried Haberler in 1936 to explain or base the theory of comparative advantage on the opportunity cost theory9. According to this theory, the nation with the lower opportunity cost in the production of a commodity has a comparative advantage in that commodity. This difference in relative prices between the two nations is a manifestation of their comparative advantage and provides the basis for mutually beneficial trade. 5.5 Heckscher-Ohlin The Heckscher - Ohlin model holds that the direction of international trade flows between two countries is determined by the endowments of productive factors in the two countries and the factor content of the goods involved10. In brief, a country will have comparative advantage in, and therefore will export that good whose production is relatively intensive in the factor with which that country is relatively well endowed. 6. Islamic View on Trade (Business) Stand of Islam regarding business and trade becomes clear from various ayahs of Holy Qur’an and the Sunnah. As said, O ye who believe! Do not squander one another’s wealth in vanities, but let there be amongst you traffic and trade by mutual good will.(4:29). Reported that, the Prophet Muhammad (SAW) was asked what type of earning was best, and he replied: ‘A man’s work with his hands and every (lawful) business transaction.’(Al-Tirmidhi, hadith 846). The Prophet Muhammad (SAW) also said: ‘It is better for any of you to carry a load of firewood on his own back than to beg from someone else.’ (Riyadh-Us-Saleheen, Chapter 59, hadith 540). And, ‘A truthful and trustworthy merchant is associated with the prophets.’(Al-Tirmidhi, hadith 50). Also reported: ‘There was a merchant who would lend to the people, and whenever his debtor was in difficult circumstances, he would say to his employees, ‘Forgive him so that Allah (SWT) may forgive us.’ So, Allah (SWT) forgave him.’ (Sahih Al-Bukhari, Volume 3, hadith 292).

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Imam Sadiq (AS) has been reported by Ali ibn Abdul Aziz as having asked: ‘What did Umar ibn Muslim do?’ I said: ‘He has become an ascetic, leaving aside trade.’ The Imam (AS) said: ‘Woe unto him! Does he not know that the prayer of one who leaves trade is not responded to?’ Then, the Imam said: ‘Some of the companions of the Holy Prophet (SAW), who had heard this verse: ‘… and whoever is careful of (his duty) to Allah (SWT), He will make for him an outlet and give him sustenance from whence he thinks not’, (65:2-3); closed the doors behind themselves, were engaged in worshipping Allah (SWT), saying: ‘This is sufficient for us.’ This news reached the Holy Prophet (SAW). So he sent for them, saying: ‘What made you to do so?’ They said: ‘O messenger of Allah (SAW)! Allah (SWT) gives us our sustenance. Therefore, we are engaged only in worshipping.’ The Holy Prophet (SAW) said: ‘Whoever does this, Allah (SWT) will not respond to his prayer. It is incumbent upon you to be engaged in a business.’ (Wasa’il al- Shiah, vol.12, p.15). The Holy Prophet (SAW) and Imam Sadiq (AS) have been reported as saying: ‘Not being dependent on others is a good example of divine piety.’ (ibid., p.16). Imam Sadiq (AS) has also said: ‘Cursed is one who is a burden to others.’ (Ibid., p.18). Jameel ibn Salih has reported Imam Sadiq (AS) as saying about the verse: ‘Our Lord! Grant us good in this word and good in the hereafter (2:201).’ The meaning of good is the pleasure of Allah (SWT) and paradise in the hereafter, abundant sustenance, and good temper in the world. Imam Sadiq (AS) has reported Imam Ali (AS) as saying: ‘Engage in trade, and Allah (SWT) will give you blessings, for I heard the Messenger of Allah (SAW) say: “Sustenance has ten parts, nine of which are in trade and one part is in other things (Wasa’il al-Shiah, vol. 12, p. 3-5).” It has been narrated from Asbaat that he came to the Imam and said: ‘He is a righteous man, but he has put trading aside.” The Imam said: “It is an act of Satan.’ The Imam repeated this three times and said: ‘Do you not know that the Messenger of Allah (SAW) bought a flock of sheep from Damascus and sold them with profit in a way that he paid his debt and divided the rest among the relatives? On this occasion, Allah (SWT) revealed the following verse: “Men whom neither merchandise nor selling diverts from remembrance of Allah (SWT) (24:37).”

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The Imam (AS) has also been reported as saying: “Leaving trade will diminish one’s wisdom (Wasa’il al-Shiah, vol. 12, p. 5.).’ Truly, one of the activities of human beings in the world is business and trade. If transactions are made justly, they are permissible, praiseworthy and even obligatory. One of the cases that trade is blamed for is to earn wealth through usury against which the Holy Qur’an has warned as: ‘…Allah (SWT) does not bless usury, and He causes charitable deeds to prosper (2:276).’

7. Usury: Historical Background7.1 Ancient Oriental System

In the Greek city states where the economy was not monetized and agricultural commodities were valued at market prices, charging usury on loans of coinage to farmers quickly led to severe social problems. Consequently, by about 600 BC, the class of free small farmers was disapperaing, with land becoming concentrated into the hands of a few. This happened because before the introduction of coined money the farmer borrowed commodities and repaid the loan in kind, but after the introduction of coined money he was needed to take a loan of money to purchase his necessary supplies at a time when money was cheap and commodities dear. In a year of good harvest when he attempted to repay the loan, commodities were cheap and money was dear. Unable to get out of debt, eventually bad weather or a poor harvest would bring them at the verge of extinction and may bind them into slavery11.

7.2 Fifteenth Century Interpretations As the demand for capital grew theologians became increasingly aware that lending at interest was not always theft. In the fifteenth century, along with others, John Eck argued that usury occurred only when the lender intended to oppress the borrower. Eck defended 5% as harmless and therefore legal rate of interest as long as the loan was for a beneficial business opportunity. Luther refused to accept the idea that intention was a proper test for usury. Luther refused even to accept the extrinsic titles, insisting that anyone who charged interest was a thief and murderer and should not be buried in consecrated ground12.

