In current times, money undergoes huge de-valuation. So how can one lend 10,000 Rs and get back only 7000 Rs after 2 years. How can a modern Islamic society counter this problem? Do we need adjustments in riba system? what kind? how can we factor risk in investment?
PKPolitics Discuss » Faith and Religion
Riba in a modern islamic state
(44 posts)-
Posted 1 year ago on 06 Apr 2011 15:03 #
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toamin
memberIn Islam we can see that the practice has always been to use Gold & Silver as currency which are not subject to inflation.
Riba in Islam is clearly HARM -period.
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah . But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.
Posted 1 year ago on 06 Apr 2011 15:10 # -
gv
Member@Salam
well thats about three generations of Pakistan, Indonesia, and quite a bit of india all going up in flames in the hereafter. promising throught
ps gold inflation exists; see
Posted 1 year ago on 06 Apr 2011 15:26 # -
gv said
@BO
no the interest is cost of capital for the opportunity cost of not using the capital elsewhere. It factors in inflation.
Inflation is simply (mehangai) or the increase in nominal prices in an economy. It has existed as long as people lived in social units.
But as far as I know loan transactions did not take interest into account until the middle ages.
The borrower in a loan transaction typically puts up collateral (economic asset)as a security in case the venture fails and the borrower is unable to repay the credit.
This secures the creditor his principal loan value in the event of a default
We have no problem with collateral. This is رہن which the Prophet SAW also gave to borrow, as armor, other things.
Mehngai is also a natural thing. It means the consumer would pay more. So interest is not clearly meant to counter mehngai but in time value of money calculations interest rate is subject to inflation. So mehngai is a result of inflation but it is not same as inflation.
In Quran is clear that riba was in use at least 1400 years go certainly preceding middle ages.
Questions:
Do we agree interest is meant for recovery of future projected value of the opportunity cost due to time value changing events?
If an investment incurs interest but also risk, i.e, no guarantee of always profit, does this investment become halal? This was the reasoning I used to hear in my childhood days of Zia time.
Posted 1 year ago on 06 Apr 2011 15:32 # -
gv
Member"Mehngai is also a natural thing. It means the consumer would pay more. So interest is not clearly meant to counter mehngai but in time value of money calculations interest rate is subject to inflation. So mehngai is a result of inflation but it is not same as inflation"
do you mean mehngai is not the same as interest?
Yes we agree that interest is meant for the recovery of future projected value of the opportunity cost of capital due to time value changing events.
Every investment even a secured loan carries some degree of risk. A debt investment is safer than an equity investment as the creditor has recourse to recovering his capital via a claim on collateral.
However debt investors do not take on as much risk as equity investors.
Posted 1 year ago on 06 Apr 2011 15:39 # -
toamin
memberGV,
How does gold inflation exist? You mean the currencies fluctuating with respect to gold as inflation?
Posted 1 year ago on 06 Apr 2011 15:49 # -
Yes mehngai is not interest, or is it?
Interest is tied to risk. A potential deadbeat (poor credit rating) would be charged higher interest than a highly rated borrower, true! But both cases incur interest, one higher the other lower. Risk does not help us since there is a constant there (interest), further it is difficult to quantify risk, so to keep things simple we could talk about de-valuation which seems to be main reason for having interest. Is this right understanding?
Posted 1 year ago on 06 Apr 2011 15:51 # -
I think he means currency is backed by gold, when currency changes the backup does too, because you could buy more or less of gold how ever your money changes.
Posted 1 year ago on 06 Apr 2011 15:52 # -
Inflation occurs due to more supply of currency in the market, simple supply and demand rule.
If the supply of currency is controlled in any economy then you will see a very little inflation.
Also the proponents of riba based economy should study japanese economy how they ran their economy on zero interest and also a bank in scandanivia was running its operation without interest.
