Economic System of Islam 14 – Prohibition Of Riba Interest 3 Distribution

Jamal Badawi


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Name is Bradley but never at the mercy of the Creator Sustainer of the universe Peace and blessings upon you serve as a missionary Mohammed forever. I mean, I greet you with a greeting that is common in the salon assalamu Aleikum, which means peace be unto you. I'm your host Hamlet Rashid. Today we have our 13th program in our series dealing with the economic system of Islam. We'll be continuing our discussion of the topic of production and productivity. And we'll be commenting on the prohibitions of interest in Islam. I have joining me as usual on the program, Dr. Jamal battery of St. Mary's University. Hello, Jamal Assalamu alaikum money.

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At the beginning of each episode, we always take a few moments to summarize the main points touched on their previous program that I asked you to quickly summarize the main points from our 13th program.

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And the 13th program, we describe the two different types of interest dealings that were common before Islam. And we said that one of them is clearly prohibited in Islam, the other miniatures believe also to be prohibited by analogy, and we'll describe why we had also some brief discussion of that opinion. Third opinions of some, you might say those who made an error in interpretation concerning the prohibition of interest, and indicated that some of them kept quiet have changed their mind after the other majority of jurist pointed to them the difficulty with their interpretation. So the consensus still, that it is prohibited, there's no question about it. There

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was also some discussion of the reasons behind the prohibition of interest dealing in a purely Islamic Society.

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We'll discuss some of the harms caused by interest dealings as it affect the character of the individual the nature of society, the social structure, the political process, and even in some cases, causing some economic harm. And we have discussed that briefly, we made the distinction between borrowing

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in return for paying such an interest versus Partnership, which is totally different, because in partnership there is showing in profit and loss.

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The basic thing we try to clarify is that dealing in interest is not really an imperative, it is not a necessity to establish an economic system at all. And there are so many alternatives acceptable within the standard legislation, which includes things like buying common stocks, mutual funds,

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partnership, variety of ways investments, which meet the needs of different people depending on the term of investment they want and the degree of risk they wish to be engaged in.

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summarizes, or even though there may be other alternatives, the elimination of interest here deals with interest and reduces those alternatives by one, how would you respond to somebody who took that particular view? Interesting enough, I had a discussion with one of my colleague, an economist at St. Mary's University on this exact issue. Two of them factory discussing the issue. One is an economist. And his basic argument is that when we speak and economics about maximization, you say you have to explore all possible alternatives. And then, of course, determine what maximizes your benefit. And he said that if an individual for example, in his own thinking, fields that dealing at

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interest maximizes his benefits, then by prohibiting by somebody stepping in, say there is no interest, you're really arbitrarily restricting those alternatives. And as such, you're not really achieving maximization to which my response was this, that for, first of all, in a purely economic system, Islamic system, it is not a matter of some dictator or ruler or somebody saying, No, nobody is going to do an interest. It is a matter which is based on the teaching of God and the conviction of members of that community or society. That's interesting is contrary to Islam. It's contrary to the will of God. And if we take the individual as the judge for maximization, then individuals in

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that community will not consider interest to be an alternative. And as such, there's no problem with maximization. In other words, it's outside of the range of thinking by their own conviction and commitment. There is no problem here.

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maximization of efficiency and by he agreed he considered to that particular point. But I may wish to add also one thing.

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Why even maximization when it looks while it looks to us as an attractive concept.

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Let's remember that maximization is not the ideal thing in everything.

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For example, in teaching in the area of labor relations, Union management relations, if a union maximizes its gain from management, regardless of management ability to pay, they might cause management to go bankrupt, and they would lose their jobs.

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If management maximizes their benefit by giving very low wages, for example, they may lose their skilled workers. And again, in the long term, they are the losers. Yes, in other words, what I'm saying but maximization is not always the ideal in everything. Regardless, let's remember that.

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Well, maximization was not a purely economic concept. It's not just a mathematical concept, because maximization cannot be divorced from values and the possible harms and benefits in society, a person can maximize his wealth by theft, cheating, or extortion. But, so maximization is not something to be worshipped, yes, they have to also be considered in in the light of the total benefit of society.

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Now, another possible argument that is sometimes referred is

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the question as to why it is ethically wrong to get guaranteed interest, but at the same time, it's okay to get a guaranteed wage or salary, regardless of whether or not the employer you're working for suffers a profit or loss.

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summarize this, this is not the same kinds of things. But a colleague of mine and the management tools seem to also to have particular interest in the concept of profit sharing,

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has raised this particular issue also.

