Common Questions About Islamic Finance (Part 3 of 5)
— Why does Islam forbid interest when money is just another commodity that comes at a price?
— Where should I keep my money? Islamic banking doesn’t adequately address the inflation problem and you say interest banking is forbidden.
— There was no Islamic bank during the Prophet’s (Allah bless him and give him peace) time, so how can there be Islamic banking now? Sounds like a bid’a. (Click here to view)
— Don’t Islamic banks simply change labels, by replacing the word “interest” with “profit”? (Click here to view)
— Stocks are like gambling, but Islam permits stocks and forbids gambling. Why?
— What’s the difference between an ordinary lease and an Islamic lease (ijarah)? They look the same.
— If Islam forbids fixed-income interest, what’s wrong with floating-rate interest? Doesn’t it also rise and fall like profit?
— I don’t have enough money to buy factory equipment (or a car, a home or pay for an education)? How do I avoid interest and still fulfill my short-term financing requirements?
— Is there a secondary market for Islamic instruments?
Why does Islam forbid interest when money is just another commodity that comes at a price?
Unlike an actual commodity (like gold, which has traditionally been the standard of measure for currencies), money has no intrinsic value. It derives its value from something other than itself, namely, market demand. So interest actually creates nothing. By creating money from nothing, we bloat economies with asset-less, service-less pieces of paper. And we all know what happens when the supply of anything, even money, exceeds its demand. Its price drops. And when the “price” of money drops, we get inflation: the money in our pocket becomes worth less today than it was yesterday. However simplified and stylized this description, it accurately illustrates the macroeconomic debilitation of interest. Because interest serves the interest (coincidence?) of capital owners like banks, governments, “development” agencies, corporations and wealthy individuals, it is unlikely to go away.
The treatment of money as a commodity is partly responsible for burgeoning world poverty (by forcing poor countries to allocate increasing amounts of capital away from social services, like healthcare and education, toward debt servicing) and increased market volatility (by widening the gap between the supply of money and the creation of real assets). It is often asked how we would live in a world without interest. We might instead begin asking how we should be expected to live in a world with interest?
Where should I keep my money? Islamic banking doesn’t adequately address the inflation problem
and you say interest banking is forbidden. If today’s $1 is going to be worth 90 cents next year
because of inflation, why can’t I charge interest to compensate for the loss?
The short answer: because interest is still haraam. Charging interest to compensate for inflation is analogous to terrorizing civilians to compensate for global injustice: two haraams do not make a halaal. Far too many Muslims, sincere practicing ones no less, have somehow reconciled the taking of interest with their personal definition of what the Koran and sunna say about the matter. But compensating for inflation is still no excuse for taking interest, no matter how noble one might feel at taking money from a conventional bank. In order to compensate for inflation, Islamic banks provide plenty of instruments that mimic the security and liquidity of an ordinary savings account while also providing a reasonable interest-free return (Meezan Bank’s Monthly Musharaka Certificate is just one example, but all the major banks, including non-Muslim banks that sell permissible Islamic products, offer basic consumer accounts). If making a long-term personal loan, for instance, one might consider gold (e.g. an individual lends $100 in gold today and tells the borrower that he would like the equivalent gold back in 3 years).