Riba and Interest - Same thing or Not?

[annache]

@elizarn You are the first person I have come across that asserts than a negative real rate of interest caused by inflation greater than the nominal rate is a type of riba compensation to the borrower. If you accept the assertion that interest=riba (which I dont), I think you are correct. But a lot of Muslims say inflation does not matter, that nominal interest rates=riba.

But of course Caliph Umar was not sure what the prophet meant by riba.

 

[elizarn]

@annache

Say I have $3600 in 1960. gold was $36 an ounce then. I deposited it with the bank without taking any interest. The bank returned that $3600 to me in 2023.

In 1960 gold was $36 and ounce, now its $2000 an ounce. I could have bought 100ounces of gold in 1960. In 2023 I can only buy about 1.8 ounces of gold!. Thats 98.2% depreciation!

So the central banks depreciated my Dollars/fiat currency. That's negative interest rates. you don't think this system is absolutely Haram? Its not like giving riba is halal unless the circumstances are dire. So you gave away 98.2% of your wealth as riba.

I also dont think interest=riba because fiat currency did not exist at the time of Prophet and real money is only money that is either pegged to a commodity or a basket of commodities or of something of value(that can include services or gdp or whatever).

but taking interest more that inflation adjusted value is also Riba in my opinion, so its a bit complicated

In the end the system is not ours, we are confused like headless chickens.

 

[alinaseh]

@elizarn Yes, riba and interest and usury are all the same thing. And yes, crypto is haraam.

 

[annache]

@elizarn

religious scholars typically evade this question because of fear of retaliation

I know how those scholars feel!

Various redditors have attacked me with ad hominem insults on this site for discussing modernist views on riba and insurance - those being 1) exploitive riba al-jahiliyya at the time of the prophet is not the same as most modern interest, and 2) insurance reduces risk (gharar), and so should not be prohibited.

If you read economic history and modern economics, you will find that academics deplore the debasement of currency and inflation as you do, and want to eliminate inflation. So most central banks have a mandate to preserve the value of money with a low inflation target. Its a pretty tough job when governments want to spend. You can debate whether the target should be 2% or zero, there are arguments on both sides. Policy errors happen, and one appears to have been the COVID spending and economic shutdown, which caused the current inflation.

 

[elizarn]

@annache I think the bigger issue is that currency without intrinsic value is not the same currency as the time of Prophet. The number printed are just arbitrary. Riba is value addition. Hypothetically speaking if a currency exists which increases 100% in value every year. We can call it currency x. If you lend someone 100 units of currency x in 2023. It will be Riba to take 100 units of currency X in 2024. The reason being that in 2024 100units of currency X have double the purchasing power of currency X in 2023 and it was by design and not random chance.

Similarly currency today has a negative interest rate built in by design. Negative interest rates are also prohibited.

And what most people dont know is that even if you take interest. In most circumstances the value of your wealth will still go down because

a-you pay tax on the arbitrary gain in value, ie number increase

b- No one is giving positive real interest rates that is interest rates in many/most places are less than the inflation rate. For example in Pakistan the Interest rates are 22-24% and the inflation rate is 30%. So even if someone takes Interest the value of their wealth will go down 6-8% before tax. If you count tax and pay 35% tax on the gain in number. You pay 7% tax.

So about 14% loss of value after taking interest!!!!

What people dont realize is govt come after Gold hoarders. Also there is risk of theft and you pay tax on gains on gold.

 

[annache]

@elizarn Ill reply on severeal points:

I think "intrinsic value" is meaningless. The value of anything is its market price, what someone else will pay for it.

You are arguing that commodity money would be better than fiat (paper) money. Probably yes, in places like Mugame's Zimbabwe, Mobutu's Congo, and Maduro's Venezuela, and maybe in Erdogan's Turkey. I do have more confidence in central banks of countries with a strong history of monetary independence - but concede that the record is not unblemished. Perhaps you do not, as you did not discuss the point. I dont see how commodity money can be practical.

On riba - its not just interest. It seems to have been the arbitrary and exploitive addition (redoubling) of unpaid debt burdening poor debtors at the time of the prophet. Prof Farooq in this heavy duty scholarly article finds no evidence that the original stipulated increase was riba, it was the redoubling of unpaid debt. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1412753 But in any case Caliph Umar was not sure what the prophet meant by riba, so we have to sort it out reasonably somehow.

