Islamic Economic Model: La Riba (Interest-free) Banking

During the last few years, a considerable body of literature has appeared, mostly in the Islamic countries, on an alternative economic system to the Western economic system. In the developing world there is increasing realization that the interest-based system of the capitalist West has failed to solve the problem of poverty and economic disparity. Various solutions have been tried to meet the economic needs of man, but he has not yet been able to achieve a welfare society, free from periodic recessions and depressions, based on equal opportunity, balance between classes, and spirit of cooperation rather that unbridled competition and greed.

Whether it is a capitalist system or socialist system, man is the center of the universe, directed by the basic instincts of food, sex and survival. Following the renaissance in the 14th century, Euro-central civilizational model has been motivated by Reason, which must be the cornerstone of all knowledge; even the Divinely inspired spiritual heritage was subjected to close scrutiny. In science, Darwin's theory of evolution and survival of the fittest permeated the intellectual courses; in economics, technological advancement as measured by GNP, became the hallmark of man's progress; in politics, democracy became the creed of representation government, rather than dictatorship.

The substitution of divine spiritualism, the common heritage of mankind since Islam, by secularist materialism has made man's life limited to satisfying the fundamental human urges, bereft of any sense of accountability before a creator in Hereafter. Churches and Synagogues have not talked about Hell for the last 75 years or so. No wonder, the prevailing civilization in the industrialized West and the deprived developing countries, which have been caught in the maze of scientific and technological developmental Western model, is suffering from political instability, the economic imbalance between rich and poor, and social ills like violence, drugs and teenage pregnancy.

Politically, European post-renaissance system has drifted from monarchy and oligarchy to government, based on popular representation. Whether they are Greek city states, consuls of Rome Constantine's Roman empire, Charlemagnes, Holy Roman Empire, nation states of medieval Europe or post-revolution democracies, their common denominator has been Man's quest for a decent living and security against attack by invaders. Since feudal lords provided protection to tenants, they levied taxes, supplied conscripts for army of the Monarch. The church itself owned land and worked in tandem with feudal aristocracy and monarchy. In the Middle Ages, on the bidding of Church, armies were raised to fight the Infidel, the Muslims, leading to the crusades in return for some pay, bounty and reward in Hereafter. Although the Christian army hated the Muslims, they respected them and contact between Muslims and Christians during crusades had a great impact on European economy, political and socio-cultural life.

In post-renaissance period Europe was swept by the wave of supremacy of Men, where the main tool of knowledge was Reason rather than Divine Revelation. Everything from scripture to secular knowledge - Astronomy, Geography, Mathematics, Medicine, Philosophy and Physics became empirical in reasoning and experimentation. Nothing existed unless it was tested by five's senses. In the history of Western thoughts, the scholars relied for inspiration on Greek civilization which was unknown to them till Arab Muslims translated (and commented upon) Greek sources into Latin and Romance languages. Under Alfonso the Third, the academy named after him, carried on this conversion and transmission of knowledge from Toledo in Spain wherefore books were carried on donkeys to all over Europe during the 11th to 13th centuries. James Barker's The Day the Universe Changed was televised, depicting that Andalus acted as a bridge between Greek civilization and Europe. In fact, ironical though it may seem, original Greek works were taken by scholars from Istanbul when it was conquered by Mohammad the conqueror in 1458, to Bologna in Italy; till then only Arabic translations were available to Europe.

In turn, the Greeks owed much to earlier civilizations: Assyrians, Babylonians, Chaldions, Chinese, Egyptians, Indians; this portrayal by Cornell's Martin Bernal in Black Athena has angered many Western Scholars who have been advocates of Greeks as precursors of Western Civilizations, ignoring the debt Greeks owed to earlier civilizations. Similarly, the West, excepting the scholars, rarely acknowledges the contribution of Arabs in heralding renaissance in Europe. Knowledge is a continuum, but not to a vast majority in the West. On the contrary, the Western man looks with disdain on Arab Muslims, considering them as retrogrades. He is ignorant of the fact that Al-Beruni in 10th century, much earlier than Galileo proved that the Earth revolved around the Sun. Avicenna's (Ibn-i-Sina) canon was taught in Europe for 200 years; Averros (Ibn-i-Rushd) is considered very popular in Europe for his philosophical commentaries on Aristotle; Ibne-Khaldun is considered the father of sociology; Al-Khwarzami (for algorithms) and Al-Jabr-wal-Muqabla heralded modern mathematics in which Arabic numerals replaced Latin numbers; in astronomy, many names of stars are Arabic in origin. Likewise, Al-Kindi as geographer and Al-beruni as mathematician measured the circumference of the Earth with greater precision than Ptolemy; Al-Zahravi as gynecologist and Ibne-Haitham as the father of optics, have made lasting contributions to Western sciences. Chemistry is derived from the Arabic branch of learning known as "Al-Kimia"; Algebra from "Al-Jabr-Wal-Muqabla". And as a final example, Al-Idrisi was a great geographer who prepared the Atlas of the world.

Nine hundred years before Columbus, a West African Muslim King of Mali sent expeditions to explore what lies beyond the Atlantic Ocean; all ships were destroyed, one survived and reached the Caribbean, where an Arabic translation was later found, confirming the discovery of America by West African Muslims long before Columbus. Al Omari, the historian has mentioned this historical fact. Likewise, Spain was first explored during the time of Othman, the third Caliph. He sent Oqba Bin Naji to Spain with instructions to reach Constantinople overland. But the Berber tribes stopped his passage and further expeditions were discontinued.

