The interest-based system and financial instability

Global economy in a downturn.

  • US dollar declines against major world currencies.
  • Turmoil in global financial markets and US economy.
  • Unemployment rate jumps to 5.1% in the US.
  • US employers cut 80,000 jobs in March, 2008.
  • US Federal Reserve (US Central Bank) cuts interest rates aggressively.
  • Global stocks on rebound as US Federal Reserve cuts interest rates.


These and so many more sensational headlines have been jumping at us from the print and electronic media, local and international, in the last couple of months. Try as we may, we cannot escape being bombarded with these grim realities. We are compelled to pause and reflect and ask the inevitable question: What is wrong? Financial instability and turmoil loom large. The symptoms are there for all to see.


Acritical look at these symptoms points to one root cause - Interest (Riba). Overlooking the root cause would be akin to taking an analgesic for malaria and hoping it would go away. The symptoms might disappear temporarily only to reappear stronger and ready to wreak more havoc. Cutting interest rates as a means of salvaging the situation is an admission, though indirect, by major capitalist economies that interest is indeed the problem. Let us take a brief look at the concept of interest so we understand clearly what drives the conventional or interest based financial system.


Interest or Riba is any predetermined, guaranteed rate of return, the payment or receipt of which is absolutely prohibited in Islam. It is a tool that enriches a small fraction of society while pauperizing and incapacitating a vast majority." Technically, interest is any positive, fixed, predetermined rate tied to the maturity and the amount of principal which is guaranteed regardless of the performance of a transaction or investment.


A practical example would suffice Mr Abu, a merchant, needs money to execute some transactions urgently and asks Mr Baba to lend him three million naira which he would pay back

after three months when his ships and merchandise should have returned from sea. Mr Baba agrees to lend the money to him on the condition that he must pay back three million six hundred thousand naira at the end of the three month period.


In addition to the predetermined six hundred thousand naira interest on the principal amount (equivalent to two hundred thousand naira every month), Mr Baba states that in the event that Mr. Abu is unable to repay the loan at the specified date, he would give him a respite period of another three months during which he will charge Mr Abu a monthly penalty of one hundred thousand naira for default in addition to the agreed two hundred thousand naira every month. Mr Baba also states that at the expiration of the "respite period", he would be forced to call in the loan and extract his "pound of flesh" from Mr Abu. Mr Abu agrees to all these conditions not because he thinks they are equitable and just but because he is desperate and has no alternative.


This scenario plays out in bur every day lives on a micro and macro level and is what drives the conventional interest based system. Money is regarded as a commodity to earn more money by those who have it in abundance at the expense of those who do not. There is hardly any incentive for an individual to work when he can give money out to people and get back more than he gave without making any effort or sharing any of the risk.


In the above example, is Mr Abu's ships and merchandise got lost or damaged at sea, Mr Baba would not accept any excuses or explanations. He also would not care if the ships got to harbour safely and Mr Abu sold the merchandise at a profit or at a loss. All he would be interested in is for Mr Abu to pay back the initial amount he borrowed from him plus all outstanding interest accrued. The dynamics of the transaction would be unnecessary details to Mr Baba.


What then are the indicators of financial instability caused by the interest-based?

Find out in the next edition


This article was culled from the publications of Deen Communication Limited



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