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My answer to this is this. If you're going to say that it is ethically wrong to take interest, for example, regardless of profit of less,

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why is it as he put it, where is it not? unethical, also improper for you to take a particular wage, without knowing whether the company is going to win or lose?

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That's a direct question that if you are going to pursue this line, and mixed between

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borrowing, and hiring labor as a factor of production, you will result in total chaos and society. Because the same thing would apply to buying power, why should you pay the power company, you know, at a given rate before waiting until you find out whether the company is making profit, and again, in view of that profit, you determine what you should pay to the power company and all other suppliers, which of course, doesn't make much sense really, because, you know, you would have so many different prices, depending on what was the company buying electric power is making profit or less more profit or less profit. I think the difficulty here, aside from the fact that it's totally

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in practice impractical to,

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to apply

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in this particular areas, is basically the nexus between two things. When you talk about investment, the the money that you have is not a factor of production, as we have indicated in a previous problem, the paper money, whatever the case may be, cannot produce wealth in itself cannot produce in itself, product or service, it's only a medium, it's a measure of value. It is only when you buy equipment

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using this money, then you can start getting something more concrete in terms of production,

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as labor is a concrete contribution to the productive process. So the two should not be mixed when you buy labor, if you will, you're buying units of effort or labor. At the going price, you're buying units of electric power at the going rate. So you don't have to say right, I will tell you unless I find out when I'm making path to your bank, and this is the kind of risk that you're taking in business. That investment is a different thing. Because you could share there is a possibility, not much difficulty of calculating

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the question of the day the share that you deserve, because of your contributions capital, like when you buy stocks, for example, on mutual funds. But to say that this applies to leverage, it would be very impractical to apply. In fact, I may add one point here. But even the notion of tying labor

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or the payment of wages and salary to profit is also possible under two circumstances

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not totally eliminated, really. One is the soccer sleeping partnership that you described in the previous program, that you contribute capital, I contribute labor, and then we agree that each one will take certain percentage of profit. So that's one possibility, where my labor is not guaranteed it's it's based on profit unless a second possibility is the scheme of profit sharing, whereby your period a certain minimum salary. But in addition to that, you get some bonus, depending on the total performance of the of the company or corporation. And this is something which is again in popularity, and would help bring about some degree of justice and equity and in which payment

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in larger economic system, according to Islam, will there be any banking institutions? Well, when we say that Islam, or an ideal Islamic situation, there should be no interest dealing, it does not mean that there would be no banks, at least the way we understand the various functions of banking today. But the functions themselves may change another one, you could still have financial institutions performing different functions. Let's take a few examples of what the bank is doing. When you go to the bank, you could have a safe deposit, wherever you want to keep cash or gold or silver, whatever. Under a static system, there's nothing wrong with that, it just acting as a service institution, and

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returning certain, you know, fee for that.

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Secondly, if you wish to keep your money in what you have to do something like current account, you may or may not authorize the bank to use that for short term type of projects. But in any case, you may be paying, for example, a fee. Just like checking your fees, or x number of cents per check, for example, isn't our minimum service charge per month. Again, that would not be contrary to Islam, because it's a service done to you.

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If you wish to invest your money in a specific project, long term project or medium range type of project, through the bank, in an Islamic system, a bank also could undertake that on behalf of many depositors where the money are designated for a particular project. And then they get profit or less, depending of course on the performance of that project or group of projects.

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And finally, even in so called short term type of deposits,

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you could still have that under Islamic system, but not in return for any sixth interest. But with the idea that the bank would use this funds in islamically, acceptable type of projects or investments. And at the end of the year, they calculate how much income has been achieved. And they just distributed privilege. So again, you get your shirt of, of your investment. So there are all kinds of ways of doing it. The main idea here is that banks here was not create money, if you will save money, because the world would be basically service or investment roads, leaving the question of the total monetary control to to the state or to the government

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muhabba consumption loans. If there's no interest being charged on these particular loans, how do you encourage people to save

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money? Well, it depends as to what are the reasons or motives behind this consumption loans.

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If you're talking, for example, about a person who is borrowing to meet his or her basic needs for food or clothing or housing,

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under a an Islamic system, proper, ideal Islamic Society

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that person need not borrow to live.

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As we will talk about later, perhaps the question of Zika or institutionalized charity would take care of this as a sort of social insurance really, that no needy person would have to borrow, to eat or

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clothe himself or herself.

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There are some consumers however, who may wish to borrow in order to meet needs, which are either emergency type of needs, which could also qualify for a car like people who have this as a situation of disaster or unexpected loss.

