Riba as a threat of creating economic crises

Anyone who is at least a little familiar with the principles of functioning of economic systems based on the principles of Islamic finance is familiar with such a concept as “riba” — an illegal increase in money or certain goods stipulated when transferring money to debt or concluding a transaction. Riba is also called a transaction in which one party acquires a profit without spending any labor for this.

In this article we will talk about how the riba, widely used in the modern traditional banking system, affects the economy, and what negative consequences are caused by violations of the fairness of the principles on which Islamic finance has been based for centuries.

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The ban on riba has been known since ancient times and has passed into all world religions. In Islam, a special ban was imposed on riba, since receiving unfair profits contradicts the basic principles of humanity.

The verses of Surah Al-Bakar say that those who engage in usury go against the will of the Almighty and should be afraid of his wrath. “O you who believe! Fear Allah and give up what is left of your usury claim, if you are really believers… do not act unjustly, and you will not be treated unfairly.”

The famous Islamic scholar Sheikh Rashid Redha, who died in 1935, spoke unequivocally about riba, calling it “a disaster of the modern economic system aimed at ridding the planet of believers.”

There are two types of usury or interest used in the financial system. The first is legal usury levied on the borrower. For example, if only 2 percent is allowed for interest on a loan, then imposing more than 2 percent is considered illegal usury.

The second is “moral” usury, defined as receiving interest from the borrower without his consent and confirmation. In this case, any additional interest imposed on the loan is clearly considered haram in Islam. But it is precisely this practice that is actively used in non-Islamic banking systems.

Money is perceived as a productive economic instrument, and every percentage received from them should be appreciated. Therefore, charging interest on the loan is acceptable and justified as rent for the use of money.

Simon Yannick dan Fuda Ecobena, in his study conducted in the USA, proved that an increase in interest rates in banks is always associated with an increase in the level of poverty. They also explained that the monetary policy pursued by many Western countries is a determining factor in the growth and fall of poverty.

Riba and economic problems

The world has experienced many economic crises, the consequences of which worldwide are one of the large-scale negative consequences of the use of riba. The negative consequences of riba in the event of a crisis in the economy always result in inequality in the distribution of wealth, contributing to an increase in poverty, deprivation and related economic problems.

The Great Depression is an excellent example of such an impact of the riba on the economy. Among the main factors that led to the most famous economic crisis that hit the United States at the beginning of the 20th century are:
1. The increase in interest rates by the banks of the United Kingdom caused by the standardization of gold prices;
2. Bank panic among depositors who took all their savings from banks;
3. Difficulties with cashing out depositors’ money;
4. Failures in investment activities and unfair distribution of wealth.

The financial crisis of 2008 was caused by an inept and even predatory mortgage policy, which provided loans to home buyers even with risky and weak financial situation, unable to fulfill their obligations on loans provided by banks.

Looking back even more on the events of the past, we can say that the Great Depression of 1929, the financial crisis in sub-Saharan Africa and the crisis of 1980 that hit developing countries such as South Korea were also caused by the unresolved debt problem.

The consequences of the 2008 financial crisis affected not only the financial or industrial sectors. Family institutions have also suffered as a result of rising prices for basic necessities and unemployment in families. For example, in Nicaragua, which suffered from the financial crisis of 1991, even the average income could not provide a resident of the country with the purchase of basic necessities.

The famous Islamic economist Ali Abdul Karim describes how the riba in the usual credit practiced by financial institutions in Western countries is the main factor of the crisis. A secured loan is a scheme in which interest rates are always revised and increased every year, which brings more profit to banks and mortgage companies. Then it really depresses people from the lower class when paying off a loan to banks, since the amount is constantly changing. In other words, accumulated loans in this system only multiply debts.

It is obvious that the use of riba in a conventional financial system harms the economy and creates conflicts. Therefore, it is necessary not only to revise the approach to the work of traditional banking systems, but also to create new ones in which the norms of Islam will become the key to the success and prosperity of the whole world.

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