7.3 Sixteenth and Seventeenth Century DevelopmentsBy the second half of the sixteenth century Catholics and Protestant alike were increasingly tolerant to the idea that the legality of loans at interest was determined by the intentions of the parties involved. Theologians were often

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reluctant to admit much favour for usury, but secular law and commercial practice embraced the idea that loans at interest, made with good intentions, were legitimate. As social goodness became the proper test of imposition of interest rate, there emerged two distinct debates about usury. By the first third of the seventeenth-century the issue of usury as a sin had been relegated to the conscience of the lender. The state was increasingly concerned only with whether or not the rate of interest was damagingly high. As the Act against Usury passed by the English Parliament in 1624 demonstrates, the rate of interest was supposed to be important to national well-being and therefore, led to lowering the maximum rate of 10%, established in 1571, to 8%13.

7.4 Eighteenth and Nineteenth Century By the eighteenth century the moral issue of usury was no longer of interest to most Protestant thinkers. In practice lending at interest with collateral had become normal, as had deposit banking. Adam Smith, prominent economist of the time, defended usury as necessary in order to encourage productive investment and discourage consumption spending. A limit to interest rates makes money cheaper for productive ventures, while forcing up the cost of money to those borrowing simply to consume, since they would be getting their money outside the regulated money market. The expense of money borrowed for consumption actually keeps many people from borrowing at all14.

7.5 Recent TrendAs economies became more dynamic, with multidimensional growth possibilities, it became clear that charging interest on business loans couldn’t be condemned as greed and the idea of a lending institution charging interest for its services seemed to be overwhelmingly accepted. More specifically, justification for charging interest evolved historically in works promoting capitalism. Adam Smith justified usury in economic terms as, ‘The interest or the use of money is the compensation which the borrower pays to the lender, and for the profit which he has an opportunity of making by the use of the money. Part of that profit naturally belongs to the borrower who runs the risk and takes the trouble of employing it; and part to the lender, who affords him the opportunity of making this profit15.’ This is how interest is popularly viewed today. But Smith overlooked that the lender gets his profit even when the enterprise loses. Smith’s endorsement did not remove the stand against usury; and the debate continued. According to

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Bentham, usury is the taking of a greater interest than the law allows or the taking of greater interest than is usual. This observation is supposed to have led to the present misinterpretation of usury.

8. Religious Stand Regarding Usury8.1 Hinduism and Buddhism

Among the oldest known references to usury are to be found in ancient Indian religious manuscripts. The earliest such record derives from the Vedic texts of Ancient India (2,000-1,400 BC) in which the usurer is mentioned several times and interpreted as any lender at interest. More frequent and detailed references to interest payment are to be found in the later Sutra texts (700-100 BC), as well as the Buddhist Jatakas (600-400 BC). It is during this latter period that the first sentiments of contempt for usury are expressed. For example, Vasishtha, a well known Hindu law-maker of that time, made a special law which forbade the higher castes of Brahmanas (priests) and Kshatriyas (warriors) from being usurers or lenders at interest16. By the second century AD, however, usury had become a more relative term, as is implied in the Laws of Manu of that time: ‘Stipulated interest beyond the legal rate being against (the law), cannot be recovered: they call that a usurious way of lending.’ This dilution of the concept of usury seems to have continued through the remaining course of Indian history so that today, while it is still condemned in principle, usury refers only to interest charged above the prevailing socially accepted range and is no longer prohibited or controlled in any significant way17.

8.2 Judaism Criticism of usury in Judaism has its roots in several Biblical passages in which the taking of interest is either forbidden, discouraged or scorned. The Hebrew word for interest is neshekh, literally meaning ‘a bite’ and is believed to refer to the exaction of interest from the point of view of the debtor. In the Exodus and Leviticus texts, the word almost certainly applies only to lending to the poor and destitute; while in Deuteronomy, the prohibition is extended to include all money lending, excluding only business dealings with foreigners. In addition to these biblical roots are various talmudic extensions of the prohibitions of interest, known as avak ribbit, literally ‘the dust of interest’ which apply, for example, to certain types of sales, rent and work contracts. This is distinguished from rubbit kezuzah, interest proper in an amount or at a rate agreed upon between lender and borrower. The difference in law is that

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the latter, if it has been paid by the borrower to the lender, is recoverable from the lender, while the former, once paid, is not recoverable18.  

8.2.1 Old Testament19

Versions of Old Testament like Exodus, Leviticus, Deuteronomy, Nehemiah, Psalm, Ezekiel, contain many verses on the issue of usury. The clear message conveyed by these is prohibition of usury. Some of these verses are mentioned below.‘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 him interest (Exodus 22:25). If one of your brethren becomes poor, and falls into poverty among you, then you shall help him, like a stranger or a sojourner that he may live with you. Take no usury or interest from him; but fear your God, that your brother may live with you. You shall not lend him your money for usury, nor lend him your food at a profit (Leviticus 25:35-37). You shall not charge interest to your brother, interest on money or food or anything that is lent out at interest. To a foreigner you may charge interest, but to your brother you shall not charge interest, that the LORD your God may bless you in all to which you set your hand in the land which you are entering to possess (Deuteronomy 23:19-20).I also, with my brethren and my servants, am lending them money and grain. Please, let us stop this usury! Restore now to them, even this day, their lands, their vineyards, their olive groves, and their houses, also a hundredth of the money and the grain, the new wine and the oil, that you have charged them (Nehemiah 5:10-11). He who does not put out his money at usury, Nor does he take a bribe against the innocent. He who does these things shall never be moved (Psalm 15:5). One who increases his possessions by usury and extortion Gathers it for him who will pity the poor (Proverbs 28:8). Woe is me, my mother, That you have borne me, A man of strife and a man of contention to the whole ezaskiarth! I have neither lent for interest, Nor have men lent to me for interest. Every one of them curses me (Jeremiah 15:10). If he has not oppressed anyone, But has restored to the debtor his pledge; Has robbed no one by violence, But has given his bread to the hungry And covered the naked with clothing. If he has not exacted usury Nor taken any increase, But has withdrawn his hand from iniquity And executed true judgment between man and man. If he has walked in My statutes And kept My

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judgments faithfully-He is just; He shall surely live! Says the Lord GOD (Ezekiel 18:7-9). If he has exacted usury Or taken increase - Shall he then live? He shall not live! If he has done any of these abominations, He shall surely die; His blood shall be upon him (Ezekiel 18:13). Who has withdrawn his hand from the poor And not received usury or increase, But has executed My judgments And walked in My statutes -- He shall not die for the iniquity of his father; He shall surely live! (Ezekiel 18:17). In you they take bribes to shed blood; you take usury and increase; you have made profit from your neighbors by extortion, and have forgotten Me, says the Lord GOD (Ezekiel 22:12).

