Islam's response to contemporary world problems (41)
ECONOMIC PEACE
(You can consult the Holy Quran references at https://www.ahmadiyya-islam.org/es/coran/ )
The prohibition of interest
The Islamic economic system is governed by a total absence of the interest factor. However, there is no historical or current evidence to suggest that, as a result of the abolition of interest, the demon of inflation has run rampant and prices have skyrocketed unchecked. In current times we have a very interesting opportunity to make comparisons regarding the influence of interest rates, or their absence, on inflation.
The Chinese government in the era of Mao Tse Tsung conducted several experiments with the economy. Some failed. Others produced excellent results. But throughout Mao's rule, interest was not allowed to play a role, either domestically or internationally. Nevertheless, throughout that period, there was no noticeable rise in inflation. In fact, when the overall level of production finally increased, prices began to fall.
Compared to this, in the State of Israel, arguably the most capitalist nation in the world, the inflation rate has been among the highest recorded anywhere in the world except, of course, in Latin American countries and in the exceptional period of post-war inflation in Europe, especially in Germany. But those were not normal days. Other things being equal, the role of interest in an economy can only be described as inflationary.
High interest rates
The debate regarding the pros and cons of high interest rates offers an interesting example for study. Interest rates are kept precariously high for the sole stated purpose of curbing private consumption and thus suppressing inflation. The economy is already creaking and groaning under the strains caused by this policy.
The notion that the higher interest rates are raised the more inflation will be reduced seems to be the only reason for keeping interest rates at an abnormally high level for some time.
The interest rate has never been the real culprit in the inflationary trend. There must have been mismanagement in various areas of the economy and an overall flawed economic policy that has led to the relatively high inflation rates of the present era. Raising interest rates has only served to divert attention from the real causes as an easy scapegoat. This strategy may have some success in fighting inflation at first, but it has set in motion powerful factors that will produce side effects. A nation will be pushed into an uncontrollable state of recession, increasing unemployment.
The high interest rate not only stifles the purchasing power of the general public, but has also squeezed the jugular vein of industry.
It has undoubtedly already hurt a large sector in their struggle for the basic necessities of existence. Those who have borrowed large amounts of money to get a roof over their heads have calculated carefully before taking out a mortgage. They have had to tighten their belts to meet their daily budget as well as to cope with new mortgage payments. They had already restricted all unnecessary and unwise spending beforehand. They had, in any case, little leeway to do so. This sector of society was certainly not responsible for inflationary trends, but, ironically, it is the sector most severely punished by the so-called anti-inflationary government measures, supposedly aimed at lowering prices for the public benefit.
The conclusion that emerges from the above is an important lesson for policy makers everywhere. Interest, as an instrument of control of national economies, interferes with the very concept of free market economics. No economy based on the philosophy of capital-related-interest can be declared genuinely free as long as its government has the power to raise or lower interest rates.
The Islamic economic system provides no such means of exploitation for the government.
Other evils of interest
It is perhaps not out of place to mention some other aspects of interest. The interbank interest rate is only paid on larger deposits and not on the savings accounts of the ordinary account holder. Despite the compounding effect of interest, the return on a small deposit is far below the real purchase value of the money. Although short-term rates fluctuate, in the long term, the interest earned on deposits is below the rate of inflation. On the other hand, a similar amount invested in certain corporate businesses has the potential to grow in real terms.
In an interest-motivated society, those who own capital are willing to lend money without investigating the borrower's ability to repay it. Few borrowers seriously consider their ability to repay. Little do they know that borrowing from loan sharks is tantamount to borrowing from their own future income. This encourages the habit of living beyond one's means, and ultimately results in overspending and a progressive inability to liquidate and honour one's promises.
Such societies provide an unrealistic stimulus to production to meet the demands of consumption.
This negative aspect of interest-driven economies is worth commenting on and clarifying.
In a society where "keeping up with the Smiths" becomes an obsession, this obsession is largely incited by advertisements and propaganda for the latest models of this and that. The general public is introduced to the luxurious lifestyle of the wealthy, being shown the latest designer furniture and lush villas, fitted with the most modern kitchens and bathrooms and all manner of amenities.
Those with little means to buy what they crave are fobbed off with fake plastic money to satisfy their whims. Of course, it means that they have to buy above their income level. If they were to repay the money, even without interest, it would be tantamount to increasing their purchasing power in the present at the cost of reducing it in the future.
If a person earns 2,000 euros per month and goes out to buy expensive items with the help of borrowed money, say for an amount of 80,000 euros, his ability to repay will be determined by his net savings each month. Let's imagine that you can make ends meet with 1,200 euros, which would allow you to save 800 euros per month. You would have to live on that tight budget for the next 100 months to repay the loan you took out to meet the joyful expense of 80,000 euros, interest-free. What he has done, therefore, is to borrow money at the cost of his future 100 months (8 years and four months) to spend at the beginning of that period. The only advantage he has gained is that he has satisfied his impatience and fulfilled his wish, instead of waiting eight years and a bit.
But if you also have to pay interest on your loan of 80,000 euros, your financial situation will be much worse than in the previous example. At an average rate of, say, 14%, the borrowing on your future earnings will be much larger than the actual money you borrowed. His ability to repay will be reduced and the repayment period will be lengthened to a significant degree. This person will have to suffer patiently for about twenty years as punishment for his impatience, considering that he would be paying 1,000 euros per month, i.e. a total amount of 240,000 euros comprising the loan plus compound interest.
The loss certainly affects the borrower and not the lender. The lender is part of a very powerful system of exploitation that ensures, taking into account inflation and other losses, that the lender always ends up with more money in his pocket.
With inflation, the situation of the borrower in question worsens markedly. His purchasing power continues to decrease, so that if it was difficult for him to live on 1,200 Euros, it becomes impossible for him to meet his daily expenses with the same amount as time goes by. Of course, there are a lucky few who receive annual increases similar to the rate of inflation.
(lpbD) - God's peace and blessings be upon him.
(To be continued in installment 42, continuing with "Economic Peace" according to the teachings of the Holy Quran).