Islamic Economics: Remedy for ailing financial world

Sarfraz Ahmad, Student, Jamia Ahmadiyya UK

Recently, the United States of America witnessed the collapse of one of its biggest banks: Silicon Valley Bank (known as SVB). While the odd bank run is not something to be too anxious about, geopolitical tensions, increasing inflation in many parts of the world and the ever-looming sword of global conflict are making it increasingly plausible that we may witness economic misery, similar to the Great Recession of late 2007.

This begs the question: To what extent is our current economic system to blame for our woes? And does Islam provide a better solution that would lead to more prosperity?

Whilst it is important to acknowledge our current free-market capitalism has been at the centre of economic prosperity for many years, we must first understand what facets of this system are inherently problematic.

Capitalism, debt and interest

The disintegration of the Soviet Union in 1991 marked the triumph of capitalism over socialism. Since then, capitalism has been the only prevailing economic ideology in the world.

Capitalism seeks to boost an economy by providing loans to businesses with interest. The idea is that if, for example, an entrepreneur wishes to kick-start a new business idea that requires £500,000, they can borrow the money from a bank under a binding agreement that it will have to be repaid to the bank with a certain amount of interest. This provides the entrepreneur with immediate funds and allows the bank to secure a possible profit. It sounds fairly simple and profitable. 

However, what must be realised is that, like any economic system, for this one to work at a national level, it must adhere to the concept of recycling. That is to say that businesses must create a profit that is greater than their debt, incurred through borrowing from the banks. Those businesses must then continue to spend their profits on their workers, and those workers must also continue to spend their wages in other businesses and shops. This, in turn, will allow businesses to repay their debts and, for more expansion and success, acquire larger loans from the banks (and repeat the cycle). Therefore, the economic output of businesses has to remain greater than the debt they are incurring. The turbulent and uncertain nature of our world is completely overlooked, and there is no real plan of what to do when businesses are not profitable.

Whilst there is no denying that spending is, by all means, the key to a healthy economy, the problem lies with the driving factor for this spending – interest.

Interest stems from the miserliness of man. Banks and lenders seek to make money without taking on the risk of spending in the first place, cutting the risk of losing their own earnings and wealth at the expense of the needy. It also encourages the needy (i.e. the borrower) to spend extravagantly, because it hands over a large sum of money all at once and with little regard for the fact that it has to be paid back. Hence, our current system is one of the extremes of both miserliness and extravagance.

The Holy Quran repels this altogether and uproots usury and interest by teaching against miserliness, extravagance and interest itself. It recognises that miserliness is appealing to human nature, but that a wealthy believer must strive to benefit the wider society with his wealth rather than hiding it away.

وَمَنۡ‭ ‬يُّوۡقَ‭ ‬شُحَّ‭ ‬نَفۡسِهٖ‭ ‬فَاُولٰٓئِكَ‭ ‬هُمُ‭ ‬الۡمُفۡلِحُوۡنَ

“And whoso is rid of the covetousness of his own soul – it is these who will be successful.” (Surah al-Hashr, Ch.59: V.10)

There are countless examples of believers being enjoined to spend on the needy, with clear categories of who is deserving of their wealth.

قُلۡ مَاۤ اَنۡفَقۡتُمۡ مِّنۡ خَيۡرٍ فَلِلۡوَالِدَيۡنِ وَالۡاَقۡرَبِيۡنَ وَالۡيَتٰمٰي وَالۡمَسٰكِيۡنِ وَابۡنِ السَّبِيۡلِ ؕ وَمَا تَفۡعَلُوۡا مِنۡ خَيۡرٍ فَاِنَّ اللّٰهَ بِهٖ عَلِيۡمٌ

“Say: ‘Whatever of good and abundant wealth you spend should be for parents and near relatives and orphans and the needy and the wayfarer. And whatever good you do, surely Allah knows it well.’” (Surah al-Baqarah, Ch.2: V.216)

Similarly, the prohibition of careless spending is absolutely clear:

وَاٰتِ ذَا الۡقُرۡبٰي حَقَّهٗ وَالۡمِسۡكِيۡنَ وَابۡنَ السَّبِيۡلِ وَلَا تُبَذِّرۡ تَبۡذِيۡرًا۔ اِنَّ الۡمُبَذِّرِيۡنَ كَانُوۡۤا اِخۡوَانَ الشَّيٰطِيۡنِ ؕ وَكَانَ الشَّيۡطٰنُ لِرَبِّهٖ كَفُوۡرًا

“And give thou to the kinsman his due, and to the poor and the wayfarer, and squander not [thy wealth] extravagantly. Verily, the extravagant are brothers of satans, and Satan is ungrateful to his Lord.” (Surah Bani Isra’il, Ch.17: V.27-28)

In fact, the virtue of the believers is to spend in moderation:

وَالَّذِيۡنَ اِذَاۤ اَنۡفَقُوۡا لَمۡ يُسۡرِفُوۡا وَلَمۡ يَقۡتُرُوۡا وَكَانَ بَيۡنَ ذٰلِكَ قَوَامًا

“And those who, when they spend, are neither extravagant nor niggardly but moderate between the two.” (Surah al-Furqan, Ch.25: V.68)

The Holy Quran goes on to address the real crux of the matter. In relation to seeking and giving out loans the Holy Quran is categorical: both the lender and borrower should seek to fulfil their duties to the best standard, with the following exception:

وَاِنۡ كَانَ ذُوۡ عُسۡرَةٍ فَنَظِرَةٌ اِلٰي مَيۡسَرَةٍ ؕ وَاَنۡ تَصَدَّقُوۡا خَيۡرٌ لَّكُمۡ اِنۡ كُنۡتُمۡ تَعۡلَمُوۡنَ

“And if any [debtor] be in straitened circumstances, then [grant him] respite till a time of ease. And that you remit it as charity shall be better for you, if only you knew.” (Surah al-Baqarah, Ch.2: V.281)

The borrower should be mindful of his duty to repay the loan as quickly as possible; however, the lender must also be flexible in regaining his loaned amount, or in exceptional circumstances, should forgive the repayment of the loan altogether. It teaches both factions of society to recognise their obligations but with the important note that the borrower is the one in need, and ought to be afforded leniency on behalf of his/her lowly state.