8.3 Christianity Despite its Judaic roots, the critique of usury was most seriously taken up as a cause by the institutions of the Christian Church where the debate prevailed with great intensity for well over a thousand years. The Old Testament decrees were resurrected and a New Testament reference to usury added to fuel the case. Building on the authority of these texts, the Roman Catholic Church had by the fourth century AD prohibited the taking of interest by the clergy; a rule which they extended in the fifth century. In the eighth century under Charlemagne, they pressed further and declared usury to be a general criminal offence. This anti-usury movement continued to gain momentum during the early Middle Ages and perhaps reached its zenith in 1311 when Pope Clement V made the absolute ban on usury and declared all secular legislation in its favour, null and void.Increasingly thereafter, and despite numerous subsequent prohibitions by Popes and civil legislators, loopholes in the law and contradictions in the Church’s arguments were found and along with the growing tide of commercialization, the pro-usury counter-movement began to grow. The rise of Protestantism and its pro-capitalism influence is also associated with this change, but it should be noted that both Luther and Calvin expressed some reservations about the practice of usury despite their belief that it could not be universally condemned20.

8.3.1 New Testament21 Versions of New Testament like Exodus, Deuteronomy, Ezekiel, Leviticus, Luke, Psalm, Matthew, contain many verses on the issue of usury. The clear message conveyed by these is prohibition of usury. Some of these verses are mentioned below.

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“If you lend money to any of my people with you who is poor, you shall not be like a moneylender to him, and you shall not exact interest from him (Exodus 22:25). “You shall not charge interest on loans to your brother, interest on money, interest on food, interest on anything that is lent for interest. You may charge a foreigner interest, but you may not charge your brother interest, that the Lord your God may bless you in all that you undertake in the land that you are entering to take possession of it (Deuteronomy 23:19-20). Lends at interest, and takes profit; shall he then live? He shall not live. He has done all these abominations; he shall surely die; his blood shall be upon himself (Ezekiel 18:13). “You shall not charge interest on loans to your brother, interest on money, interest on food, interest on anything that is lent for interest (Deuteronomy 23:19). In you they take bribes to shed blood; you take interest and profit and make gain of your neighbors by extortion; but me you have forgotten, declares the Lord God (Ezekiel 22:12). You shall not lend him your money at interest, nor give him your food for profit (Leviticus 25:37). Does not lend at interest or take any profit, withholds his hand from injustice, executes true justice between man and man (Ezekiel 18:8). “If your brother becomes poor and cannot maintain himself with you, you shall support him as though he were a stranger and a sojourner, and he shall live with you. Take no interest from him or profit, but fear your God, that your brother may live beside you. You shall not lend him your money at interest, nor give him your food for profit (Leviticus 25:35-37). Take no interest from him or profit, but fear your God, that your brother may live beside you (Leviticus 25:36). But love your enemies, and do good, and lend, expecting nothing in return, and your reward will be great, and you will be sons of the Most High, for he is kind to the ungrateful and the evil (Luke 6:35). The rich rules over the poor, and the borrower is the slave of the lender (Proverbs 22:7). Withholds his hand from iniquity, takes no interest or profit, obeys my rules, and walks in my statutes; he shall not die for his father's iniquity; he shall surely live (Ezekiel 18:17). Who does not put out his money at interest and does not take a bribe against the innocent. He who does these things shall never be moved (Psalm 15:5). Whoever multiplies his wealth by interest and profit gathers it for him who is generous to the poor (Proverbs 28:8). It is well with the man who deals generously and lends; who conducts his affairs with justice.

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For the righteous will never be moved; he will be remembered forever (Psalm 112:5-6). Then you ought to have invested my money with the bankers, and at my coming I should have received what was my own with interest (Matthew 25:27). A Psalm of David. O Lord, who shall sojourn in your tent? Who shall dwell on your holy hill? He who walks blamelessly and does what is right and speaks truth in his heart; who does not slander with his tongue and does no evil to his neighbor, nor takes up a reproach against his friend; in whose eyes a vile person is despised, but who honors those who fear the Lord; who swears to his own hurt and does not change; who does not put out his money at interest and does not take a bribe against the innocent. He who does these things shall never be moved. (Psalm 15:1-5)

8.4 Islam The criticism of usury in Islam was well established during the Prophet Mohammed’s (SAW) life and reinforced by several of his teachings in the Holy Qur’an dating back to around 600 AD. The Qur’anic word used for usury is riba which literally means excess or addition. This refers directly to interest on loans so that, by the time of Caliph Umar, the prohibition of interest was a well established working principle integrated into the Islamic economic system. It is not true that this interpretation of usury has been universally accepted or applied in the Islamic world.

8.4.1 The Holy Qur’an22

The Qur’an explicitly prohibits riba, and since the Qur’an is an undisputed source of guidance for Muslims, all Muslim authorities unanimously agree on prohibition of riba. There is no difference of opinion between any school of thought on the prohibition of riba in Islamic Shariah. The Qur’an mentions that the person who deals with riba will stand (on judgment day) as one who is beaten by Satan into insanity. Here, Qur’an makes it clear that trade and riba are not the same and that Allah (SWT) forbade riba and allowed trade. It further states that whoever accepts the guidance of Allah (SWT) must immediately stop dealing in riba, and those who return to riba after Allah’s (SWT) guidance has reached are dwellers in fire because Allah (SWT) destroys riba and will reward those who give to charity.Islamic Shariah considers riba as a tool of oppression and a means to unjustly take the money of others by exploiting their needs and circumstances. Hence, it forbids a riba-based system altogether and promotes charity as an alternative. The crimes of dealing in riba are so serious that Allah (SWT) has

