Lending money on rent is an Economic peril.What’s the premise ?
Whenever we witness an economic slowdown, questions are raised on the credibility of the prevailing interest based economic system. All economic slowdowns have resulted in massive Government Level debt defaults impacting millions of lives trapped in the never-ending debt cycle. We also see how the bailouts happen by creation of artificial money supply. Many economists have time and again raised the demand for an alternative economic system that thrives on risk sharing, equity, fairness and social responsibility.
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So, we thought to delve deep into the interest free economic system that takes its cues from Shariah principles.
Let’s get started with a basic understanding of Shariah and how it influences the economic and financial system. Shariah compliance in simple terms is all about adhering to clearly defined dos & don’ts in Islam. The fundamentals of these rules are based on Social responsibility, equality, transparency and fair treatment amongst each other.
Shariah is practiced not just for one community, it’s imperative on Muslims to practice Shariah while dealing with others regardless of their religion or beliefs.
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Let’s understand why Shariah disallows interest based dealings?
To understand the reasons, it’s important to decipher the WHAT, HOW and WHEN of an Interest based transaction.
In simple terms Interest based transaction is like renting money (What) for a specific return (How much) over specific time (When), so what’s wrong in renting out money? Does this mean Islam doesn’t allow renting? The straight answer is NO.
Renting in Islam is allowed, it could be on a fixed rate of return and for a predetermined period. For example, it’s OK to rent out my car to a user at a fixed rate of Rs 5000 a month for 1 year, but Shariah doesn’t allow renting of money like a car.
So why does Shariah treat renting of money and renting of assets differently?
The answer to this can be found in the difference of treatment of money & assets in prevailing economic system visa-wiz Islamic economic system. The prevailing economic system treats money as an asset class whereas Islamic economic system treats money as a medium of exchange to measure the value of an asset or service.
Why does Islam treat Money as a medium of exchange and not an asset?
As per Islam every creation in this world is subject to mortality via cycle of life & death (i.e.) Birth, Growth, Saturation, Fall & eventual Death, likewise assets are also subject to mortality. The ingredient of morality in assets plays a vital role in creating self-sustainable & self-correcting market forces as mortality of old assets paves way for the entry of new assets in the markets. on the other hand, Money as per Islam is a medium of exchange that helps to measure the value of an asset or service, hence not subject to mortality.
However as per the contemporary economic system money is treated as an asset and probably the only asset class in the world not subjected to mortality, this treatment of immortality makes money to be loaned forever in the form of rent.
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So, what’s wrong if money is treated as an immortal asset & rented out?
It becomes unfair to the consumer if money is treated as an immortal asset. The producer of money (generally the rich) gets the unfair advantage to clone and amass as much money as possible and then rent it out to consumers who would then keep paying interest in form of rent forever.
Imagine, two entrepreneurs raising funds for business, one borrows money on rent (loan on interest) from the bank to buy machinery and other entrepreneur (leases the machine directly on rent ). The first entrepreneur who took loan will have to pay interest (rent) without delays regardless of the Machine’s age and depreciation. On the other hand, entrepreneur who directly got the machine on rent has the advantage of renegotiating his rental amount and terms depending on the machine’s life & depreciating value.
In the case of first entrepreneur he paid rent on money which never aged or depreciated in value based on time and usage,this artificial immortalization of money keeps it young & alive forever giving it an unfair advantage to clone and multiply itself regardless of circumstances.On the hand the second entrepreneur who got the machine on rent could pay less & flexible rent and the owner of the machine could never make unreasonable profits forever as the machine phases out due to its life and depreciation.So clearly the owner of money stands to gain undue advantage forever because of artificial immortalization of money whereas the owner of machine makes good enough profit but limited to the age of the machine.
R&D, Innovation and startups never thrives in a debt based ecosystem because the lender would not be willing to give more time or accept failures, however these two ingredients are the foundation stones of startups, Innovation & R&D.
Hence we all need to question ourselves whether keeping money alive artificially forever is good for our economies and societies or would it be better to convert money into an asset that has limited but purposeful life.