My point is besides the sharaa arguement (which is enough for muslims) even it is proven that a interest free economy is possible and flourish quite successfully
FJ
Posted 1 year ago on 06 Apr 2011 16:04 # -
gv
Member@salam
I mean that the increase of the price of gold over time implies price inflation of gold as a monetary commodity.
The value(price) of gold is determined by supply/demand
if you click the link above scroll down to the chart below and take a 10 year view of gold prices you will see that prices have risen from ~ $300/oz to $1451/oz which implies an inflation of 383%
while this number is influenced by a weak dollar (which contributed to greater demand in gold) you can see a similar effect in sterling terms which is still a pretty strong currency.
i.e gold as a commodity has become more expensive over time due to demand/supply factors. i.e. gold has suffered inflation.
Posted 1 year ago on 06 Apr 2011 16:08 # -
gv
Member@bo
"Yes mehngai is not interest, or is it?
Interest is tied to risk. A potential deadbeat (poor credit rating) would be charged higher interest than a highly rated borrower, true! But both cases incur interest, one higher the other lower. Risk does not help us since there is a constant there (interest), further it is difficult to quantify risk, so to keep things simple we could talk about de-valuation which seems to be main reason for having interest. Is this right understanding? "
you're approaching thing the wrong way around. The main reason for charging interest is two fold
1) (the main reason) To earn a return for providing the risk capital
2) to factor the devaluation of their capital due to inflationPosted 1 year ago on 06 Apr 2011 16:12 # -
gv
Member@FJ
this is for you ( i was about to open a new thread but i thought since you are already here id save myself the trouble.
Islam 101 (and who writes laws)
(in bulllet form so even thick heads get it )
1) there is ony one supreme creator God (Allah)
2) Muhammed is his messenger who has brought his message to the world
3) The message which is a way of life for the Muslim is revealed via the Quran (i.e. the divine recitation) which is the word of god as revealed to Muhammad bin Abdullah
4) Islamic code has therefore two fundamental infallible/near infallible sources - The Quran and Muhammed the Messenger.Summary of the above - there is only one Divine power (infallible source) and only one divine text and only one divinely appointed messenger. (the next best thing to infallible source)
Everyone else from Hazrat Abu Bakr to Imam's Hanafi, Shafi, Malik, Ahmad, Ghazali etc are just mortal interpreters of the divine law. They are therefore Fallible.
Therefore all islamic legislation pertaining to state and governance is written by mortal interpreters of the divine law.
While certain laws are beyond question as they are clearly outlined in the Quran (infallible source) There are others which are not so black and white and widely open to interpretation.
Posted 1 year ago on 06 Apr 2011 16:14 # -
@ GV
and you point is ?????
FJ
Posted 1 year ago on 06 Apr 2011 16:26 # -
@gv
I have problem with point 1 (your main reason for interest).
In Islamic view the loan is provided for help w/o charging interest, so there is a good social cause. i.e. the lender does not profit of someone's misery.
So how do you reconcile the reasoning for Islamic legislation with the financial reasoning of point 1? Clearly, the higher moral ground is the Islamic perspective.
Secondly, the Islamic concept for borrowing is largely for individual's or community's difficult times i.e. loan transactions are small and not long term. I mean we typically do not seek borrowing 100 Million dollars for some cause. So I think inside an Islamic society interest free economy is not too unreal, but dealing with outside world is a different story.
For point 2, I have seen many people using this justification for riba, that money is not the same as before, so something has to be done to recover or else suffer loss for a good cause. This particular case is I'm after.
Posted 1 year ago on 06 Apr 2011 16:26 # -
@gv
I am not being sarcastic here
Could you please describe me your understanding of Ijtihad and the process of ijtihad in islam
FJ
Posted 1 year ago on 06 Apr 2011 16:28 # -
gv
Member@BO
coming back to point one
In a modern economy Many entreprenuers require capital to achieve a business goals. businesses are purely profit seeking enterprises.