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declared war against those who deal in it. Muhammad (SAW) has cursed anyone who deals with riba, the one who takes it, the one who pays it and the one who records it, as their sins are considered equal under the Qur’an. Muhammad (SAW) declared the practice of riba worse than adultery, worse than to a man committing adultery with his own mother.The Qur’an forbids usury, or riba, and the prohibition of lending for interest without risk to the lender. Islam stresses the consumable nature of money. This stress on consumption comes naturally, since the Qur’an says ‘O you who have believed, do not consume usury, doubled and multiplied, but fear Allah (SWT) that you may be successful (3:130). Those who charge riba are in the same position as those controlled by the devil’s influence. This is because they claim that riba is the same as commerce. However, Allah (SWT) permits commerce, and prohibits riba. Thus, whoever heeds this commandment from his Lord, and refrains from riba, he may keep his past earnings, and his judgment rests with Allah (SWT). As for those who persist in riba, they incur Hell, wherein they abide forever (2:275).Also said, Allah (SWT) condemns riba, and blesses charity. Allah (SWT) dislikes every disbeliever, guilty. Lo! those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe Allah (SWT) and refrain from all kinds of riba, if you are believers. If you do not, then expect a war from Allah (SWT) and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (2:276-280)Other verses go as, ‘And their taking usury though indeed they were forbidden it and their devouring the property of people falsely, and We have prepared for the unbelievers from among them a painful chastisement. (4:161) And whatever you lay out as usury, so that it may increase in the property of men, it shall not increase with Allah (SWT); and whatever you give in charity, desiring Allah´s (SWT) pleasure - it is these (persons) that shall get manifold. (30:39)

8.4.2 The SunnahNarrated Abu Huraira: The Prophet said, ‘Avoid the seven great destructive sins.’ The people inquire, ‘O Allah’s (SWT) Apostle! What are they? ‘He said, ‘To associate others in worship along with Allah (SWT), to practice sorcery, to kill the life which Allah (SWT) has forbidden except for a just cause, (according to Islamic law), to eat up riba (usury), to eat up an orphan's wealth, to give back to the enemy to flee from the battlefield at the time of

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fighting, and to accuse chaste women who never even think of anything touching chastity and are good believers.’ Hadrat Muhammad (SAW) said in his farewell sermon: ‘Allah (SWT) has forbidden you to take riba, therefore all riba obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer inequity. Allah (SWT) has judged that there shall be no riba and that all the riba due to Abbas ibn Abd al Muttalib shall henceforth be waived. Muhammad (SAW) cursed the one who deals with riba. From Jabir: Muhammad cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: They are all alike in guilt. (Sahih al-Muslim, Sahih Al-Bukhari, Tirmidhi, Ibn Majah, Bahiqi and Musnad Ahmad). As for the punishment of usury, Imam Sadiq (AS) has been reported as saying: ‘One Dirham of usury to Allah (SWT) is worse than seventy acts of incest committed in the House of Allah (SWT) (Safeenat al-Bihar, vol. 1, p. 507).” The Holy Prophet (SAW) has been reported as saying: ‘One who swallows down usury, Allah (SWT) will fill his stomach with the fire of hell as much as he has swallowed down usury. Should he earn a wealth after that, Allah (SWT) will not accept anything of his act. Allah (SWT) and His angels will curse him, as long as a measure of one carat from usury is with him.” (Safeenat al-Bihar, vol. 1, p. 505). The Holy prophet (SAW) has also been reported as saying: “The worst trade is the one mixed with usury.’ Such a trade is forbidden in all religions and by all prophets. (Safeenat al-Bihar, vol. 1, p. 507). Allamah Qutb Ravandi in his book Da’awat has reported: ‘The Messenger of Allah (SAW), during his night journey, saw a red river with a man swimming in it. On the bank of the river, there was sitting a man with many stones around him. The swimmer would often come to this man and open his mouth. The man sitting on the bank of the river would put a stone in the swimmer’s mouth. This was his repeated doing. The Holy prophet (SAW) asked about it and it was said to him: “He has eaten usury during his life (Safeenat al-Bihar, vol. 1, p. 507). Allamah Tabarsi mentions that Imam Ali (a.s.) said: ‘The Messenger of Allah (SWT) has cursed five groups of people concerning usury; the eater of usury, the agent, the two witnesses, and the writer (of the contract) (Wasa’il al-Shiah, vol. 12, p. 430).’ It is for this reason that the Lord of the universe has made piety obligatory in the matter of usury. Whenever the question of sale and

Thoughts on Economics 39

usury are raised, Allah (SWT) says, “Fear Allah (SWT)” so that human beings are warned against it and keep away from this punishment’.Abu Hamzah ath-Thumali has reported Imam Baqir (AS) as saying: ‘The Messenger of Allah (SAW), during the farewell (last) Hajj, delivered a sermon, saying: “O people! By Allah (SWT)! There is nothing that takes you nearer to Paradise and keeps you away from Fire except that I have enjoined on it to you, and there is nothing that takes you near to fire and keeps you away from Paradise except that I have forbidden it. Be aware! Gabriel inspired me that no one dies unless he has fully received his sustenance. Therefore, be careful of your duty to Allah (SWT). Behave well in seeking sustenance. Take care not to get anything unlawfully when your sustenance comes late; for what is with Allah (SWT) cannot be sought except by obedience to Him.” And also narrated as: ‘There was a merchant who would lend to the people, and whenever his debtor was in difficult circumstances, he would say to his employees, ‘Forgive him so that Allah (SWT) may forgive us.’ So, Allah (SWT) forgave him.’(Sahih Al-Bukhari, Vol.3, 292.)

9. Debate over Usury 9.1 John Whipple

Despite continuous pressure and support from the financial community, the various justifications for usury proved inadequate in 1836, when John Whipple, an American lawyer proved the impossibility of sustaining long term metallic usury in following terms: ‘If 5 English pennies had been lent at 5 per cent compound interest from the beginning of the Christian era until the present time, it would amount in gold of standard fineness to 32,366,648,157 spheres of gold each eight thousand miles in diameter, or as large as the earth’. Whipple knew that answering the usury question required an accurate view of the nature of money, and he echoed Aristotle: ‘The purpose of money is to facilitate exchange. It was never intended as an article of trade, as an article possessing an inherent value in itself, (but) as a representative or test of the value of all other articles. It undoubtedly admits of private ownership but of an ownership that is not absolute, like the product of individual industry, but qualified and limited by the special use for which it was designed23.’