And then there is the outright prohibition of interest, the catalyst to both spending extremes.

يٰۤاَيُّهَا الَّذِيۡنَ اٰمَنُوۡا لَا تَاۡكُلُوا الرِّبٰۤوا اَضۡعَافًا مُّضٰعَفَةً ۪ وَاتَّقُوا اللّٰهَ لَعَلَّكُمۡ تُفۡلِحُوۡنَ

“O ye who believe! devour not interest involving diverse additions; and fear Allah that you may prosper.” (Surah Aal-e-‘Imran, Ch.3: V.131)

In summary, whereas free-market capitalism encourages a “winner takes all” attitude, Islam’s teachings show due regard to the poor and vulnerable and protects them from exploitation.

Unequal distribution of wealth

It is indeed surprising how today’s free-market capitalism is so diametrically opposed to the teachings of the Holy Quran, and simultaneously so detrimental to the vast majority of the human population. The suffering of the poor under free-market capitalism is not a matter of opinion. The International Monetary Fund (IMF) admits that “The richest 10 percent today snap up 52 percent of all income. The poorest half get just 8.5 percent.” (www.imf.org/en/Publications/fandd/issues/2022/03/Global-inequalities-Stanley)

What is more alarming is that the wealthy have already devised ways to protect their wealth, much to the detriment of the global economy. Bankers are a prime example. If we return to our above-mentioned example of an entrepreneur borrowing £500,000 from a bank, a banker will seek to make back the loaned amount as soon as it has been transferred to the borrower. They will, for example, encourage ordinary customers to invest in the business and buy shares of, say, £100 each. As soon as 5000 shares of £100 each are sold, the banker will prescribe an interest rate on it, from which the shareholders will benefit, however, it will be less than the interest rate that the original borrower (the entrepreneur) has been charged. The bank, therefore, will still make a profit and will almost immediately also get back the £500,000 that it had loaned out, without having to wait for the entrepreneur to pay it back.

As harmless as this sounds, it sets a dangerous paradigm in which banks grant loans to anyone and everyone, becoming uninterested in whether their loans will be repaid to them in the future or not. This has an adverse effect on the whole system, as the debt catches up with economic production, directly harming the “recycling” required for the economic wheel to operate and pushing it towards a recession.

Yanis Varoufakis, one of the most famous economists of recent years, states in this regard: “The black magic of banking destabilises market societies. It massively amplifies wealth creation during the good times and wealth destruction during the bad times, constantly skewing the distribution of power and money.” (Talking to My Daughter About the Economy: A Brief History of Capitalism, Yanis Varoufakis, p. 64)

If the rich are to get richer without risking their fortunes, regardless of whether the economy as a whole may suffer as a consequence, the hoarding of wealth by them is unavoidable.

Zakat: The engine for economic growth

Being so accustomed to our current financial systems has made us reluctant in accepting a solution. However, the Holy Quran has presented a golden principle that the world needs to adopt if it wishes to avoid the dire consequences tied to free-market capitalism.

The Quran offers the ultimate antidote to interest – Zakat. Whilst capitalism encourages the wealthy to increase their wealth through idle capital, Islam seeks to scrutinise idle capital so that it is forcibly re-circulated back into the national economy. The believers, who are wealthy above a certain threshold, are instructed to pay 2.5% due on any wealth that has not been used for over a year. This encourages the wealthy to spend their wealth, as opposed to hoarding it. Yes, the wealthy are allowed to accumulate wealth, but with the caveat that they must pay the Zakat which will then be spent on the poor of the community as per the instruction of the Holy Prophet^sa:

“It [Zakat] is to be taken from the rich amongst them and given to the poor amongst them.” (Sahih Bukhari, Hadith No. 537)

Consequently, the gap between rich and poor is reduced, the problem of debt is solved and the objective that interest seeks to attain (to get rich people to throw their money into the economy) is achieved through fairer means. This is why the Holy Quran is categorical in its statement:

وَمَاۤ اٰتَيۡتُمۡ مِّنۡ رِّبًا لِّيَرۡبُوَا۠ فِيۡۤ اَمۡوَالِ النَّاسِ فَلَا يَرۡبُوۡا عِنۡدَ اللّٰهِ ۚ وَمَاۤ اٰتَيۡتُمۡ مِّنۡ زَكٰوةٍ تُرِيۡدُوۡنَ وَجۡهَ اللّٰهِ فَاُولٰٓئِكَ هُمُ الۡمُضۡعِفُوۡنَ

“Whatever you pay as interest that it may increase the wealth of the people, it does not increase in the sight of Allah; but whatever you give in Zakat seeking the favour of Allah – it is these who will increase [their wealth] manifold.” (Surah ar-Rum, Ch.30: V.40)

The fact of the matter is that when debt reaches its limits and becomes unpayable, it has to be written off in order for economic activity to continue. Zakat poses no such problem, in fact, it allows for an amicable society, free of unjust exploitation.

Hence, the answer to our economic struggles is embedded in Islamic Economics, an ideology that is as moral as it is practical.