Sosyal Medya

Economy

Why we are against interest-based economy system

To put it differently, the dilemma of the desire for an ‘interest-free economy’ can only be likened to that of ‘Death and heaven’. Although nearly all humans desire to go to heaven, none of us seems prepared enough to die and yet it’s the only way to get to heaven!

05-09-2020 19:07
B. Abubakar 
 
In a recent study on 23 economies from the Eurozone and OECD, Selim & Hassan (2019) demonstrated how the how those with negative and or interest-free economies seem to be faring much better in terms of sustainable low inflation rates as compared to the those pursuing positive interest rates. Despite such studies, however, the general public is still reluctant to embrace the only tested and proven tool to poverty eradication, interest-free economic practices.
 
To put it differently, the dilemma of the desire for an ‘interest-free economy’ can only be likened to that of ‘Death and heaven’. Although nearly all humans desire to go to heaven, none of us seems prepared enough to die and yet it’s the only way to get to heaven! Since time immemorial, interest rate charges have been blamed and condemned as an unjustified form of self-enrichment at the expense of the vulnerable groups in every society. Take for example the holy Quran and the Bible, both of which are the most pronounced among the divine scriptures, they explicitly prohibit and unequivocally condemn lending and or doing any form of business on the basis of charging and receiving of interest. Instead, benevolent lending /interest-free schemes (Qardh-Hassan as known from the Islamic viewpoint) and mutual partnerships in form of profit and loss sharing such as (musharak, amudaraba, ijarah, and extra) are encouraged for the prosperity and wellbeing of humanity. Surprisingly, to this day, almost all financial institutions continue to engage in some form of interest-based business. 
 
Besides, according to the United Nations General Assembly (UNDA, 2011), any economic policy, monetary or otherwise is measured by evaluating its effectiveness towards improving the happiness of the people and their general wellbeing. Charging interest as a policy which dominates contemporary business dealings as practised across financial as well as banking institutions and even amongst individuals over and above being exploitative to the vulnerable groups in society, it is inherently prone to economic crises. So, charging interest as a lending policy fails the UN standard test. Specifically, all major economic and financial crises throughout history have in one way or another been attributed to interest-based business transactions. Some of the immediate questions that remain lingering in the mind of the reader then is “Why this paradox?” Does it mean interest rate charging and or receipt is a “necessary evil”? The plain answer is no, not at all. To be straight forward, the logic behind its seemingly perpetual existence hails from its economic power as an effective tool by which the “haves” extend their dominance over the “have-nots”. 
 
Economically, interest rate charging and receiving is a clear cut “evil” that does not require any extra natural abilities like that of the genius to understand as I will theoretically demonstrate by way of comparing the interest-based and the interest-free systems on the basis of the aggregate demand function. In fact, it is the main reason for which the so-called “poor countries” of Africa, South America, Asia, among others languish in poverty and unending hunger crises despite purportedly enormous efforts by the World’s so-called “Rich Countries”. Their supposed help is extended in the form of the so-called soft-loans. Technically, however, such loans are only offered as a product of power relations in which the economically powerful capture, dominate, subordinate and exploit the poor groups in the different societal, political and economic fields. It is not surprising, therefore, to observe that using the institution of interest charges, the otherwise poor countries have perpetuated their influence over the would-be richest countries of the world such as the Democratic Republic of Congo. 
 
Quoting the words of the former president of the federal republic of Nigeria; Olusegun Obasanjo in which he proclaimed the evil of charging interest to the vulnerable societies thus: “All that we had borrowed up to 1985 or 1986 was around $5 billion and we have paid about $16 billion yet we are still being told that we owe about $28 billion. That $28 billion came about because of the injustice in the foreign creditors’ interest rates. If you ask me what the worst thing in the world is, I will say it is compound interest.”  (Jubilee 2000 news update, 18 August 2000). Therefore, from such proclamations, it is not an exaggeration to argue that poor countries are to remain poor if the much-needed attention is not given to the long-overdue interest-free loaning schemes.
 
To demonstrate how poor economies have been kept under impoverished conditions, I compare the impact of loans obtained on the basis of Charging/paying interest against those under the interest-free financial schemes. Since paying of interest is an undisputed additional cost of capital to entrepreneurs, it becomes clear that such businesses and even countries cannot be able to operate at their full potential. The unrealized potential national output that is put to waste due to interest charges on borrowed funds implies that such firms and economies perpetually produce at excess capacity. This production at excess capacity leads to wastage of scarce resources, exploitation of consumers, perpetual poverty, predation and intimidation in economic activities all of which are typical vices that characterize the capitalistic economies across the globe. So, the attainment of macroeconomic goals under the interest-based system is similar to chasing a mirage!
 
In contrast, in an interest-free financial and monetary environment where lending and borrowing is on the basis of either mutual partnerships and or profit and loss sharing arrangements, macroeconomic goals of high economic growth, full employment and sustainable price and financial stability can easily be achieved. This is attributed to the lower cost of borrowing and activation of the full potential of all cohorts of the populace by way of a distributed justice. The absence of interest rate charges positively impacts on the Aggregate consumption and Aggregate government expenditures. The multiplier effect of all this positive correlation, therefore, ceteris paribus, all this work in a synchronized manner to increase aggregate expenditure thereby prompting a shift in the aggregate expenditure function upwards, causing a reduction in unemployment rates and ultimately achieving a new higher equilibrium real national incomes.
 
In conclusion, an interest-free approach as a mode of financing in an economy is the ideal solutions for any society that is genuine about fighting poverty and misery amongst the largest cohort of its populace. Specifically, since the least developed countries of the world are dominated by small and medium-sized enterprises that crucially need funding, the only ideal solution is to embrace interest-free financing strategies. Lest the vicious cycle of poverty, inferiority, hunger and disease will continue to haunt us! 

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