9.2 The Church Scholars On the issue of charging interest, the Church scholars (1100 -1500 AD), was in a consensus that lending at interest for guaranteed return was illegal and condemnable. However, they also agreed that if the lender shared in the risk of

40 An Investigative Analysis on……………..

the venture, the loan was legal. Consequently, laws against usury seldom interfered with merchant capitalism. Businessmen could always get loans if their contracts made them partners in risk. According to them, money is a measure, and usury diversifies the measure placing extra demands on the money mechanism which harmed its function as a measure. They also held that, money is medium in exchange, and not terminus; therefore, money should not be able to be bought and sold. The Scholastics made the first attempt at a science of economics and their main concern was usury; but this was not the same as just charging interest. It was generally not forbidden to earn interest if the lender was actually taking some risk, without a guaranteed gain. Interest could also be charged when the lender suffered some loss or passed up some opportunity by extending the loan. Venice used advanced financial forms for centuries without violating the Scholastic usury bans. Two types of loans were always exempt from bans on interest. Firstly, the case where the lender assumed some portion of the risk of the enterprise. Secondly, the case of an obligation to pay an annual return based on some fruitful property24. 9.3 Adam SmithSome may be surprised to discover that Adam Smith, despite his image as the ‘father of the free-market capitalism’ and his general advocacy of laissez-fair economics, came out strongly in support of controlling usury. While he opposed a complete prohibition of interest, he was in favour of the imposition of an interest rate ceiling. This, he felt, would ensure that low-risk borrowers who were likely to undertake socially beneficial investments were not deprived of funds as a result of ‘the greater part of the money which was to be lent to investors in risky, speculative ventures, who alone would be willing to give an unregulated high interest rate’25.

9.4 Lord Keynes The great twentieth century economist John Maynard Keynes held a similar position believing that ‘the disquisitions of the schoolmen on usury were directed towards elucidation of a formula which should allow the schedule of the marginal efficiency to be high, whilst using rule and custom and the moral law to keep down the rate of interest, so that a wise Government is concerned to curb it by statute and custom and even by invoking the sanctions of the Moral Law’26.

9.5 Twentieth Century Controversy

Thoughts on Economics 41

Twentieth century economists have reopened the usury question. Modern researches are reexamining the Scholastic’s work and conclusions. It is realized that they had an intuitive insight into the problem only now becoming apparent. Though their argument that usury would lead to the abandonment of industry seemed naive or exaggerated at first, but the experiences of agricultural communities, such as ancient Greece, or China throughout most of its history offer considerable corroboration. Some modern interest critics have their roots in the complementary work of several socio-economic reformists of the early twentieth century. According to them, it is completely wrong and unacceptable for commercial banks to hold a monopoly on the money or credit creation process. They argue that, for banks to charge interest on money which they had in the first place created out of nothing, having suffered no opportunity cost or sacrifice, amount to nothing less than immoral and fraudulent practice.   Despite the omnipresence of charging interest in our lives today, this question is not really settled. Furthermore, the modern world is now getting a taste of real usury. Up to 1981, interest limits (usually under 10%) were in effect in most of the USA. Today credit card debt is very high and growing, along with personal bankruptcy rates. Most people are paying 21-25% interest on their credit cards each year. Money they really can’t afford to pay. Some economists actually favor letting the market charge whatever interest rates people can be forced to pay. But this should not continue, it will do so much harm to society that all the free market economists in the world chanting in unison won’t be able to hide the damage.In recent times, one of the Islamic responses to the West in the past fifty years has been the rapid growth of banks known as Islami banks that do not contract for a predetermined amount over and above the principal. These banks must share the risk with the borrower, and they must not make money from money27.

10. Rationale of Prohibition of Usury10.1 Unequal Distribution of Income

The main characteristic of interest is that either the borrower or the lender would absolutely and inevitably be subjected to a loss. The rate is fixed at the very beginning, but it is impossible to predict the outcome (either profit or loss) of the business at which the loan is used. Thus, it can be identified with an absolute injustice for either side of the transaction. It does not matter

42 An Investigative Analysis on……………..

whether the interest rate is high or low and whether it is called interest or usury because different kinds of interest or different rates change only the address, or the direction, of the injustice; it is sometimes the payer and sometimes the receiver of interest who is exposed to this injustice and financial loss28. In the case of interest it is observed that, while a small group receives a fixed and assured reward on its capital, the returns to all other factors fluctuate and may even be negative. Thus, wealth is concentrated in fewer hands, and, simple mathematical calculation can show that, if this system of distribution of returns continues for a long time, a situation will arise when exploitation and concentration of the entire wealth of the world would be in the hands of those who are trading in lending money on interest. Similar is the case with consumption loans, where, high interest rate charged reduces the purchasing power of the borrower. This cuts in two ways; firstly, it helps in inviting depression in the economy and secondly, it leaves the borrower in a vicious circle from where he cannot comeout29.

Moreover, injustice and unequal distribution of income is an indispensable nature of interest as well as usury, which is considered to be an excessive rate of interest. As a matter of fact, while any high rate of interest may expose the borrower to a financial loss in hard economic conditions, any low rate may expose the lender to a loss in favourable economic conditions where return on capital is high. This case reveals that there is not any acceptable rate of interest, low or high, from the standpoint of the equitable distribution of income. That characteristic of interest arises from the fact that its rate is predetermined despite the impossibility for mankind of predicting whether or not a profit will be made, and even if, how much it will be. Interest mechanism can be compared to a two-bladed saw, or a knife, that cuts on both sides, such that either the borrower or the lender must pay more than they received—one or the other side is unavoidably injured by the interest mechanism.Interest is the income earned by the borrowed financial capital regardless it is in the production process or not. Interest is the allocation, to the capital owner, of an unearned, undeserved, unborn, unavailable and imaginary income that might be attained without producing anything and without contributing any value to the revenue of the society. It imposes all the risks on the debtor directly and on the society indirectly but not on the lender although it is directly related to him/her30. Interest mechanism prevents the fair distribution of positive or negative outcomes of economic activities among the lender and borrower and worsens

