Economic Rationale Of Riba Prohibition And Implications Economics Essay

The constitution of a operable system of economic system: –

Islam encourages the economic system to work in natural manner and roots of which are really practical without any exterior forces to make so. That put forth the really ground of being a human to execute at its natural capacity degree without development of oneself.

Enabling every one to acquire what is truly due to him: –

Islam being a faith beyond boundaries allow people to gain wealth by really take parting in the work procedure therefore earn the wealth by seting 1s attempts straight and practically.

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Eliminating the concentration of wealth:

It is of extreme importance in Islamic legal power that the wealth should non be agitating in the custodies of few people instead it is encouragingevery one to gain halal income.It is done to cut down the spread between Rich and hapless that is consequence of natural procedure of economic system.

Economic Rationale of Riba Prohibition and Deductions

If we analyze the involvement based economic system, we can picture is inefficiency from its incapableness of allotment of resources and growing as evident from past path record of the same.

Conventional economic experts claim that their mechanism of involvement based economic system assures and guarantees the efficient use of available financess. As per Keynesian theory of efficiency that every investor looks for fringy efficiency of investing as their focal point but it is besides believed that price reduction rate ( involvement rate ) is determined by demand and supply. The determination devising point is ever that MEI must be greater that determined Discount rate or else the undertaking can non be undertaken. he point of treatment here is that what will go on to those undertakings which do non follow with the MEI/DR? Here comes the use of those financess which will stay unutilized, Islamic economic system believes in the hazard and net income sharing mechanism therefore labour fruitfully will be improved in comparing to conventional based system how of all time it should be noted that the same job still persists in both economic systems that is of anticipation of price reduction rate.

It is besides being noted that involvement based economic system which is regulated infact controlled by Interest rate factor is impacting the planetary economic system severly.Shariha has purely prohibited the usage of Riba at minute degree where as Riba free system offers net income and loss sharing system which is expected to be free from all these contradictions as a whole.

An illustration of economic development Riba: A individual who lends Rs. 100,000/= at a fixed rate of 10 % yearly therefore he will acquire 10,000/= supernumerary for the waiting of his one twelvemonth hence he is selling 100,000 for 120,000 without making any labour work which is undoubtedly an economic development.

Not merely Islam but besides other faiths have strictly prohibited the Riba. The economic grounds are as follows:

Riba stimulate the wealth to roll up in few custodies trailing major part of wealth in the custodies of few that is traveling to be debatable for remainder of others.

Islamic economic system let to gain net income merely if capable is exposed to hazard of loss.In conventional banking system most of the undertakings are lent by Bankss are non of their ain but of the sedimentation holders so they merely merely relend the bing liability at higher cost they don & amp ; acirc ; ˆ™t do any thing else and doest non represent ain financess mobilisation.

As anchoring rule of Islamic finance that promotes distribution of wealth with natural procedure unlike conventional 1s that promotes to gain if you have capital merely.

Refraction of Money from its nature of being MONEY:

Having gone through and studied economic sciences in my academe everyone has surveies the maps of Money as Medium of exchange, step of value or shop. To understand how riba or Interest alterations the map of Money, please refer following illustration:

A individual who has Rs.500,000 in his pocket, He lends Rs. 500,000 to B individual on evidences that he will pay 10 % involvement rate on the sum individual A lends to B. At the twelvemonth terminal B returns the same with 500,000+50,000 as Interest income to A now he has 550,000 at twelvemonth terminal that becomes his income.In this scenario map of money alterations to Trading of money from medium of exchange. Money is non a good itself that is sold in market and gain money on it because it has no public-service corporation in it.

Interest exploits the system:

DrEjaad, PhD in Islamic Finance explained the development of economic system through involvement back system. He narrated that cost of money doubles and redoubles after every specific period of clip and therefore this computation and system of generation continues. Suppose there is a economic system named A in which Rs100mn is injected through a concern by a Lone bank in that state at the rate of 10 % therefore at the twelvemonth terminal economic system must be holding available financess of Rs110mn with no axial rotation over option available. What if a individual who has borrowed from bank goes default? The bank who has financess of general populace will besides be near to bankruptcy. It is to be noted that it besides creates money over money in the economic system now at the twelvemonth terminal Bank A has 10mn supernumerary to impart to another individual for another involvement income. Hence Bank earns involvement on involvement which is development of system.

Positive correlativity with Inflation

It is crystal clear fact that involvement rate is co determiner of rising prices and that affects and is being affected by rising prices on existent footing. Increase in rate of the rising prices consequences in deflation of existent involvement rate doing lessening in demand for money, On the other manus provider of money raises nominal involvement rates so that existent involvement rate does non fall which finally consequences in addition in rising prices rate which shows direct correlativity of rising prices with involvement rates therefore raise in rising prices will ensue in rise in involvement rates and lower demand for money.

