Islam has strictly prohibited and strongly condemned riba. Islam has also provided its rationale and evil implications for mankind (be it society, country or individual). However, there has been an active debate against and in favor of the prohibition of riba in different parts of the world. These views can be summarized thus:
• Riba is a curse that spreads upon its incurrence and is like a swamp trap that engulfs everyone who falls into it, be it commercial or individual consumption debt — an argument promoted by Islamic scholars.
• Commercial riba is NOT harmful to society and in fact it is a price or rent for the use of money — an argument presented by advocates of the modern and capitalist economic system.
• Only riba charged to individuals on consumption debt is harmful — an argument made by some supporters of the modern and capitalist economic system.
• Whether prohibition of riba is relevant and practically possible in today’s modern world. The argument is that the institutionalized financial borrowing and lending business in the modern economic system does not fall into the category of riba as these institutions adopt a ‘business’ exposure regarding a borrower — providing financing is part of the conduct of business and hence has no traits of riba.
An appreciable amount of work has been undertaken by Islamic scholars in order to provide a solid basis in support of the prohibition of riba. However, most of the work has offered explanations based on the interpretations and injunctions of Islam which are more than enough to establish riba’s prohibition to those who are believers of Islam, but there is a further need to establish the evilness of riba from the economic facts of the modern world. There is a need to show some concrete evidence with regard to riba and in support of claims made to justify the prohibition of riba on individual consumption debt and on commercial debt.
Therefore, this paper is an attempt to find out real life and practical evidence in support of the negative implications of riba so that it can be determined that riba does exist and is at work in today’s modern economic system with all its unhealthy influences forewarned by Islam. Toward this end a series of analyses has been conducted to test different aspects of the prohibition of riba to see how it is harmful and what negative implications it has for an economy in general, without limiting the debate on the prohibition or non-prohibition of riba on individual or commercial debt.
The findings provide interesting insights on the issue. These are presented and discussed in the following sections.
Methodology of the work
This work is undertaken with the help of simple and multiple regression models. These models have been used in different research work on economy and capital markets around the world and hence this paper has also used the same tools for conducting the analyses. Microsoft Excel is used in this work to perform statistical analyses based on regression model including associated tests such as f-test, t-test, slope, p-values and regression charts.
The economy selected for the purpose is that of the US because the required data are not only readily and publicly available but also because of their quality and timeliness. To make the analyses more meaningful, useful and productive the economic data have been taken from 1966 to 2007, as data on the commercial banks’ interest income could only be found from 1966. The analyses period also covers the economic ups and downs in the form of seven business cycles and this provides an excellent data set to evaluate the impact of riba in different economic conditions.
In order to have more comfort on the results that are obtained by the statistical analyses, the results, wherever suitable, are conducted on single variable and multiple variable basis to cross-check the results that are obtained. Besides the statistical analysis, the calculations for computing multiple (index) with reference to riba are also employed to further augment the results obtained by statistical tools to see the concentration of wealth due to riba.
The sources for obtaining the information that has been used are:
• Bureau of Economic Analysis (www.bea.gov)
• Federal Deposit Insurance Corporation (www.fdic.gov)
• Bureau of Labor Statistics (www.bls.gov)
• Federal Reserve (www.federalreserve.gov)
The other supplemental data that has been used are disclosed in the relevant sections with due credit and disclosures/disclaimers.
Does riba have any real economic implications?
A question that may be posed to check the relevance of riba to any established indicator of economy is: “How does riba influence the health of a given economic indicator?” In this regard, one of the negative influences of riba, as declared in Islam, is that it reduces wealth even though it may be increasing the absolute amount of wealth. This immediately brings to mind inflation, which reduces the purchasing power of any economy.
If the answer to the above contention turns out to be positive then it will lead to questioning riba-influenced/fueled inflation’s impact on the real GDP — an indicator of real economic activities. Therefore, real GDP will also be looked into as a next logical test to see its statistical relationship with riba-fueled Inflation.
Finally, if the answer is affirmative then we will try to explore its potential link with the occurrence of business cycles. In subsequent sections the other key economic indicators such as real GDP and business cycles will be looked into based on the results of riba and inflation analyses.
This is the first part of a series excerpted from a paper by the author. The continuation part will appear next week.
Mohammad Aamir is an investment banker with over 12 years experience in reputable houses and accounting firm in Pakistan. He is also a cost and management accountant.