Thoughts on Economics 43

the income distribution. This occurs either by providing the capital owner a certain and fixed percentage of earning in any case regardless of the negative outcome of the business, or by limiting his earning with only a predetermined amount of return in case the borrower entrepreneur earns considerably high income out of his/her financial capital31. 10.2 Lowered Productive Investment and Inflationary PressureRegarding interest on productive investment, the standard practice is that interest is to be paid even if the venture turns out to be unprofitable. In this way, high interest rates harm business, as the advantage from interest is greater than profit from trade, which makes the rich merchants give over and put out their stocks to interest, and the lesser merchants break. High rates of ensured return on capital, in the long run, are injurious to trade and industry as the return from the latter is comparatively low and also uncertain. Another detrimental impact of interest is manifested in the form of diverting investment towards projects giving quick and high turnover. As is evident from the above discussion, the institution of interest has a significant impact on the mechanism of resource allocation. Factually, resources fail to assume their natural flow into the appropriate direction; instead, they are made to flow to the ends of the interest mongers. Projects with high gestation period and social overhead are neglected and investments are directed towards the projects giving quick turn over. Again, interest being added to cost of production, it leads to high prices of goods, thereby making inflation a way of life, and, hence, causing miseries to the life of the common man. Interest-based economic system, thus, benefits the capitalist class at the cost of consumers’ welfare32.

10.3 Occurrence of Trade CyclesMany writers see the destabilizing effects that interest has on trade cycles. The basic idea is that different interest rates and their variations allow for speculative institutions. Speculators hoard capital for the purpose of chasing higher rates, which in turn deprives the deployment of capital for productive purposes. It is argued that these vast movements of funds contribute to the fluctuations in the trade cycles and make economic planning and organization problematic. With the absence of interest, writers argued there will be less speculation due to the absence of the interest rate and the reduced levels of debt that will result. That is not to say there will be no debt: non-interest modes of finance allows debt but less. Decreased levels of speculation would thus result in a more stable environment.Gesell’s main objection to interest is that it is an endemic factor in the instability of interest-based economies, i.e. the cycles of boom and bust, recession and recovery. Similarly, Ahmad, arguing from an Islamic

44 An Investigative Analysis on……………..

perspective, claims ‘the greatest problem in the capitalist economy is that of the crises and interest plays a peculiar part in bringing about the crises’33. Even Keynes, the campaigner for interest-based monetary policy, admits the fact that ‘the rate of interest is not self-adjusting at the level best suited to the social advantage but constantly tends to rise too high’34. Kennedy is bolder, suggesting that the compounded growth of interest may in fact cause inflation. She shows, for instance, how in Germany, while government income, Gross National Product and the salaries and wages of the average income earner rose by about 400% between 1968 and 1989, the interest payments of the government rose by 1,360% which she claims implies an inflationary effect35.

10.4 Discounting the Future The last reason cited for condemning usury relates to the concept and practice of discounting future values. Because compound interest results in an appreciation in invested monetary capital, it is presumed rational for people to prefer having a specified amount of currency now than the same amount sometime in the future. This simple and rarely questioned logic has several disastrous implications. For instance, Pearce and Turner note that discounting affects the rate at which we use up natural resources - the higher the discount rate (derived partly from the interest rate), the faster the resources are likely to be depleted36. Daly and Cobb take this observation to its logical conclusion and show that discounting can lead to the economically rational extinction of a species, simply if the prevailing interest rate happens to be greater than the reproduction rate of the exploited species37. Another consequence of the discounting principle, argued by Kula, is that “in evaluating long term investment projects, particularly those in which the benefits and costs are separated from each other with a long time interval, the net present value rules guide the decision maker to maximize the utility of present generations at the expense of future ones”38.In this context it is fitting to observe that a key feature that distinguishes financial economy from nature’s economy is that the one operates on a compound interest basis, whereas the other is based on simple interest. Money deposited in the bank may yield 10% plus interest on the compounded sum next year, but in nature, if you leave this year’s crop of apples on the tree, you are unlikely to pick a compoundable heavier crop next year. Accordingly, usury permits a disjunction between financial and ecological economy. The

Thoughts on Economics 45

result is either the progressive destruction of nature, or in the absence of redistributive social justice, an inbuilt necessity for periodic financial crashes throughout history. The point is well made by the illustration that if Judas Iscariot had invested his thirty pieces of silver at just a few percentage points compound, repayable in silver as of today, the amount of silver required would be equivalent to the weight of the Earth.The implicit ethics, or dearth thereof, of discounting can be used to illustrate clearly why usury corrupts the natural world as well as social relations. For instance, consider the impact of net present value discounted cash flow methodology in appraising the trade-off between natural and human made capital which, over the fullness of time, can usually be justified only if the utility of future generations is discounted39. This violates intergenerational equity - a key principle of sustainable development recognized by both the 1987 Brundtland Commission and the 1992 Rio Earth Summit of the United Nations. It also violates an age old percept of right livelihood which flies in the face of the presumption of time value of money on which interest rates are based: that is, it violates the presumption of many traditional land users that the land should be handed on to the next generation in at least as good heart as it was inherited from the forebears. Discounting, as the counterpoint of usury, can be thus exposed as rueful device employed to justify theft of the children’s future. Exploration of the theoretical basis and practical illustrations of this argument perhaps provides much scope for future micro and macroeconomic research in ecological economics40.

11. Empirical Evidence11.1 Trade and Per Capita GDP

Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialization, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions.Following graph shows merchandise trade (sum of merchandise exports and imports) as a share of GDP for selected nine countries (all in current U.S. dollars). It is evident from the graph that, in comparison to other countries, Hong Kong and Singapore have very high percentages of merchandise trade as

46 An Investigative Analysis on……………..

a share of GDP, which are respectively 394.525, and 275.2 in this regard (Table 1 of Appendix). Excepting South Korea, other six countries have more or less uniform pattern in this respect.