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They could also qualify for DACA or it could be a temporary type of situation and the person is able to pay in which case

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It would be only reasonable to expect that some funds part of the zakka fund or parts of the or portion, the portion of the fund in a bank could be located to be provided interest free for this basic needs.

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If a person however, wishes to buy something, which is not really essential, and the bank, of course, would have to investigate all these applications, then it's a matter than the agreement between the person and whoever

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selling him that item to agree on, you know, how the payment is going to be made, provided, of course, there will be no interest involved in that. And preferably actually waiting until he's got the sufficient funds to,

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to be able to buy things without really having to go around and

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beg people for for health actually, as indicated in one program in modern teaching, it's it's appropriate,

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ethically in Islam, not to try to overspend beyond one's own mean, and just depend on borrowing. Whether with interest or not, it's better to try to live within one's means. And in fact, many of the problems faced by many people in many families today, is this availability of charge cards and borrow now and pay later. This temptation leads people to spend beyond their means and suffer as a consequence

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of this might be some I'm sure who might suggest that this seems to be appropriate and fitting when you're talking about the situation on the individual level, but perhaps wouldn't have application on the macro level or on the state level. And they asked, for example, what about public debts? How would How can governments borrow money if the need arises? If they're not permitted to get involved in interest? related kinds of situations? How would you? How would you respond to that? Okay, maybe you can approach it also the same way we're looking at the individual artist in terms of methodology. Why does the government

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want to borrow?

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Well, first of all, by way of comment, let us remember that the easy access to money to government, by way of just offering bonds, and whatever, people, of course, will be encouraged because of the interest they get. This easy access many times leads to a great deal of inefficiencies. I leave that to politicians and economists. But there are lots of question, as you know, particularly North America about the inefficiencies in government expenditure, and this availability of excess funds,

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probably might not necessarily work in favor of the taxpayer themselves. And it is, after all, the taxpayer who's going to pay for this interest. If you look into the budget of any municipal or state, provincial or federal government, you'll find a sizable percentage of the budget simply goes to finance that, yes, just by way of interest, so it folds back on the taxpayers shoulders. In the final analysis. However, one has to be fair also, and recognizing that there may be cases where it is necessary for the government to obtain funds. I'm not saying to work to obtain funds, in order to meet certain

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emergencies, take the case of a country under attack or being invaded and they need to collect funds to defend themselves. And we know that defense budget could be quite, quite expensive. Yes. What the Islamic approach to this is that, first of all, through the regular Zakah or institutionalized charity,

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you could have funds to use for for this purpose of emergency. So this legitimate expenditures occur without suddenly having to borrow.

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Secondly, in Islamic law, adjust, government may impose additional taxes on those who are able to not on the poor, on those who are able to, but at least in justice, not just picking one individuals to but I mean to have also equitably on those who are able to in order to meet those needs. And after all, why, in the case of emergency or war, you expect people to sacrifice their lives, and you don't expect the rich to sacrifice their property, not even their lives will be unreasonable. And in fact, one of the main problems as you know that faced United States for example, that is the debt incurred during the war, which continued for decades, still to be paid back along with with its

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compound interest. This is unfair because the rich at the time of war, they became richer because of

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The industrial complex suppose the world, so to become much richer, they get this windfall profit. Young people were the ones who sacrificed their lives. So I expect them to sacrifice their lives or not expect those who gain even financially out of the the state of war to pay their fair share, rather than distributed on the poor and virtually. So this is one serious question to be raised, really, they should be. However, if there is need also for other projects, which would be needed certain public utilities, let's say that the government may wish to take over again, they can invite people to, instead of lent money to invest in this project, maybe the government can give some kind

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of support and,

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you know, help,

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by with technical information, and so on. And people can still get some profit, not interest, by their contribution to this. So the question of public debt could be dealt with under Islamic system without interest after all, under Islamic rule, which extended for hundreds of years, there was no need really to resort to interest and it was a very prosperous economy. Yes, there was no problem with consumer loans. And everything was going quite, quite smooth to the point, as you might recall from a previous program, that at one time, the minimum with the two and a half percent, roughly, the minimum amount of institutionalized charity or the cap

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was not,

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did not find enough people to to demand it, and it was spent for other humanitarian purposes. We don't have that even in the 20th century now.

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But so far in this, in the 13, programs that we've had in the series, we've been concentrating predominantly on consumption and production.

