Reported Hazrat Abu Hurairah (ra) that the Messenger of Allah (saw) said, ‘On the night I was taken to the heavens I came across some people. Their stomachs were like houses wherein there were serpents which could be seen from the front of the stomach. I asked Gabriel, ‘Who are these people’? He replied, ‘These are the people who devoured usury’. (Amed Ibn Majah)
The Quranic verses and the ahadith have strongly condemned riba because of the evil role it plays in the socio-economic life, besides bringing about moral decadence in the society.
Here is how riba creates a chaotic situation in an economy:
The earning of effortless profit by the people is a form of economic exploitation.
People lose the motivation to work hard because of riba. Earning money through riba can make a person disinterested in business, agriculture, construction etc which hampers the progress of the society, by and large.
Interest rates can decrease investments because interest is also believed to be a cost of production. Therefore, the prices of the goods need to be adjusted according to it. This affects the consumers because of the higher prices of commodities.
Interest rates can trigger unemployment and inflation because when the rate of interest is high the cost of production increases as well. This leads to a decline in investment, shutting down of manufacturing units and retrenchment of employees to reduce costs. On the other hand, low costs of interest induce capital intensive techniques of manufacturing which leads to technical unemployment because the machinery replaces labor.
Interest has a tendency to de-stabilize an economy because of its unpredictable fluctuations. The high degree of interest rate fluctuations can alter the investment decisions of the businessmen.
The eminent economist Martin Weitzman has suggested that the best policy of dealing with inflation and unemployment is profit sharing and not interest. Islam encourages Muslims to share profit and risk money in trade instead of becoming creditor.
There is a misconception that the profit-sharing system will not turn out to be as lucrative for the financers as the conventional interest based system. However, the profit and loss sharing system definitely has an edge over the interest- based system in the following ways:
In profit-sharing based system the trouble of risks on the capitalists has been reduced considerably which induces them to undertake high risk projects that are linked to high profitability.
Profit-sharing system stimulates a sense of responsibility which leads to efficient use if resources and high profits.
The riba/interest-based system also leads to concentration of wealth in the hands of some industrialists who take loans from the banks and earn massive profits. They pay only a small portion to the depositors via the banking system.
Therefore, though the capitalist economies may try hard to institutionalize interest, but the truth remains that this system is full of flaws and short-comings as compared to the riba-free economy propagated by Islam.
Keep Me In Your Prayers.