Graph 1: Percentage Share of Merchandise Trade in GDP

Source: World Trade Organization and World Bank GDP estimates (see Appendix)

Following graph shows per capita GDP for the same nine countries (all in current U.S. dollars). According to the graph (Table 1 of Appendix), countries like, Hong Kong, Singapore, UAE, and Netherlands, enjoy very high per capita GDP (US$ 53,216, 78,763, 59.845, and 46,298, respectively) in comparison to other selected countries. It is, therefore, evident from the above two graphs that the pattern of the two features (merchandise trade as a share of GDP and per capita GDP) almost follow similar trend in case of these selected countries. The point to ponder is that, there appears a positive correlation between percentage share of merchandise trade in GDP and per capita GDP. This can be interpreted roughly as, countries having high rate of export and import trade enjoy high per capita GDP.

Graph 2: Per Capita GDP (in current U.S. dollars)

Thoughts on Economics 47

Source: World Development Indicators database, World Bank (2011–2013)

Following graph plots the same nine countries in accordance to their HDI scores (Table 3 of Appendix). Excepting South Korea, here also countries like Hong Kong, Singapore, UAE and Netherlands tower other countries (having HDI score 0.906, 0.895, 0.818, and 0.921 respectively). In this case of HDI ranking also, similar type of trend is observed with respect to the selected countries.

Graph 3: Rating on the Basis of HDI

Source: United Nations Development Programme’s Human Development Report, 14 March 2013

Moreover, in this case, seven out of nine countries fall under the very high human development category, one under high human development category and one under medium human development category (Table 3 of Appendix). In a summary fashion, therefore, it can be said that high engagement in trade

48 An Investigative Analysis on……………..

positively influence economic indicators of development like per capita GDP and human development index (HDI).

11.2 Usury and Financial Crisis

The global so-called credit crunch (defined as a severe shortage of money or credit) is generally considered to have started on 9 August 2007 when French bank BNP Paribas raised the cost of credit41.

Underlying this had been a rise in US interest rates between 2004 and 2005 from 1% to 5.35%, resulting in high levels of default at the high risk end of the housing market. Because mortgage lenders had sold on their debts via hedge funds to other financial institutions, the consequence of irresponsible lending spread contagiously through banking systems, especially in the West, as house prices started to fall and the real estate asset value underpinning the loans became negative.  When BNP Paribas told its investors that they would not be able to draw money out of two of its funds owing to a ‘complete evaporation of liquidity’ it was the start of a domino effect, forcing governments to step in and avert potentially catastrophic runs on major banks.

The credit crunch was a consequence of the preceding credit bubble inevitably bursting. In certain Western countries, including Britain and America, governments had deregulated financial agencies to an extent where irresponsible lending became normalized. For example, in Britain, through until 2008, it was easy for people to get mortgage loans on property of 120% of the property value. Property prices were rising sharply, the global economy was booming, and traditional banking caution was thrown to the wind. People re-mortgaged their homes to pay off credit card debts that carried very high rates of interest, and which had been sold to them by aggressive marketing. People had started to believe that ever-rising house values and continuing economic good times would generate property values that would continuously outstrip their liabilities.

While everybody played the game and interest rates remained low the system appeared to be working. It met investor expectations with high rewards. But as US interest rates rose in a necessary effort to counteract the economic knock-on effects of house price inflation, the consequences of having bought into a usurious and greed-driven system started to hit home.  Loan default rates reached the point of crisis.

Thoughts on Economics 49

Capitalism can be understood at many different levels, from honest trade and entrepreneurialism all the way to its advanced Anglo-American casino version. In the latter, the role of money undergoes a shift. It changes from its primary role as a means of recording and lubricating exchanges of goods and services. It takes on second order abstract qualities of being speculative. Here money alone generates more money, and the principle of usury – defining it as the lending of money at real positive rates of interest (i.e. rates greater than what is needed to cover inflation and risk) – is the inner wheel driving the system42.

Besides, countries are crippled with servicing both non-governmental and foreign debt. Often, loans readily lend to governments regardless of the project as they know that there is no guaranteed return on capital is available. This, results in projects with low or no return on investment receiving funding, with the lenders taking no responsibility or involvement in the project or the debtors as long as continuous payments are made, even if the debts are never settled. The resulting debt, which benefited the receiving society very little, leads to limited spending on developing their infrastructure and human capital as large amounts of future revenue are spent on debt servicing.

12. Conclusion

Approaching the usury question intelligently requires a better understanding of the nature of money. The Scholastics maintained that there was a distinction between money, and productive capital. This approach has been re-affirmed as, ‘It is not true that money is only one form of capital; that the lending of money constitutes the lending of real capital in the form of money. Money does not enter into the process of production; it is in itself as Aristotle showed, quite sterile43.’

Following comments also echo in line with above stand. As Harrod writes, ‘Interest 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 such reasons for the scarcity of capital44. And according to Keynes’, ‘A properly run community equipped with modern technical resource of which the population is not increasing rapidly, ought to be able to bring down the marginal efficiency of

50 An Investigative Analysis on……………..

capital in equilibrium approximately to zero within a single generation. If I am right in supposing it to be comparatively easy to make capital goods abundant that the marginal efficiency of capital is zero (i.e. interest is reduced to zero or is eliminated) this may be the most sensible way of gradually getting rid of the objectionable features of the capitalism’45.

With the abolition of interest, the economic focus becomes attached to entrepreneurial activities. Although it may be assume that without interest, incentive to save drops, Keynesian analysis indicates that savings are a function of income and the influence of interest on savings is minor. As such, if income can be increased, savings should increase, even in the absence of interest. Moreover, without interest, capital can be more efficiently allocated to productive projects based on the rates of profit rather than more credit-worthy individuals.

A system based on profit-sharing also harmonizes the interests between investors and entrepreneurs increasing efficiency. We, therefore, cannot but admit that it is our greed that has driven the problems now faced. So, we cannot help but be reminded of the Qur’anic verse that ‘Allah (SWT) has permitted trade and forbidden usury.’(2:275); and the hadith, that states: ‘The taker of usury and the giver of it and the writer of its papers and the witness to it, are equal in crime.’