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I'd like to perhaps Now move over to some discussion, begin some discussion of the question of distribution. First of all,

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does Islam encourage or allow for the free determination of prices in the in the marketplace? Okay, the basic rule in Islamic law, and in that respect, is basically the freedom of pricing. That is to let the prices be determined in the market or in the more modern term to let the forces of supply and demand determine the price level.

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The source for this kind of statement is saying of Prophet Muhammad peace be upon him, when at one time prices seemed to have been going up, so the companions came to him. And he says, Why don't you, you know, interfere and step in and just determine prices for us? And his reply was, Allahu, and massage, he says, Allah or God, capital G, God, is the one who determined prices. What he really meant by that allegorically really is that

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the that there are forces, natural forces of supply and demand which results in the determination of this prices. But he continued, he says, I fear that I need God, or Allah in the day of judgment with somebody complaining. In other words, I'm afraid if I say like, you must sell at this price or that price, that somebody would come in the day of judgment and complained to God, that I caused injustice, or inequity by stepping in and dictating a price. This is the basic rule. But this rule, however, should not be confused to mean that, under no circumstances, is a just Muslim rulers

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illegible or allowed to determine prices or interferes in the operation of the market. Because after all, as many economists, not all socialist economists, even people like Chamberlain, as early as the 30s, have indicated that

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the old notion suggested by Adam Smith of the so called invisible hand, keeping everything in, in balance or equilibrium and the economy is not really totally correct. That many times there are

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imbalances disequilibrium, which requires some interference or some stepping in on the part of the government. So that everyone should not mean then that even in rare situations where the need arises, when there is social interest and social justice at stake, that still government can never interfere in prices. Let me give you just one example. Not from Islamic history, but even from what happened here in North America.

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I think some viewers may recall,

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some years back when the price of sugar was artificially high. I recall it reached something like 750 $7.50 for two kilos or something like that. And it was discovered later. And there were some court cases that there were artificial creation of shortages and manipulation of the market to make this quick games. I think many people would agree that a case like that, or a case where there is an artificial creation of shortages of basic food necessities, you know, basic foodstuffs or other essentials that people need.

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You cannot say no, we should respect individual freedom and let people starve. You know, in cases like that, you could

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step in and determine a third price. You don't have to give the price that's less than cost, you can interfere and determine some equivalent

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third price and demand that under the circumstances,

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there are cases even

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know where the government may really take a very strong role on that provided again, that should be only used an absolute necessity, and not in an arbitrary way, on the basis of mutual consultation and what is absolutely needed to provide for that. One interesting thing that shows some early jurists, and their understanding of basic economic notions.

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A famous jurist by the name of Edna Tamia said that higher prices could be caused by one of two things, one, in modern terms, that there is more demand, or that cost is going up.

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And if somebody forces you to sell at a given price, he might be forcing you to sell at less than cost, which is unfair.

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On the other hand, he said the other reason is that prices may be going up because somebody, somewhere, person or group

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are exploiting the basic necessities of people creating an artificially high price, in which case, the interference or control would be called for.

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Now, there's a another related question you were speaking a moment ago about the basic needs of people? What happens if you have a forgetting about price for a month, but what happens if you have a merchant who has materials that are badly needed that he's refusing to sell? For example, you talked about foodstuffs earlier?

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might forget him a price, can you place them on the market to distribute themselves? Well, again, like the question of price determination, the basic rule, again, is the respective individual freedom. I qualify that in a minute. But basically, an individual is free to sell or not to sell. Because again, if you open the door and say, all right, you don't have that basic freedom. Well, any dictator or desperate can just, you know, impose anything on you. So the basic rule is that you're free to, you know, to sell what you wish or withhold what you want. But the case that you mentioned here, is a very serious one. Here is the case where individual freedom comes into conflict with

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social needs,

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and or social interest. And the two must be balanced. And that's a principle that we all recognize and all those various aspects, we have to balance both needs. Well, in a case like that, Islam does not let people starve. And if the person fails to sell at a fair price, Islamic law would not rule out the possibility that you have to force the person to sell the basic needs will actually forced him to sell his principle which is applied even in the most capitalist economies, for example, if you if you don't pay your taxes on your home, so you could be forced to sell to pay for this. If you have debts towards others, and you fail to pay them, your property could be again, sold against your

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your one. So the bat provides, of course, that this would not be an arbitrary type of matters should be searched, and absolutely need.

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Well, I think on that note, we'll conclude for today, we want to invite you back next week when we'll continue with our discussion of distribution and social justice in Islam. Thank you for watching. Assalamu alaikum peace be unto you