Entreprenuers approach the investor community who are looking to deploy capital to the economy in order to make a return on their excess capital.
Investors can choose to provide that capital as Debt or Equity. Each has its own merits and demerits from the investor and the entreprenuer's point of view.
From the investors point of view:
Debt is short term (has a fixed life)and offers a lower return to the investor but offers some form of security in the event of a failure
Equity is for the life of the project offers higher returns and has the possbility of going to zero if the project completely fails
from the borrowers point of view:
Debt entails a cash out flow to service the debt while equity is 'free' however equity means you share profits with a party which is not involved in the day to day running of the venture while with a debt investor you can eventually pay them back and keep 100% profits for the owners
As far as inflation is concerned. It is not neccessary that inflation will always occur in an economy. you could have a period of deflation when the debtor will suffer as the price value of money is less
Posted 1 year ago on 06 Apr 2011 16:45 # -
@gv
That's all fine.
It is all about wealth (the financial perspective).
Now what about virtue? (the religion aspect)
Posted 1 year ago on 06 Apr 2011 16:57 # -
gv
MemberI dont see how charging (a reasonable) interest rate on loan for a business venture which seeks to make profit for the business owner is immoral or not virtuous.
now if you have a brother/friend who needs a loan to build a house and you charge him interest i see that as immoral
Posted 1 year ago on 06 Apr 2011 16:59 # -
gv
Member@FJ
the open ended ability for Islamic Jurists to deploy logic/independent thought to interpret legislation not clearly covered by the Quran or the Hadith (in light of islamic values etc)
Posted 1 year ago on 06 Apr 2011 17:05 # -
@gv
I don't know what to say.
The problem is borrower's loss or profit or is always lender's profit. If the borrower does not make a buck, lender would still seek profit. If there was no collateral, the lender suffers too.
But in Islamic way, there is always collateral, so the lender can recover at least some opportunity cost. Further, if the lender thinks he won't get back anything, he either does not lend out, or forgives upon no recovery. So there is virtue and your take is pure business. Islam does not forbids profit, material is human desire, but Islam limits profit seeking to become avarice .
Posted 1 year ago on 06 Apr 2011 18:04 # -
gv
Member@BO
Your argument vis a vis collateral and opportunity cost is misplaced.
Interest is the recovery of opportunity cost
collateral is merely protection against the loss of principal.
@FJ
still waiting for your comments.
Nice to know what a high opinion you have of me by the way. i just bothered to read all your comments about my 'thread disrupting ways and wicked agenda' in the khilafat thread.
Posted 1 year ago on 07 Apr 2011 10:20 # -
Dear gv
This is my understanding of ijtehad based upon the classical definition of Ijtihad.
In a nutshell Ijtehad is the Hukm of Allah for a particula matter i.e the whole process and struggle of a mujtahid is to establish/find the hukm of Allah swt in a particular situation/matter/issue where there is no direct hukm can be found for that situation/matter/issue from quraan or sunnah or ijmaa as-sahaba. So a mujtahid put all of his efforts and knowledge and understanding of the reality to find what is the hukm of allah swt for that matter/situation/issue by using certain adopted criterion backed by the daleel e shari'i
If you understand the process of ijtihad you will have answers to your above questions.
BTW just for your clarification, throughout the whole history of islamic jurisprudence the main focus was and (even today )is the authenticity of the text/daleel/evidence. So your assertion/mischief regarding the fallability of individual is irrelevant and a non issue.
FJ
Posted 1 year ago on 07 Apr 2011 10:54 # -
gv
Member@salam
here is a better argued case for allowing interest with some references
http://www.globalwebpost.com/farooqm/writings/islamic/riba_interest.doc
and another against it
http://msmsoton.files.wordpress.com/2008/02/guide-to-interest.pdf
Posted 1 year ago on 07 Apr 2011 11:02 # -
gv
Member@FJ
im sorry but it seems that your heart is too powerful and your brain has apparently stopped working.
