By. Dr. Syed Thanvir Ahmed
(ii) The Economic Argument
The doubts expressed by the author of the book, which is under review, can easily be dispelled if we look into the Economic literature and the latest developments in various countries. An interest free economy is defended on the grounds of Growth, Stability and Distributive justice - the fundamental problems dealt by Economic Theory.
It is now an accepted fact that the greatest hindrance to growth is the institution of interest. Prudhon observed “why are we short of houses, machinery and ships? Because money is a sentinel posted at the entrance to the markets with orders to let no one pass”. John Maynard Keynes argued that the best way to revive the economy is to increase the money supply so that the rate of interest falls. A fall in the rate of interest would lead to higher investment, employment and output. In fact Keynes held that ultimately an ideal economy is one wherein interest does not exist.
This writer, in one of his papers, has shown, using modern economic tools of analysis, that high rates of economic growth can be achieved only through the abolition of interest. Higher investment is extremely essential for economic growth. For investment to take placXe, economists say that the Marginal efficiency of capital (MEC) should be higher than the rate of interest. Therefore interest determines investment and thus employment and growth. In the absence of interest, the cost of holding idle cash balances or hoarding money and the MEC will determine the level of investment instead of rate of interest and MEC. Investment so determined will definitely be extremely high. If one goes into this analysis in greater detail one will understand the significance of the following verse of the Holy Qur’an. “Allah will deprive usury of all blessings, But will give increase for deeds of charity” (2.276). It has been shown in the above paper that the prohibition of interest and the insistence upon Zakah and charity will ensure a higher and higher growth rate for the economy on a continuing basis bringing prosperity to rich and poor.
Economists like Milton Friedman, Kindleberger and H.C. Simon hold fixed interest rates to be responsible for instability. Friedman contends that changes in rate of interest bring about either inflation or deflation and both are harmful to the Society. He therefore argues “ Our final rule for the optimum quantity of money is that it will be attained by a rate of price deflation that makes the nominal rate of interest equal to zero” (Friedman, 1969). This proposition is known as Friedman’s Rule, and it is “one of the most celebrated propositions in modern monetary theory”. (Woodford, 1995) Hence, Yousifi, McCormick and Abizadeh argue that Islam’s prohibition of interest has proved to be of much significance with this realisation in the west.
The recent developments in Asia where the so called Asian tigers (the East Asian countries) have collapsed from the high rates of growth and prosperity which they had attained during the last ten-fifteen years, has made economists to reassess their assumptions. It is proved beyond doubt that the most important factor contributing to the Asian crises is the institution of interest and the interest based transactions. The Indian experience of the last couple of years where efforts made by the Government to revive the economy have failed strengthens our argument. The Government is forced to reduce the rate of interest realising that interest is the factor responsible for the current problem of lower growth, falling exports and increasing inflation.
Mehra and Prescott (1985), Siegel(1992) and Darrat (1988) through their studies on “Equity premium puzzle”, have found that even though stocks carry risk, they offer much higher returns than bonds, which proves the superiority of Islamic principles of business and industry. In an article published in the World Bank’s June 1997 issue of ‘Finance and Development’, Zamir Iqbal has convincingly argued that the Islamic Financial system “encourages risk sharing, promotes entrepreneurship, discourages speculative behaviour and emphasises the sanctity of contracts”.
Josh Martin in his article in ‘Management Review’, New York, points out that U.S. companies doing business globally “are turning to Islamic finance as an alternative source of funding for everything from trade finance to equipment leasing” - Multinationals such as General Motors, IBM, Xerox, Enron and Shell have used Islamic Banks to finance their activities. Citibank opened its City Islamic Investment Bank in 1996. The Islamic banks have now assets exceeding $ 160 billion. There are more than 100 financial institutions operating in 45 different countries based upon Islamic principles. Their annual growth rates are more than 15 percent. Multilateral organisations such as IFC have successfully completed funding arrangements in various countries amounting to $ 40 million. These facts show that it is no longer a blind belief that interest free economy can function. It shows that the foundation laid by Imam Abu Haneefa in establishing an interest free bank having deposits of more than 50 million Dinars is now revived and structures of modern business are being constructed on it.
As far as the distribution aspect is concerned, not much needs to be written because everyone accepts that interest is exploitative and has resulted in increasing inequalities in the distribution of income and wealth.
I hope that Mr. Mohammad Shafi Aga will make efforts to study the interest free banking system, with an open mind. This system ensures that the depositors, the banks and the borrowers get much higher returns than what they would get under the traditional interest based banking system can offer. One should realise that religion is not a matter that can be taken lightly. It is not one’s own limited knowledge or thinking powers which are paramount in the matters of religion. What are paramount are the words of Allah (SWT) and the Sunnah of the Prophet (Pbuh).
(*. Author is Deputy Secretary to Govt. of Karnataka, Finance Department, 12th Floor, Vishveshwaraiah Main Tower, Bangalore-560001.)
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