Ann Pettifor

Interest, Usury and Islam – Lessons from Islamic and Ethical Finance

By: Ann Pettifor

The notion of the moral economy is intrinsic to all the major faiths,

each of which has placed ethical boundaries on the behavior of those

active in the market.

The ten commandments of the Jewish Torah or Christian Old Testament

laid down an ethical boundary - or regulation - for work:

"for six days you shall labor and do all your work. But the seventh

day is a Sabbath to the Lord your God; you shall not do any work -

you, your son or your daughter, your male or female slave, your

livestock, or the alien resident in your towns".

The Qu'ran lays down clear ethical boundaries for lending and

borrowing, and for trade.

These boundaries have been vital in the maintenance of great

civilizations. As Karl Polanyi, the great economic historian argued

(in his 1944 book "The Great Transformation") - the regulation of the

conduct of human affairs by law is vital to the maintenance of

civilized society, and to the market, because

"robbed of the protective covering of cultural institutions, human

beings would perish from the effects of social exposure; they would

die as the victims of acute social dislocation through vice,

perversion, crime and starvation....neighborhoods and landscapes

defiled, rivers polluted, military safety jeopardized, the power to

produce food and raw materials destroyed".

So one of the great contradictions we in the West face today is this:

law - or regulation - needs boundaries, in particular ethical

boundaries; but also geographical and political boundaries.

However markets, in particular financial markets, abhor boundaries.

How do we reconcile therefore, the ethical boundaries/regulation

advocated by the world's great religions with the resistance of, in

particular financial markets, to these boundaries?

That is the great challenge faced today by those who would promote

the notion of a moral economy.

One of the most important ethical boundaries set by the Prophet in

the Qu'ran has to do with the 'price' paid for a loan: the rate of

interest. While many would regard the Qu'ran's strictures on interest

rates as antiquated, I would like to argue that they are acutely

relevant to today's financial crisis.

This is because one of the economic characteristics of the period

from 1980 to the present day is high real rates of interest (i.e.

adjusted for inflation/deflation) paid by borrowers. By this we mean

interest rates in the broadest sense: those for short, long, real,

risky as well as safe loans. While the Federal Funds or Bank of

England rate might seem low, the real rate paid by credit card holders

or entrepreneurs taking risks, has for a long period, been much, much

higher.

Indeed it is these high rates of interest, that I contend, led to the

'debtonation' of the financial system in August, 2007, and the most

severe financial crisis in history. For it is high real rates of

interest that ultimately made debts unpayable - for sub-prime mortgage

borrowers in the US, for the millions that have defaulted on their

mortgages and had their homes 'foreclosed'; for thousands of companies

that have been bankrupted by a heavy burden of debt; by semi-states

such as Dubai, and now by states such as Iceland, Ireland and perhaps

Greece.

Historically the average rate of return on investment has been in the

range of 3-5%. Any borrowing above that rate presents repayment

difficulties for most entrepreneurs and investors. The post 1977 rates

of interest can be described as usurious.

Sidney Homer's A History of Interest Rates, has been the definitive

analysis of the subject since its first edition in 1967. He published

a second edition ten years later. Homer died in 1983, and his pupil

Richard Sylla was entrusted with the production of a third edition of

his work. On the opening page, Sylla warned:

"The spectacular rise in interest rates during the 1970s and early

1980s pushed many long-term market rates on prime credits up to levels

never before approached, much less reached, in modern history. A long

view, provided by this history, shows that recent peak yields were far

above the highest prime long-term rates reported in the United States

since 1800, in England since 1700, or in Holland since 1600. In other

words, since modern capital markets came into existence, there have

never been such high long-term rates as we recently have had all over

the world." (Homer and Sylla, 1991, p. 1)

High rates across the whole architecture of rates - for short and

long, safe and risky loans - have prevailed ever since.

Tremendous capital gains have effortlessly been made by those who

held assets, lent them on to governments, corporations or individuals,

and thereby extracted even greater wealth. This is what has always

been understood as usury.

Islam and interest-bearing money

'Those who consume interest shall not rise, except as he rises whom

Satan by his touch prostrates [i.e. one who is misled]; that is

because they say: "Trade is like interest"; whereas, Allah [God] has

permitted trading but forbidden interest. ......whosoever reverts (to

devouring interest) those, they are the inhabitants of the fire,

therein dwelling forever." Qu'ran 2:275

Islam prohibits the taking or giving of interest or riba, regardless

of the purpose of the loan, or the rates at which interest is charged.

"Riba" includes the whole concept of effortless profit or earnings

that comes without work or value added production.

In Islam money can only be used for facilitating trade and commerce -

a crucial difference with the world's major Christian religions. This

was because Islamic scholars were fully aware that debt-creating money

can stratify wealth, and exacerbate exploitation, oppression and the

enslavement of those who do not own assets.

The Qur'anic ban on interest does not imply that capital or savings

are without cost in an Islamic system. While Islam recognizes capital

as a factor of production, it does not allow capital to make a claim

on the productive surplus in the form of interest. Instead Islam views

profit-sharing as permissible, and a viable alternative. The owner of

capital can legitimately share in the gains made by the entrepreneur.

That implies that the owner of capital will also share in the losses.

Investors in the Islamic order have no right to demand a fixed rate

of return. No one is entitled to any addition to the principal sum if

he does not share in the risks involved. Another legitimate mode of

financing recognized in Islam is based on equity participation

(musharaka) in which partners use their capital jointly to generate a

surplus. Profits or losses are shared between partners depending on

the equity ratio.

Islamic banking is a risky business compared with conventional

banking, for risk-sharing forms the very basis of all Islamic

financial transactions.

Global finance, in the shape of un-regulated and unethical

capitalism, poses a profound threat to Islam. Because Islam expressly

prohibits the concentration of wealth in the hands of the few, i.e.

hoarding (kenz) waste (tabthir) extravagant consumption (israf) and

miserliness (bukhl) - the excesses of global financial liberalization

are in deep conflict with Muslim values.

Not only Muslim values, but the values of Jews and Christians too.

If we are to return to our roots; if we are to protect both our

civilization, but also our ecosystem, then it is vital that we, as

people of faith, once again assert the centrality to society of the

moral economy.

*****

Ann Pettifor is a fellow of the new economics foundation (nef) and

co-author of 'The Green New Deal'. In 2009 she was named one of the

Ecologist magazine's 'visionaries'. She lectures widely on

international finance and sovereign debt; and on the need to devise

new economic policies to deal with the 'triple crunch' of the

financial crisis; peak oil and climate change. She is also executive

director of Advocacy International Ltd.

Source: ToddsMurray.com