Also have you ever considered that it might be possible for somebody to have a contrarian point of view without having any 'agenda'???
Posted 1 year ago on 07 Apr 2011 11:13 # -
Dear gv
could you cater to point out where I have the contrarian point of view.
As per my understanding and experience, sec lib in pakistan and the mutazzila are the one who have the contrarian point of view in muslim soceities. :-P
By using the big terms and phrases you can only fool yourself and not anyone else ;-)
FJ
Posted 1 year ago on 07 Apr 2011 11:53 # -
gv
Membernot you genius
me !
Posted 1 year ago on 07 Apr 2011 14:33 # -
@gv
Interest based borrowing is a win win situation for the lender and for the borrower it is 50/50 win-lose.
I was hoping if you could come up with the changes that a modern financial system undergoes to be accepted as Islamic. I think the concept of sharing loss on part of lender is something that Zia's time fuqaha used to say is not usury. Another argument to counter interest is by eliminating a fixed RoR. These are two elements I am aware which are typically presented for making the finance dealings "soodi".
I remember MSI was the first to offer riba free financing, (also developed equity with each payment).
Also Lariba:
https://www.lariba.com/default.htmSimilarly, another closely related deal is tawakkul in Indonesia which was introduced as an alternate to insurance.
There is lot of theory that goes in the background from interest to going interest free while keeping the financier positive (not necessarily always profitable).
So I think these are lines we would need to develop a full system and experts like you could assist in bridging the two views.
Posted 1 year ago on 07 Apr 2011 15:36 # -
This was the swedish bank who is completely interest free and its operations are a slap on the face of people who say you cant run a interest free economy. watch the whole documentry
Also read
http://en.wikipedia.org/wiki/JAK_members_bank
FJ
Posted 1 year ago on 11 Apr 2011 16:33 # -
gv
Member@FJ
thanks for the link (couldnt access the video but went to the wiki link and the jak bank website)
i think its a great way to provide personal/small business loans
however im talking about corporate loans at the large scale for large businesses
Posted 1 year ago on 12 Apr 2011 16:49 # -
gv
Member@BO
the premise that a lender has zero risk when he lends is mistaken which is where we are failing to agree.
Posted 1 year ago on 12 Apr 2011 16:50 # -
@gv
"however im talking about corporate loans at the large scale for large businesses"
I already had said that:
Secondly, the Islamic concept for borrowing is largely for individual's or community's difficult times i.e. loan transactions are small and not long term.
This means that the kind of loans we are talking about are not intended to make a profit for the lender. We need to address interest dealing at individual level since this is what majority of the Muslims are faced with.
Definitely there is no such thing as zero risk, but why can't collateral cover that?
Posted 1 year ago on 13 Apr 2011 11:22 # -
gv
Member@BO
While i am in agreement with you on all your points above the issue remains that the term Riba is being equated to any form of interest by current (and past) islamic law.
If you take the JAK bank model provided above it is charging (via a set of fees) an effective interest rate of 2.5% however it is also forcing the borrower to save alongside a loan which presumably contributes to the balance sheet of jak bank.
Now this is an excellent model because at the end of the loan the borrower is actually better off financially. While the bank has benefitted from a larger balance sheet from which they can lend.
However this can also be simply achieved by limiting interest to a minimal (just?) amount for inidvidual/small scale loans.
The point remains that you are still charging for the use of money. whether you structure it as equity(mudaraba)or in loan fees. Why is it acceptable if you call it something else?
RE: your point on collateral. The biggest wake up call the financial world received from the credit crisis (and other historic economic shocks) is that collateral does not have a guaranteed value. Its value is worth only what the market is willing to pay at the time you wish to sell it. This can change drastically from the moment of issuing a loan to the point of trying to collect the collateral.
