Mu' meneen Brothers and Sisters,
As Salaam Aleikum wa Rahmatullahi wa Barakatuh. (May Allah's Peace, Mercy and Blessings be upon all of you)
one of our brothers/sisters has asked this question:
There are a few questions about Islamic banking that have been confusing me for quite some time. If we lend our money without any interest, we end up losing because of inflation. If we charge interest, we are deviating from Islam as well as being unfair to the borrower. And if we lend on a profit and loss basis, we have to take a risk. Is there any way around this problem? I understand that the only Islamic way to make a profit is to share the risk of loss with the borrower. But if I am not interested in profit and only want to protect the amount that I am lending, how do I protect myself from inflation without charging interest?
A second confusion is that if an Islamic country decided to prohibit interest, wouldn't its economy be hit? I certainly believe that the Islamic system is practical but what if a substantial portion of the people start taking their money out of the Islamic banks and start putting it in interest based banks in some other country due to their lack of faith in the system? If there is such a risk, what should the government do? Should it go ahead and implement the interest free system anyway and risk a total collapse of the banking system?
I will really apreciate it if you answer these questions. Thank you
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Your comment: But if I am not interested in profit and only want to protect the amount that I am lending, how do I protect myself from inflation without charging interest?
Islamic economists have written volumes explaining the concept of Islamic Banking, and it would be almost impossible to address your questions in detail in this short answer. Thus, we will try to just outline the basic principles in light of the Holy Quran and Sunnah.
In Islam, if one is lending money, it will be considered that he is helping his brother in distress, and it will be assumed that the main reason he loaned the amount was to earn the pleasure and reward of Allah Subhanah.
But, if one is lending money to earn interest, then the transaction will be considered an investment, because the intention of the lender is not to help someone or earn the pleasure of Allah, but rather to increase his wealth; albeit, in a haraam manner.
Thus, in reality, it is an irony and a distortion of the truth to say that the lender is not interested in any profit, but only wants to protect himself from inflation! If the inflation rate is negative (deflation), will the lender offer to pay the borrower any money for using the funds? Or if the inflation rate is zero, will the lender offer to lend the money without any interest? The truth is that whoever puts his wealth on interest, is interested to increase his wealth, but does not want to take any risk.
In Islam, the hoarding of wealth, just for the sake of hoarding, is not considered a virtue. Islam encourages that one invests the money, so that the economy of the whole nation will prosper. The principles of Islam states that money should only grow when one puts hard work, planning, time, effort, etc. along with the invested capital. Islam has termed it unjust if one party should put in all the hard work, planning, time, etc. and the other party simply takes a fixed return, whether the work of the first party is successful or not! To be fair, the sharing of risks and rewards should be the responsibility of both parties.
Q-2: A second confusion is that if an Islamic country decided to prohibit interest, wouldn't its economy be hit?
The problem is that all the people of the world are so engrossed and in-tune with the conventional and unjust interest-based banking system of the so-called modern world, that even the thought of an alternative and just economic system is scary! The issue with the wealth in the world, both with nations and with individuals, is that some have too much, and some dont have enough to survive. With this current interest-based economic system, the rich nations and people of the world get richer, and the poor nations and people of the world get poorer!
Islam encourages the people to invest and rotate the money into their economies, so that not only the investor, but the whole nation would benefit from this renewed economic activity. Islam absolutely discourages that people and nations hoard the wealth, just for the sake of hoarding; and thereby lend this hoarded wealth on their terms to the distressed and poor nations on interest, thus pushing them deeper into debt and destitution!
The biggest evidence and benefit of an interest-free economy can be seen from the current economic recession in the world. The Federal Reserve of the USA have cut interest rates at least 8-10 times this year alone. Why? Because by reducing interest rates, the people who had put all their money on interest will not be getting enough returns on their wealth; and would thus be forced to take out the money from the interest-bearing accounts and put them to work in the actual economy. And the authorities hope that this influx of the hoarded wealth into the system will invigorate and revitalize the stagnant economy!
In an interest-free economy, everyone will perpetually be encouraged to invest his wealth in the economy, instead of simply hoarding it; which will obviously help the economy of the nation. Thus, instead of the fear that the economy will be hit if the nations turned to Interest-free banking, the truth is that it would rather help the economies, and there will be a just and fair distribution of wealth in the nations of the world.
Interest based banking helps the rich nations and individuals of the world get richer, and the poor get more destitute! It is devised and based to help these few rich nations suck the blood of the poor nations of the world. Whereby these borrower nations are never able to come out of the interest based trap; and more often than not, the interest paid by these poor nations over the years to the IMF and the World Banks is more than the capital they had borrowed in the first place! Is it any wonder, that through this current interest-based economic system, 2% of the rich control 90% of the wealth of the world!
The fact of the matter is that the current interest based economic system is catered for, and addresses the needs of the wealthy, but is a curse and burden for the poor! It is an unjust system, and Islam wants to replace this unjust interest based system with a just, righteous, sharing, and fair for all system of interest-free economics.
Having said that, one must also understand that any government which implements the concept of Islamic Banking, will only be able to bear its fruits and see its blessings, when all the other political, social, moral, civil, and personal system of Islam and Shariah are practiced. But if one tries to implement only one of the systems of Shariah into their lives or nation, without supplementing them with the others, he will not be able to reap the whole benefits.
Whatever written of Truth and benefit is only due to Allahs Assistance and Guidance, and whatever of error is of me. Allah Alone Knows Best and He is the Only Source of Strength.
Your brother and well wisher in Islam,