Prohibition of Interest (Riba)
Islam forbids lending and borrowing of money on interest, which also entails certain limits on commerce. It is ironic that this country’s intellectuals tend to look with favour on Communism, and yet are inclined to support an economic order based on interest. The fact of the matter is that interest has been the most important cause of economic and financial catastrophes in the world.
Interest enables a shrewd and clever businessman to accumulate vast amounts of money, which then enables him to control markets or establish large factories, thereby reducing many people to perpetual economic subservience. If one were to examine the list of the world’s richest men, it would be found that it was made up of mostly people who owe their rise to interest. They start with a small amount of capital but soon establish a reputation of creditworthiness, which allows them to leverage their small personal capital many times over via bank borrowing and overdrafts, thereby becoming super-rich in just a few years. There are others, who may not have any significant amount to invest, but use their wit and contacts to cultivate relationship with bank managers to borrow large sums of money. Only a tiny percentage of the rich make their entire money from personal capital.
Interest is one of the most destructive economic forces in the world and a major hurdle that stops the poor from moving forward. It is thus imperative that mankind rid itself of interest. If the rich were unable to borrow money on interest, they would be left with one of the two choices. They could expand their business by including more people in their partnership, which would of necessity involve spreading the earnings over a wider group of people. Or, alternatively, they would not be able to grow their business and become a hindrance to other small businesses. Either way, there would be a more equitable distribution of wealth. It would also prevent the accumulation of wealth into the hands of a few people, which is extremely dangerous and detrimental for overall economic progress. Unfortunately despite the clearly visible harmful effects of interest, people remain entangled in the deadly web of interest, and do not ponder over the destructive impact that this financial system has at national and international levels. Ironically, even the supporters of Communism do not escape from this trap, for they do not find anything wrong with interest even though it is the root of capitalism. There are communists around the world who do not see anything wrong with interest, and as such end up inadvertently lending support to the very foundation of capitalism.
Islam adopts a rather broader definition of interest. According to the Islamic definition, certain transactions, which are generally not considered to fall within its purview, nevertheless fall within its domain and are therefore prohibited. Islam defines interest as any transaction where the profit is guaranteed. Therefore all trusts, [local monopolistic arrangements] which are set up to guarantee profit by destroying competition, are to be considered un-Islamic. For example, suppose fifteen or twenty large businesses in a country got together and formed a monopoly that fixed prices and restricted competition. Then a commodity that sells for (say) two rupees in a competitive market could sell at an artificial monopolistic price of (say) five rupees. Since everyone would be colluding to sell the commodity at five rupees, consumers would not be able to shop around for the best price and would have no choice but to pay the higher price.
Smaller businesses would not have the ability to compete with such trusts. Even if they tried to compete by reducing the price, the trust with its monopolistic power would start a price war, which they would find impossible to win. Thus, all monopolistic arrangements are dangerous both for the country and for the global economy.
In connection with certain commercial schemes of Ahmadiyya Muslim Community, I once had the occasion to collect information concerning the shellac business, which requires only a small capital to set up and is confined to certain areas of India, notably the Patiala state. I was surprised to discover that one single European firm had established a monopoly over its trade. On enquiring as to how this monopoly had emerged, I learned that other firms were very small, while this firm was doing business of far greater magnitude. It not only controlled the shellac trade, but was also engaged in trading wheat, cloth, jute and other products. If any business ventured to compete, the European firm would reduce the shellac price so low that a new entrant could not survive for long. In fact the new entrant was often made to sell its remaining inventory to the European firm, which would then recoup its lost earnings by raising the shellac price. That is how the firm managed to maintain its monopoly power and did not allow a competitor to come in. It is as such evident that all monopolistic arrangements that seek guaranteed profit hurt public at large, and are therefore against the Islamic precepts.
Similarly, cartels formed across countries are also unlawful under the Islamic economic system. Such cartels involve businesses belonging to different countries, which get together and agree on a price for a particular commodity. While trusts are monopolistic arrangements between local businesses, cartels are formed across countries. For example, firms from America and England, or America, England and Germany, or England and India might come together to agree on the terms for trading in specific commodities. Suppose these firms entered into an agreement in the chemicals industry, which is largely in the hands of American, English and German firms. If firms from these countries were to collude in fixing the prices of medicines, the world would be compelled to pay the higher prices, and deliver the negotiated profits to the cartel network.