Andalus served as a bridge for transfer of learning from Arabia into Europe, leading to renaissance there. At an International Conference on Islamic Spain at Lahore in 1991, tributes were paid to the contribution made to the West by Arab Muslims [the writer coordinated this conference]. The scientific, technological and economic advance in the West since the rennaissance accompanied by political and intellectual development, has not made man a happy being or the present society more egalitarian and just. Plagued by socio-economic ills the West is bewildered as attempts are being made to tinker with the problem as is evident from the advocacy of family virtues by Republicans who upon that platform, won the 1994 congressional elections. In national economies, sustained economic progress leads to the heating of the economy, giving rise to increases in interest rates to curb inflation; the risk always remains that the pendulum may swing in the other direction - recession.

To overcome the economic ills of the West, spilling over in the political and social realm, another alternative economic model is needed, especially in the wake of the failure of the socialist model. In that sense, Fukuyame's End of History is at best a flawed proclamation about the victory of Capitalism as the panacea for all ills afflicting modern society, i.e. the ecological disasters, green house effect, pollution, and prospects of nuclear winter. These are attributed to unbridled industrialization and urbanization with their concomitant effects in social fields.

The alternative is the La-Riba (interest free) system postulated by Islam and practical for a long time before the Western interest-based system played havoc with the world's economy. Interest is banned in the Old Testament of the Bible. Al Quran considers interest as war on Allah. In the Islamic economic system, money is a medium of exchange, not-to-be transacted on, be it home or mortgage, credit card, car purchase, and the like. In the Western economic model, the consumer society, based on instant gratification, has placed a heavy burden of debt on individual and community, being passed on to future generations.

To obviate these ills, Islamic system proposes Modaraba, Musharka, and Ijara. The Modaraba is a partnership between the provider of capital and worker; both agree to share profits on an agreed basis while the loss is borne by the former as the worker loses his labor. The messenger of Allah (MPBUH) carried on in this manner trading with the capital of Khadijah. In Musharka, the shareholders in a joint stock company share their profits and losses, but the management company made responsible for the day to day operations, share in profit while the loss is borne by the shareholders, with the management company losing their labor. In capitalist system the management company receives their fees irrespective of profit or loss, enabling them to acquire riches at the expense of share holders which is iniquitous. For instance, in stocks and Mutual Funds, the holding company is paid finance charges, losses notwithstanding. Ijara, is a form of leasing with the user of machinery paying the rent on the market value of the machinery on a declining scale.

For example, La Riba bank, a form of Mudaraba, enters into agreement with depositors that they will be paid a return, proportionate to the profit or loss in the investment of their capital; the bank invests capital on agreed terms, with a director of the bank sitting in the board of directors of the joint venture, be it an industry or a trading company, and sharing profit as well as loss. This is in sharp contrast to the prevalent banking practices, charging fixed interest against collateral, irrespective of the profit or loss with depositors receiving fixed interest in turn. The credit card venture, whether it is a company or a bank, charges exorbitant interest, passing on a small percentage to depositors. The musharka has its equivalent in joint stock company, considered permissible in Islam, as it entails a sharing in both profits and losses.

Apart from equipment and machinery, leasing or Ijara is used in the purchase of homes or cars, with La Riba financing institution entering into separate agreements with depositors and users. By way of example, if a loan of $100,000 is provided, the tenant, not the owner, agrees to pay installments of the loan over an agreed period which is much shorter than 15-30 years so that the investors receive their capital early enough. In addition, the tenant or user pays rent, depending on the market value, assessed annually, with the total of investment and rent not exceeding the installment of loan under mortgage system. Also, in the event of default, the house or car is not seized, as is the capital system, and the tenant is given a grace period beyond which a penalty may be imposed to deter defaults. Thus, the Islamic system works on the tradition of the prophet (MPBUH): that the lender should provide a grace period, etc. It is more just and equitable than the capitalist system wherein the lender must receive his pound of flesh. At the same time, the debtor is encouraged to pay back the loan; in case of death, it is paid before the inheritance is divided.

Besides the interest free financing, the Islamic system is based on voluntary spending (Sadaqa) or charity, gifts and donations to the poor, needy, old, handicapped, wayfarers, war veterans, widows, orphans, school, hospitals, in addition to the compulsory payment of Zakat (2.5%). Al-Quran exhorts Muslims to spend whatever is surplus to their neess, ensuring circulation of wealth in forty years. Earning of reward in Hereafter provides the incentive for spending on the poor, rather than hoarding and instant gratification. Helping the neighbor is encouraged to the extent that the Prophet (MPBUH) imagined that Gabriel may make neighbors entitled to inherit property. Giving to the relations earns double reward - Sila Rahmi.

No wonder, the Islamic system is gaining popularity. In Pakistan, mutual funds and industrial joint ventures on Mudaraba basis have been established. The Baitul Mal Al Islamic Geneva has set up about a dozen Islamic banks. La Riba financing institution by Dr Yahya Abdul Rahman has opened many branches in USA including one in Uzbekistan. Grindlays Bank in Pakistan has opened a Mudaraba. In Houston, St Louis, and Toronto, loans are being given on an interest-free basis.

Given the concept of accountability in Hereafter, the Islamic system, especially in the field of Economics, may prove to be a harbinger of a new era of welfare state - a Utopia - which has been the unrealized dream of mankind. If man realizes his true station in life as vice-roy of God on earth, he may make it a heaven of peace, progress and harmony.