Why Has Islam Prohibited Interest?

An explanatory presentation on M. Umer Chapra article Why Has Islam Prohibited Interest: Rationale behind the prohibition of interest

Inquiries
Questions raised from the article abstract:
1. 2. 3.

Would it be possible for an Islamic society to realize humanitarian goals by using a different strategy? Why a system of financial intermediation that encourages substancial reliance on interest-bearing debt endangers the goal realization? Why the Islamic strategy may be more conducive to achieve humanitarian goals?

Introduction
Before providing relevant explanation to those inquiries, we have to understand why Moslem countries, especially Pakistan should adopt a different mechanism for financial intermediation. The obvious anwer is, because of Islamic injunction against interest. This premise then leads to another question; Is there any solid rationale behind the prohibition?
The rationale might be difficult to comprehend if we do not take account the maqasid al-shariah or the goals of Islam. The strategy should be in line with these goals. If it is not, the goals may not be attained. Thus, we need to see what the goals of Islam first.

Flow of Rationale

The central goal of Islam

Establishment of justice
Umer Chapra, 1982

The implications of justice

Establishment of Justice: The central goal of Islam

The Quran and the Sunnah have both emphasized on justice and considered it one of the central objectives of shariah.

Establishment of justice is one of the primary purposes for which God has sent His prophets (al-Quran, 57:25).

The Quran places justice nearest to righteousness or taqwa (al-Quran, 5:8) due to its importance in the Islamic faith.
The Prophet, peace and blessings be upon him, warned: Beware of injustice for injustice will lead to absolute darkness on the Day of Judgement.

Establishment of Justice (contd)

All leading jurist throughout Muslim history have held justice to be an indispensable ingredient of maqasid al-shariah.

Abu Yusuf (d. 182/798) in his letter to Chalip Harun al-Rashid (d. 193/809): Rendering justice to those wronged and eradicating injustice, raises tax revenue, accelerates development of the country, and brings blessings in addition to reward in the Hereafter. Al-Mawardi (d. 450/1058) stressed that comprehensive justice inculcates mutual love and affection, obedience to the law, development of the country, expansion of wealth, growth of progeny, and security of the sovereign.

Establishment of Justice (contd)

Ibn Taymiyyah (d. 728/1328) zealously upheld the adages prevailing in his times that: God upholds the just state even if it is unbelieving, but does not uphold the unjust state even if it is Islamic, and that the world can survive with justice and unbelief, but not with injustice and Islam. Ibn Khaldun (d. 808/1406) elaborated further about injustice, especially on opression that: Oppression does not consist merely in taking away wealth and property from its owner without cause or compensation. Oppression has rather a wider connotation. Anyone who seizes the property of others, forces them to work for him against their will, makes unjust claims on them, or imposes on them burdens not sanctioned by the shariah, is an oppressor.

The Implications of Justice

Justice has wide implications, one of the most important of these is that resources provided by God to mankind are a trust (amanah) and must be utilized in such a manner that the well-being of all is ensured.
In the field of economics, justice demands the use of resources in such an equitable manner in order to realize universally-cherished humanitarian goals. Humanitarian goals cannot be realized without a humanitarian strategy. One of things the strategy requires is the injection of a moral dimension. Abolition of interest is a part of this moral dimension.

The Implications of Justice (Contd)

Umer Chapra wrote in his article: confining the rationale behind the prohibition of interest to just this limited objective is not only factually wrong but also unduly restrictive in terms of the concept of justice in Islam. Chapra used the trader and financier case in Prophets time to show the rationale behind the prohibition of interest.
Chapra then elaborated the idea to reorganize the economic system, especially in financial intermediation with the basis of equity and profitand-loss sharing. It would make the financier share in the risks as well as the reward of business.

The Humanitarian Goals

Need fulfillment

Equitable distribution

Optimum growth and full employment

Economic stability
Umer Chapra, 1982

1. Need fulfillment

Financial resources with the basis of interest are available to borrowers who are able to provide acceptable collateral and sufficient cash flow.
Hence, financial resources go to the rich and governments who considered fulfill the criteria. In fact, they borrow not only for investment, but also for unproductive and wasteful consumption. The relatively easy availability of credit generates a rapid expansion in claims on resources, accentuates macroeconomic and external imbalances, and squeezes resources for need fulfillment and development.

Need fulfillment (Contd)

When the governments apply for borrowed funds, it will be imposed with debt-servicing payment consisting of interest and amortization.
Chapra had a notion that if the country had undertaken the Islamic junction seriously, it would have tried to reduce its deficits by minimizing its borrowing. The higher the interest payment as a percentage of total government expenditure, the less will be available for development purposes.

2. Optimum growth and full employment

The basic ingredients for sustained growth are:
Saving Investment Hard and conscientious work Technological progress and

creative management government policies

Helpful social behaviour and

3. Equitable distribution

Zakat and inheritance system.

The replacement of interestbased financial intermediation with profit-and-loss sharing system. According Laster Thurow, credit tends to go to those who are lucky rather than smart or meriocratic.

4. Economic stability

Lenders should not only rely on ones ability in providing acceptable collateral and the strength or prospect of the project.
Borrowed funds should be allocated to productive spendings. Do not depend too much on short-term loans which are able to cause instability toward foreign exchange trading. Choose long-term loans and equity financing.

Conclusion
1.

Yes, it would be possible because the Islamic society undertakes a humanitarian strategy emphasizing on establishment of justice for mankind.
Because an interest-based financial intermediation tends to give borrowed funds easily. Problems come up when the funds are spent on unproductive and wasteful purposes that squeeze resources availability for need fulfillment and social development. As Chapra mentioned in his article, humanitarian goals need a humanitarian strategy. Abolition of interest in Islamic junction and Islamic values themselves enable to provide conducive predicament to the goal realization.

2.

3.

Raise your hand. Ask us any questions.

Zaiful Bahri 12820038 Irsa Wafiatul Qisthi 12820092