ISLAM AND INTEREST

Why did Islam prohibit interest? What is the logic behind that? What types of interest has Islam prohibited? These are certainly the questions that face a lot of both Muslim and non-Muslim economists. When Islam was introduced 1400 years ago, one of the main issues discussed, was Riba or interest. How interest made people manipulate poor people, and how interest made the rich richer and the poor poorer. It also made people work less because of their guaranteed return.

Muslim economists have always searched and are still searching for flaws in an economy that is driven by interest so that they could justify their theories of a just monetary system. Muslim economists continually refer to the global economic crisis as a result of interest rates from the great depression to the crisis in Southeast Asia. Huge budgetary imbalances, excessive monetary expansion, large balance of payments deficits, insufficient foreign aid, and inadequate international cooperation can all be related to flaws in the theory of interest, which is also the root of the crisis. Muslim economists see the demand for economic growth as parallel to inflated interest rates and global economic crisis. It is healthy to say that most countries, which make the transition to a market economy, had developed some kind of crisis in the early stages. Inflation often occurs as a result of a fast growing economy, hence, contracting the monetary policy is a must to offset inflation. This increase in interest rates would only add to the unemployment level. The Keynesian school had emphasized the problem of high interest as a contributor to unemployment, therefore, stressing the need of reducing interest rates to the lowest possible. But the question is what is the optimal rate of interest? Or should interest exist?

The money and banking system should, like all other aspects of the Islamic way of life, be made to contribute richly to the achievement of the major socio-economic goals of Islam. The system should also continue to perform the usual functions that relate to its own special field and which other banking systems perform, i.e.. :

1. Broad-based economic well-being with full employment and optimum rate of economic growth.
2. Stability in the value of money to enable the medium of exchange to be a reliable unit of account and a stable store of value.
3. A just return is ensured on investment and development projects.
4. Effective rendering of all services normally expected from the banking system.
5. Socio-economic justice and equitable distribution of income and wealth