References

1. Jain, L.C. (1929) Indigenous Banking in India, London: Macmillan & Co.2. Jones, Norman, Usury, Utah State University, eh.net/encyclopedia/usury,

Economic History Association 3. Watson, Peter, 2005, Ideas: A History of Thought and Invention from Fire to

Freud, Harper Collins, ISBN 0-06-621064-X,(http://en.wikipedia.org/wiki/Trade)

4. Greenberg, J. Pat, 1951, http://en.wikipedia.org/wiki/Trade#5. Beckwith, 2011, http://en.wikipedia.org/wiki/Trade#

Thoughts on Economics 51

6. Husted, Steven. & Michael Melvin, International Economics, Harper Collins College Publishers, New York, 1993, p. 56.

7. Husted & Melvin, ibid., p. 63. 8. Kindleberger, Charles P., International Economics, D. B. Taraporevala Sons

& Co. Private Ltd., Bombay, 1973, p. 35. 9. Salvatore, Dominick, International Economics, John Wiley & Sons (Asia) Pvt

Ltd., India, 2006, p. 41.10. Husted & Melvin, ibid., 11. Fritz Heichelheim, 1938, An Ancient Economic History, 12. Jones, Norman, Utah State University, eh.net/encyclopedia/usury, Economic

History Association13. Jones, Norman, ibid. 14. Smith, Adam, 1776, An Inquiry into the Nature and Causes of the Wealth of

Nations.15. Smith, Adam, ibid., 16. Jain, L.C. (1929) Indigenous Banking in India, London: Macmillan & Co. Jones, Norman, ibid. 17. Wayne, A.M. Visser, & McIntosh, Alastair, History of Usury Prohibition: A Short

Review of the Historical Critique of Usury, Centre for Human Ecology, Accounting, Business & Financial History, 8:2, Routledge, London, July 1998, pp. 175-189.

18. The Jewish Encyclopedia, 1912.19. Bible, James, New King20. Jain, ibid.,21. Bible, ibid.22. Ali, Abdullah Yusuf, The Holy Qur’an, Goodword Books, in association with

IPCI: Islamic Vision, Birmingham, 2001.23. John Whipple, 1836, The Importance of Usury Lows – An Answer to Jeremy

Bentham.24. Wayne, ibid.,25. Smith, ibid.,26. Keynes, J. M., “The General Theory of Employment, Interest and Money”,

London, Macmillan, 1936.27. Jones, ibid.,28. Ozsoy, Ismail, Faiz ve Problemleri (Interest and Its Problems), Nil Publications,

Izmir, 1994, p. 50.

52 An Investigative Analysis on……………..

29. Hamid, Fauzia, The Way World Economy is Destined: A Retrospective Analysis, Thoughts on Economics, Vol. 22, No. 2, April-June, 2012, Islamic Economics Research Bureau (IERB), Dhaka.

30. Ozsoy, ibid., p. 17331. Ozsoy, ibid., p. 381-232. Hamid, ibid.,33. Gesell, (1904) Die Naturliche Wirtschaftsordnung. Nuremberg: Rudolf Zitzmann

Verlag.34. Keynes, ibid.,35. Kennedy, M. (1995) Interest and Inflation Free Money, Okemos: Seva

International.36. Pearce, D.W. and Turner, R.K. (1990) Economics of Natural Resources and the

Environment, London: Harvester Wheatsheaf.37. Daly, H.E. and Cobb, J.B. (1990) For the Common Good, London: Greenprint.38. Kula, E. (1981) ‘Future Generations and Discounting Rules in Public Sector

Investment Appraisal’, Environment and Planning A, 13: 899-910.39. McIntosh, A. (1996) ‘The Fallacy of the Presumption of Symmetrical

Depreciation in the Substitution of Natural and Human-Made Capital’, Journal of Law and Religion, XI:2 (forthcoming).

40. Wayne, ibid.,41. http://news.bbc.co.uk/1/hi/business/7521250.stm).42 Wayne,ibid., Alastair McIntosh & Wayne Visser Added to the online version of

this paper, January 200943. Knut Wicksell, Interest and Prices. 44. Harrod, R.F., “Towards a Dynamic Economics”, St. Martins, 1948. 45. Keynes, ibid.,

Appendix

Table 1

Country name Merchandise Tradea P.C.GDPb

2010 2011 2012 2013 Average Value

South Korea 81.5 89.8 87.3 82.4 85.25 33,140Equatorial Guinea 131.2 127.2 139.4 138.0 133.95 33,768

Lithuania 120.3 138.9 145.4 147.6 138.05 25,467Czech Republic 125.4 138.6 144.4 146.1 138.625 28,770

Thoughts on Economics 53

Malaysia 146.7 143.5 138.9 138.7 141.95 23,338Netherlands 130.4 141.7 151.2 147.8 142.775 46,298UAE 132.5 145.3 154.4 156.6 147.2 59,845Singapore 280.3 282.9 274.7 262.9 275.2 78,763Hong Kong 368.3 388.9 398.4 422.5 394.525 53,216

Source: a. Merchandise trade (% of GDP), World Trade Organization, and World Bank GDP estimates. b. World Bank (2011–2013), GDP per capita, PPP (current international $), World Development Indicators database, World Bank. Database updated on 16 December 2014. Accessed on 20 December 2014.

Table 2Range of Ranking on the Basis of HDI Category

1− 47 Very High Human Development48− 94 High Human Development95− 141 Medium Human Development142− 187 Low Human Development

Source: United Nations Development Programme’s Human Development Report, 14 March 2013

Table 3Ranking on the Basis of HDI

Country Name

Rating Category

12 South Korea 0.909 Very High Human Development136 Equatorial

Guinea 0.554 Medium Human Development

41 Lithuania 0.818 Very High Human Development28 Czech

Republic 0.873 Very High Human Development

64 Malaysia 0.769 High Human Development4 Netherlands 0.921 Very High Human Development41 UAE 0.818 Very High Human Development18 Singapore 0.895 Very High Human Development13 Hong Kong 0.906 Very High Human Development

Source: United Nations Development Programme’s Human Development Report, 14 March 2013