Islam is extremely strict in
its prohibition of interest (Riba.) Riba is an unfair, unearned, and undeserved
income which is usually used to denote business transactions like money lending
or credit. Muslims argue that Riba is at the heart of most of the ills of the
modern economic system. Islamic economics proposes that instead of interest, a
more fair approach would involve profit sharing; that is, in which both parties
gain a proportional income depending on the investment or business in question.
One of the main points in
favor of the prohibition on interest is that economic activities become focused
on actual entrepreneurship, trade, and production, rather than in artificial
manipulations of interest rates. This has been one of the main problems of
modern capitalism, resulting in several bubbles that have contributed to
several market crashes. These impact society negatively both directly and
indirectly.
While modern economic
thinking considers that interest helps increase savings, Muslims argue that savings are
related to income rather than to interest. Typically, interest is only a
secondary consideration when generating savings. An interest-free system also
would allow a better allocation of resources to projects that have a direct
impact on society, rather than on projects that are only attractive because of
their particular interest rate. A system based on profit sharing would also
place emphasis on the particular investments and business ventures
rather than on a particular individual's credit rating.
Muslim economists also see
interest as a destabilizing force on the market. This is because interest
inherently lends itself to speculation. To institutions and individuals
dedicated solely to speculating and manipulating the market to earn money that
is not associated to a project with real-world impact and value. Practices like
hoarding capital to take advantage of higher interest rates, thus blocking this
capital for being used productively, makes the market unstable. These kinds of
practices turn financial planning into a gamble; they disrupt the trade cycle
and make the market almost impossible to predict. Muslim economists predict
that a market without interest would contain less speculative practices, which
would also result in lower debt. Islam does not prohibit debt, but it would be
interest-free debt, managed in different financial modes that do not involve
Riba in any form.
Many of the market crashes
and financial problems in the past decades can be attributed to manipulation of
interest rates and other securities, excessive speculative practices, and a
lack of investment and entrepreneurship in infrastructure and new technologies.
Modern economic practices also can result in unacceptable unemployment rates
and infrastructure problems. Islamic economists propose substituting interest
with profit-sharing practices as a way to solve many of these problems.
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