The system of cartels is so dangerous that many governments are troubled by it. Just a few days ago the government prosecuted some businesses on anti-trust charges and even punished them. Islam is against any mechanism that leads to guaranteed profit and hence the monopolization of wealth in a few hands. It seeks to ensure that money continues to circulate throughout the economy so that the poorer segment of society also has a chance to improve itself. Thus, cartels and monopolies are not allowed in an Islamic system of governance.
Withholding Supplies from the Market Forbidden
Islam also demands that supplies should not be deliberately withheld from the market with the purpose of artificially boosting prices. If a person hoards goods for this reason, he does so by going against the Islamic principles. If a trader has wheat but deliberately withholds its supply from the public in order to raise prices, he is engaged in a sinful activity, according to Islamic teachings.
Some people believe that regulation of markets by the state is a modern economic concept, but Islam has always recognized its need. The British have now come to recognize that hoarding with the purpose of extracting higher prices is not good for the economy, but Islam recognized it thirteen centuries ago. An Islamic government would require that no trader could hoard his goods, and if any trader were found to be doing so, the government would be entitled to force liquidation of his inventory at appropriate market prices. Thus, the broader Islamic principle mandates that any good that is a need of the people must not be artificially hoarded. The word used for hoarding is ihtikar which primarily refers to the hoarding of food grains. But in line with the Islamic rules of jurisprudence, this injunction would be interpreted broadly to cover all goods that are withheld from the market with the intent of raising the price.
Injunction Against Artificial Lowering of Prices
Similarly, Islam does not permit that prices be forced down by artificial means, because, as mentioned above, this too enables unscrupulous traders to strangle their rivals by forcing them to sell at reduced prices.
During his reign, Hazrat Umar(ra), while inspecting the market, came across a trader from outside Madinah who was selling dried grapes at prices that local producers and traders could not compete against. Hazrat Umar(ra) ordered the man to remove his produce from the market or to sell it at the price prevailing in Madinah. When asked for the reasons of this order, Hazrat Umar(ra) replied that without such an order the local merchants would have suffered a loss even though they were not charging an undue price.
It is true that some companions questioned the validity of this order in view of the saying of the Holy Prophet(sa) that market prices should not be interfered with. However, their objection was not well founded, since the prohibition against state intervention in market prices by the Holy Prophet(sa) pertained to interference with the free interplay of supply and demand. The government should avoid undue interference, as it would provide no benefit to consumers while inflicting serious losses upon traders.
The validity of this principle is borne out by recent events. The government failed in its attempt to fix the wheat price because, in the prevailing war conditions, no trader was able to sell at cost price and remain in business. The result was that the normal market activity for wheat came to a standstill and a black market emerged. Starving people were ready to buy wheat at whatever price they could afford. The price that was fixed at six rupees a ‘maund’1 by the government at once soared to sixteen rupees in the black market. People did not even report to the government about the black market because their survival depended on it. Several months ago, I had drawn the government’s attention to this danger but this warning went unheeded. The right course was adopted only after a great deal of suffering and serious unrest among the public. The earlier wheat price control order was meant to safeguard farmers’ interests, but in reality the farmers lost heavily while the traders netted large profits.
In short, the Holy Prophet(sa) prohibited only improper interference with price levels or unnecessary disruption in the normal operation of supply and demand. He did not forbid regulation to check abnormal price movements whether prices are driven artificially high or artificially low. The prohibition of ihtikar, which is firmly established according to the sayings of the Holy Prophet(sa), also bears this out, because ihtikar only means that artificial increases in prices be checked. Therefore, Hazrat Umar’s(ra) action, although an interference in the market, was a necessary regulation; it was consistent with shariah and demonstrated a sound principle of Islamic teachings.
The aforementioned are the three sources of unlawful wealth accumulation that Islam has prohibited. In this manner, Islam blocks all channels that lead to the unlawful and excessive accumulation of wealth.
Since clever and shrewd people might still find ways to accumulate excessive wealth, to the detriment of the less fortunate, Islam has adopted the following means to address this problem.