It is besides supported by the sole survey of Steven Doldfield ( 1973 ) , he concluded that for the period from 1952 to 1973 10 % addition in involvement rate cause three per centum decrease in existent demand for money M1 and thenceforth decrease in demand of money consequences in worsening GDP, maintain in head that involvement rates affects Money demand, supply and GDP nevertheless no excess end product was produced at big.

Debt slaves- Global economic system.

As reported by HDR 1992 that rich are going wealths and the hapless are becomingg poorer. In 1960, the worth of one billion population out of 5bn was better off than the worth of 30 billion population of the planetary economic system. It was besides putforth that the net transportation from rich states to hapless states is acquiring lower by lower i.e for every one dollar hapless states get as loan by rich states they pay off 11.1 dollar in return to the same, a true illustration of debt bondage.

Catastrophic effects on Society:

Apart from existent pecuniary consequence of Riba, it has terrible effects on moral and humanity of the society at big and it is done by accretion of wealth in the custodies of few. Which triggers risk free retention of capital, there by concern failure, inequality of income, unemployement and inequal distribution of wealth.Islam as a faith of peace, supports the just dealing in every work where as such procedure sucks the blood of homo at big therefore lodging the same to the holder of hazard free capital.

Unjustified pre-determined rate of return:

Money given for investing and concern intent can non foretell the rate of return on the investing and it is impossible to cognize in front that what will be the rate of return on the same and there is besides opportunity of loss in this game. Therefore, it is undue to bear down preset rate of involvement on the investing on which rate of net income is unknown which is morally non justified itself. Capital supplier should portion the hazard in loss and net income if he wants to gain the net income.

Function of involvement in backing economy:

It is by and large believed that involvement rate becomes the beginning of income for those who has economy and therefore advance investing and economic development globally.But the fact is other unit of ammunition of the coin, Financial crisis 2008 and Asia crisis are few of the illustrations of Interest rate miracles that caused immense reverse to planetary economic system with particular mention to Asia. Financial crisis of 2008 is fundamentally mortgage back crisis and Riba was the major factor behind this.

Above image depict that Interest fundamentally sucked the economic system into vain and ensuing in immense reverse to planetary economic systems and go forthing behind 1000000s of people unemployed. For salvaging purpose involvement rate is non ONLY of import factor to chew over on, there are others excessively similar income degree, demand of ingestion, rising prices, economic and financial measurings and ability to salvage.

Rent on capital- yes involvement is non.

It is putforth before the people by conventional economic expert that involvement is the rate of return of the individual who takes hazard for imparting the money to a individual he doest non know and does non swear, it is compensation of the rising prices, hazard of loaning and chance cost. Islam does non see anything halal unless individual takes the hazard of loss as good and participates in the work and portion net income and loss. But how come he earns a fix rate of return on the loan he makes to a individual who himself does non cognize what will be the future return on the same investing in a given period of time.If he does non cognize the rate of return himself how come he can offer the fixed rate of return to the individual who even does non take part in the labour.

Against the want of Allah:

Allah creates this universe and implements His ain opinions over His people. It is we who changes the Godhead counsel. Look at today & A ; acirc ; ˆ™s unfairness with those who need the money for their everyday care where as rich takes the benefit of it and confirm it as his income. Analyze the virtuousness of it that Riches charge more than he owes to him and its contrarary to the Divine opinions to assist the individual who is needy without any subterranean benefit because it is between you and ALLAH and it was ne’er between you and individual seeking aid.

Unemployment and rising prices

It is specifically has been proved by the celebrated economic experts including Weitzman refering rising prices and unemployment with regard to consequence of Interest rates. Interest rate has direct and positive consequence on cost of production, therefore higher the involvement rates higher the cost of production therefore complication the investing and worsening in the same. Hence workers are at the brink of unemployment so that cost of labour can be controlled. On the other side, due to increasing involvement rates, investors increase the monetary value of their merchandise so that fringy cost can be recovered therefore cost push rising prices occurs.

Contrary to this when there are lower involvement rates so investors opt for capital intensive techniques in which labours are replaced with heavy machinery items.It is now proved that stagflation do exists as earlier it was non entrusted.Todayunemployement and rising prices can coexist and economic experts have suggested that net income sharing mechanism is the lone mechanism that can work out the enigma of stagflation

Economic resources are non utilised decently due to selective undertakings:

In involvement based systems and banking with the same, work under fixed rate of return on both sides of liability. One on the sedimentation holders where they are promised the fixed rate of return and same on loan side where borrower has promised to pay fixed rate of return regardless of the place of concern. In this respect, Bankss take really selective locales for investing and grants loans to large giants merely those who have ability to refund even in instance of default. When they find deficiency in party, the proposal is rejected on the evidences of security. Hence all the beginnings of economic system are non utilised decently which could hold been used to bring forth and increase the GNP of state. In conventional economic system merely security and chance of return is considered non the economic well being.