Posted 1 year ago on 13 Apr 2011 18:18 # -
@gv
You made an excellent point. I was confused on riba free auto financing when I investigated the option few years back. They didn't use the term APR but the premium and down payment were structured in such way (with markup like fee) that I did not quite understand how the offer was any different than regular financing. I was not quite convinced. It seemed that the various fees charged were covering up some effective APR, which is the key to the whole argument. I thought this is the explanation religious jurists came up with but I am not sure, that jurisprudentially you are NOT in riba and at the same time the finance system stakeholders are happy camper when payments are high with upfront fees. The financiers get what they want in a different way. I mean what makes grape juice wine, alcohol, right, but if you could get drunk with a drink without alcohol, is that still haram? So similar deal here i.e. the devil lies in the detail, you could have the taste and feel of your apple and still it won't be apple and neither spelled apple. See the ruling Jamal Badawi states in the video below.
Posted 1 year ago on 13 Apr 2011 21:51 # -
Posted 1 year ago on 13 Apr 2011 21:53 #
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gv
Member@bo
sorry BO I can't access videos on my work computer.
but do you see my point which i was trying to make originally which is that laws need to be open to interpretation for effective implementation in society.
Q) Why was usury banned by the Jews, Christians and Muslims in the classical mid east?
A) Because it was unfair!
So what is the general thrust of islamic law - to maintain fairness and equality in a society.
That is what we need to focus on - there is no point in a blind following of the letter if we refuse to follow the spirit of the message
Posted 1 year ago on 14 Apr 2011 9:37 # -
Dear BO & gv
I think we can not separate the concept of price and value when comes to any economic model. In capitalist economy, The so called abundace of cash or the liquid money in essence is the highly inflated value of a object which is measured in price. This is very week and shallow base of the capitalist economic model and on that basis people are told that their capital/money is something which should be valued highly and they must be compensated for use of that money.
In reality there is no value in the currecy and especially the modern day currency. There was a movie I watched some years back where the scene was that a european goes to old time china and in the court of a king.He present the king the currency note saying this is money, king and his courtesan laughs at him and then a courtesan burns the paper currency note and ask the guy where is your money gone. He then picks a gold coin and says this is real money.
If you think deep and you will see that there is no intrinsic value of todays paper money and hence how someone could claim that he/she be paid for utilisation of something which has NO VALUE.
FJ
Posted 1 year ago on 14 Apr 2011 11:42 # -
gv
Member@fj
value is attributed due to demand.
If you think about it or a minute. Why does gold have intrinsic value? It does not have much utility as a metal. In fact copper or iron have many more uses than gold.
The only major utility for gold is jewelry (aside from being a store of wealth) now im pretty sure that mankind can live without gold jewelry if it comes to the crunch dont you?
Similarly if gold has intrinsic value as a store of wealth than paper money has intrinsic value as an efficient medium of exchange.
Posted 1 year ago on 14 Apr 2011 12:41 # -
gv
can you produce /make gold or silver or copper thye way you can print hundreds of tonnes or worthless paper mone. Why the currency of a country becomes worthless overnight if it has any intrinsic value and gold and silver or copper will always have a intrinsic value.
FJ
Posted 1 year ago on 14 Apr 2011 13:11 # -
gv
Member@FJ
Point conceded. But this problem will only occur in a failed economy.
There are problems associated with using a metal/(fixed quantity asset) as a medium of exchange as well.
Posted 1 year ago on 14 Apr 2011 14:04 # -
@dear bros.
Whether your medium of exchange is paper or other material, intrinsic value is more of a symbolic thing and a perception about demonetization. Gold is probably kept for historic reasons. Can you buy gold using ALL the print money in circulation in the world?
