From: mmdh@cbnewsf.cb.att.com (Mazen Mokhtar)
Subject: Re: 'Riba' and Interest (was: Re: Civilization bandwagon)
Keywords: Riba, interest, Islam, economics
Organization: AT&T
Date: Fri, 11 Dec 1992 20:52:55 GMT

Assalamu `alaykum,

In article <1992Dec11.090010.19488@galileo.cc.rochester.edu> abde@troi.cc.rochester.edu (Tamer A. Abdelgawad) writes:
>In article <1992Dec10.175152.11332@cbfsb.cb.att.com> mmdh@cbnewsf.cb.att.com (Mazen Mokhtar) writes:

>Actually, you are right (and I study economics!  Oh, the shame.... :-) ).

  No problem. It's an easy mistake to make.

>You are right, and I should be more precise.  Read my statement "interest 
>rate under perfect competition reflects..".  Of course, very few markets
>are perfectly competitive, and the loan market is certainly not.  But that
>is besides the point:  If profits are competed away (as in the perfectly
>competitive model) do you then agree with my statement?  After all, we are
>discussing the concept of interest, not what interest rates are being 
>charged by US banks today.

  Yes I agree with your statement.

>Another way to view this is to think of a bank (in its function as
>intermediary between borrowers and lenders) as a firm that provides a
>service (intermediation) and receives compensation for providing it.
>This compensation (the difference between the borrowing and lending rate)
>covers costs (like wages of bank employees, return on capital investment,
>...etc.) and probably (in practice) includes a profit/loss component over
>and above cost compensation.

  What you are saying is correct and makes sense. This does not change the
fact that Islam made the interest forbidden. I am not denying the advantages
of charging it, I am only suggesting that the disadvantages are greater. More
important is that it is forbidden whether or not it is advantageous.

  This is a little like the ruling on pork. I personally do not deny that
pork may have some nutritional value, nor do I insist that pork was forbidden
because of disease. Even if pure and healthful it is still forbidden. The one
who set the law is Most Knowing of the wisdom behind it.

>So the only 'unfair' item is profit over and above costs.  This is usually
>dealt with in two ways:  either these profits are competed away, or the 
>government introduces regulation.  Again, this is not particular to the 
>banking industry.

  True.

>Having said all this, all you need to think about in the context of our 
>discussion is two people: a borrower and a lender.  If these two write
>a loan contract,  then it is only fair to take into account the value
>difference between a dollar today and a dollar a year from today.  You
>seem to accept compensation for inflation, but why not compensation for
>risk of default and pure time preference?

  The issue as I understand it is that money should not make money by vitue of
its existence. Money can make money by virtue of the work it generates or
the change in value of something which was bought.

  I cannot speak for God in things which He did not say, but I feel safe
asserting that the business behaviour resulting from an economy which allows
interest is contrary to the values which Islam tries to establish. In other
words, if interest were allowed, people would use their money in a way which
is far less desirable than the way they would use it if interest were not
allowed. The Islamic system encourages business and discourage so called
"lazy saving." It would also eliminate a majority of bankruptcies.

  If you notice, zakah is not levied on income, it is levied on assets. This
has the effect of encouraging business and discouraging saving under the
mattress.

  I do not claim to understand the intention of Allah, but the  picture is
gaining clarity about the economic model which Islam seeks to implement. Islam
clearly encourages business. Perhapse the rules of riba are to further that
goal.

>Despite my embarassing blunder above, I will say that the above four
>paragraphs (excluding mistakes of course :-) ) are standard economics.

  No problem, we all make mistakes. I agree that what you presented is
standard economics, but Muslims are not bound to obey Keynes (for example)
instead of obeying God. We both know how far economics is from beings an
exact science. Theories change. Ideas evolve. Furthermore, Islam has come
to set a complete way of life. A look at economics alone may not reveal the
wisdom of a law based on more comprehensive concerns.

>I would appreciate specific references to where it is precisely defined.

  Since I don't have the references with me today, I would kindly request that
you remind me to post them if I forget in the next few days.

>First, If you simply want to save your money, with minimal risk, then you
>shouldn't be expecting to make serious real returns on your savings.  In
>the U.S. today, you should be able to *at least* protect your savings from
>inflation with minimal risk.  In 'business venture' you couldn't even come
>close to doing that.  You always stand to lose your whole investment (e.g.
>Tawzeef ElAmwal debacle).  Even if you made negative real returns to your
>savings, that still doesn't compare with 'business venture'.  Again refer
>to my example above.

  Your argument above is sound. As a matter of fact, you bring up the only
good argument which I know in defense of interest. I do not deny that interest
can be of some benefit on occasion (so does alcohol), however, I feel that the
disadvantages, especially on the economy as a whole are serious. Of course,
the way I feel is secondary. Primary is the obedience of God.

  I would like to thank you for carrying on an intelligent and useful
discussion, free of flames or insults. Usenet needs that.


Assalamu `alaykum,

Mazen Mokhtar