Interest and entrepreneurship

In this fast turning economic system, enterprenuears play a cardinal function in the development of economy.They are cardinal piilars of economic construction of coutry because they are exclusive determinents of the progress.The very fact is that they lack in security they merely have thought and ability to bring forth. Due to miss in mortage and security involvement backed banking does now let and allow loans to them on the other manus large land Godheads and large houses do the same by utilizing their thoughts and capitalized the thoughts of immature entrpreneuers therefore they are non paid which is due to them and discourages the new rise starts and this is besides one of the cardinal hindrends of economic development in developing economic systems.

Interest and stableness in the economic system:

A good proved fact in today & A ; acirc ; ˆ™s field of economic sciences is that involvement rate plays a cardinal function in the really ground of stableness of the capitalist economy.An independent survey by Milton Friedman concluded that the lone factor behind fickle behaviour of US economic system is due to Interest rate. This does non merely impact the predictability of economic system but besides cost of making concern, fluctuations in sectorial development, unannounced motions in loan based investings, stock monetary values and trade good monetary values. It besides creates spread between long term and short term investing programs due to volatitle cost of financess, investing besides becomes volatitle due uncertanility of involvement rates therefore impacting rate of nest eggs in economic system because due to uncertainityin cost of financess, Bankss are left with excesss financess with them therefore Bankss offer lower rates of return to lodge holders.

Profitableness and productiveness

From the research it is apparent that involvement rate dramas intermediary function between productiveness and profitableness. Oppositions of Islamic economic system argue that net income sharing system reduces the profitableness of elephantine houses and Bankss but the fact is that it spreads the net income to larger multitudes than agitating in few custodies. Due to sharing of net income, spouses put their maximal possible attempts to work difficult hence productiveness additions in comparing to conventional counter parts loan based investments.Thus Interest based economic system reduces the productiveness and profitableness at big.

Specifically talking why each type of Riba is unacceptable:

Riba Al Nasiha: Riba Al Nasiha is redirected at pricing the money in a ballad adult male linguistic communication. Riba Al Nasihasimply means bear downing above or over the principal without any due consideration.

The economic grounds why Usury is prohibited in Islam is as follows:

Usury as Unearned Income

It is really simple to understand that money is non trade good or has non any public-service corporation in it that can be priced for. Any addition earned on the same is considered as unearned income because it is earned without seting any attempts in it

Double Charge

Universally accepted truth is that through riba bogus money is created by bear downing involvement from one and imparting the same accrued involvement to an other one and bear downing the involvement from them excessively.

Usury as Exploitation of the Needy

It is possible in instance individual has borrowed money for their pressing and everyday demands. Person who is borrowing money for run intoing his or her everyday demands mean he is unable to run into the same in given resoucrs available to him how semen he will pay the monetary value of that loan excessively?

Usury as Dismissing the Future

Interest rate is used for dismissing the money that is collectible in future with what worth it today. A individual who does non cognize the future how come he predicts it when it comes for paying the cost?

Riba Al

Riba al-Fadl & A ; Acirc ; consequences in instance of sale procedure, which occurs when individual inquire for any compensation without any due consideration ensuing from instance of sale.It is merely recognized when six stated trade goods are exchanged without consideraing the quality but must be equal and on topographic point or else dealing will come under the umbrella of Riba Al Fadal.

Due to infliction of Riba Al Fadl, Islam closed the doors of swap trade unless it is on topographic point and of similar goods.Riba Al Fadl rises on history of debasing of coins whilst interchanging the same with echt 1s. The really ground Riba Al Fadl was prohibited and was condemned on same evidences. As per Hadith if same point is exchanged for same point so factor of quality has to ignored and measure and weight be the same that must be on spot dealing. Why that is so? This is because why a individual would interchange the same trade goods with another 1s because he wants to interchange the inferior goods with superior 1s which is evidently an unjust trade.

This injuction is aimed at detering the people from accretion of goods, the crystal clear understanding given by Imam Ghazali in his narrative about the same subject that On that clip Gold and Ag were considered as medium of exchange and interchanging the same trade goods for same point in different measures loses the intent of their being. An other ground explained by Ibn Qayoom that Riba Al Fadl was prohibited because it could hold been possible that individual may indulge in Riba Al Nasiha.


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