The argument using paper as an easier way of exchange is also losing ground especially in the west. I haven't written checks in a long time and hardly carry any cash now for past several years. Practically everything is electronic transfer for me, all monthly bill payments are e-transfers. You could even buy cigarettes 3-5 $/€/£ and subway tickets 1-3 $/€/£ using a debit card. In fact e-transfers are recommended because there comes an automatic transaction record. Cab fares and even fines are paid right away electronically. When I see a bill of 20 or 50 at a super market I'm a bit amused because you dun see too much of those things any more. It is likely that paper money would vanish in regular sales in advanced countries in the coming decades. For all I care, use pebbles as your tender as long as it represents a backup that is well understood, agreed upon and stable .. could be even nonphysical.
Furthermore, the interest concept is not new. The Quran discusses it quite thoroughly so would have preceded before Quran. At that time there was probably not a sudden de-valuation phenomenon or at the least it was negligible. It follows that concept of interest has always been about the cost for money being tied up and not about the value diminution. Many times the transaction did not involve currency but other commodity exchanges e.g borrowing grain for armor or livestock.
Posted 1 year ago on 14 Apr 2011 23:02 # -
Our main topic .. concerns with losing worth and cost for borrowing. The only way to hold worth over time on the borrowed capital is by charging interest. We have seen during the Fannie Mae crisis the foreclosures were not recovering attractive compensation for the collateral. The lender had to wait until the values rise to get an equal worth and until this time their money was tied and not making money. But those were extraordinary times, typically the understanding is that the collateral, when executed, would be equivalent or higher to the principal but as gv said this could be grossly wrong as the price depends on market dynamics and supply/demand. So we remain with the issue of rental fee on the borrowed money i.e. interest. Furthermore, what if the borrower does not have assets. We have two options: lender charges a fee (interest/usury) or goes in the investment sharing profit and loss (islamic view).
For individual needs (short term, small capital) which is the context in which Quran discusses the interest e.g. sukuk bonds, mortgages, personal loan, auto financing and what have you.. all these products are available thru riba free Islamic banking. But how about corporate loans, 100 Million dollars? My impression is not all services of modern finance could be Islamize because of their nature or the way they are structured.
??Posted 1 year ago on 14 Apr 2011 23:49 # -
gv
Member"Whether your medium of exchange is paper or other material, intrinsic value is more of a symbolic thing and a perception about demonetization.
For all I care, use pebbles as your tender as long as it represents a backup that is well understood, agreed upon and stable .. could be even nonphysical."
@BO
you've hit the nail on the head so perfectly!!!!!
once again in full agreement with you.
but you've ignored my last point to you which is
"but do you see my point which i was trying to make originally which is that laws need to be open to interpretation for effective implementation in society."
&
"- there is no point in a blind following of the letter if we refuse to follow the spirit of the message"Posted 1 year ago on 15 Apr 2011 10:02 # -
I didn't ignore it, I don't have the answer to it. I dun believe that every law is open for interpretation but many are. Interest and insurance matters in the context of individual living in the west is something scholars have taken up in the last 20 years. However, the scholars have not expanded on venture capital. I have belief that since Islamic law is divine, all matters that would arise until the end would be solvable thru Quran down to Ijma level. Modern finance is one area where religious work must be expanded including every aspect of the business. I think we have two camps, one who knows religion and other who knows finance, so bridging remains.
In old times, some scholars used to hypothetically make up scenarios and used to argue the ruling. It was not the right way, because the Sahabas RA used to discourage people from asking what-if questions until things actually occur. For instance, a question was put to Abu Hanifah about the ruling of a sacrificial animal which is half human and half goat. The purpose was the depth of understanding of zabiha ruling. Now with the advent of genetic engineering and animal breeding, the question does not seem stupid but only ahead of time. So now we have live situations but the required religious debate is not coming up, that's all.
Posted 1 year ago on 16 Apr 2011 0:16 # -
gv
Member@bo
"I dun believe that every law is open for interpretation but many are"
Thats exactly how i started this argument before FJ (and salaam to a lesser extent) jumped down my throat and called me a kaafir
thank you for agreeing with me finally.
Posted 1 year ago on 17 Apr 2011 14:09 #
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