The most reasonable idea is that riba is like loan sharking and predatory lending upon the poor today. Most interest is not riba, but I know many scholars think otherwise. Your examples are quite extreme, but I would agree with your analysis of Pakistan, as with many countries with bad monetary policy who have to print money for the govenment. Thats why central banks have to be independent.

 

[elizarn]

@annache Intrinsic value is not meaningless because fiat money has no value of itself. Its enforced upon people by govt.

The value is manipulated by the Central banks. The market does not decide its value. Central bank can decrease the value in a mere second by creating 100X or a 1000X an infinitely large amount by the press of a button.

So your first statement is wrong and that the central point of my argument which most people don't understand.

Fiat money itself is Riba. How do you escape that? Central banks manipulate the value so the value decreases every year by 2-3 % AKA negative interest.

I personally consider an increase in value to be riba. But here the banks are decreasing the value of your wealth. How is that not riba?

If I force you to deposit 10kg of gold with me and I give you my own currency called units. I give you 10units. Now I have the authority to print and create as many units as I want.

Next year when you come with 10units to repurchase your gold. I tell you the value of 10units has decreased because I printed 90 more so there are 100units in circulation now.

I only have 10Kg of gold so with your 10units you can only buy 1Kg of gold.

I offer to give you interest - 900% interest so that that you can now have a 100units. with a 100units you can buy the 10Kg of gold.

Is that interest Riba ?

But in reality that doesnt happen. If they printed 90 units the most interest they will offer is probably 70units.

you now have 80units. 10 units of your own and 70units interest.

I am going to now charge you tax on the 70 units you eared. a 50% tax.you now have 35+10=45 units. You can only buy 4.5Kg of gold now.

Thats how Fiat currency works.

 

[annache]

@elizarn

fiat money has no value of itself

true, the paper or the electronic deposit record has no "value in itself", but also gold has no value itself to me. I have to exchange it for what I need. There are lots of gold bugs in the world obsessed with gold, Im not one. But I do have a phoney gold bar at home that looks nice. The fiat money is a useful social construct, but it seems you dont think so, or dont trust those who manage it. Ill agree its a healthy attitude to keep a close watch on the authorities who manage it.

The value is manipulated by the Central banks. The market does not decide its value.

agreed, we dont want the value of money to fluctuate randomly, as I said most central banks target (about) 2% inflation. If you think another target is better, make your case. Also agreed as in your examples how central banks and governments can debase currency by printing money. But since the Volker era in the US most developed country central banks have got a handle on inflation. A bigger problem seems to be financial stability - bank failures.

 

[elizarn]

@annache

eposit record has no "value in itself", but also gold has no value itself to me. I have to exchange it for what I need. There are lots of gold bugs in the world obsessed with gold, Im not one. But I do have a phoney gold bar at home that looks nice. The fiat money is a useful social construct, but it see

Gold has value because of its rarity. So do a lot of other elements, as does art, cars ect. I am using gold as and example because it has been used as currency in the past, even now if there are no legal restriction you can take it to a remote village and they will gladly take it, they will take it now, they would have taken it 5000yrs ago and they will take it for the next foreseeable future.

If some point if man is able to manufacture elements or travel to stars/other plants it might not be rare but that is not possible for the foreseeable future.

Fiat Money is not rare. It is under control of Central banks. They can print as much as they want. If they Print more, which they do, the value of currency declines, which it does decline. Currency is just numbers on a computer, infinite quantity exists on the fingertip of the central banks.

I think fiat money is very very useful tool, I don't think that the society can function without it, and I don't think gold is a viable alternative.

Its just that the central banks purposefully decrease the value of Currency. That's negative interest or RIba, in addition you are giving wealth to the already wealthy, they get access to our wealth and use it at their discretion.

Scholars say taking interest is Riba which I don't agree with as long as total currency returned is adjusted to inflation. I think if you add value to your wealth that's riba.

People are deceived by numbers on a banknote or their bank account. Its easy to get deceived, you get taxed on the numbers and not the value.

 

[annache]

@elizarn I think we have exchanged views so I wont repeat. To come back to your question riba and interest, no its not the same, the context is entirely different, banks did not exist then, moneylenders at the time of the prophet were exploitive and unregulated .... and we understand a lot more about financial intermediation, time value of money, capital structure of businesses, the pricing of risk, and portfolio managment now than then.

But we still have loan sharking and predatory lending upon the poor which is like riba.

 

[chanticleera]

@elizarn All great questions. I’m amazed also that these simple questions are evaded most of the time. Government money, aka Fiat money, is something very recent. Until 1970s most monies were backed by gold, a commodity. I hate big government and I hate government controlling the money.