Is Interest a 'Necessity'?

This is part 5 of 5 of our series highlighting key arguments and refutations from Mufti Taqi Usmani and others in the "Historic Judgment on Interest" delivered at the Supreme Court of Pakistan in 1999. Please note that the data contained in the judgment is from 1999.

Argument

Though modern interest-based transactions are covered by the prohibition of 'riba,' yet commercial interest is the back-bone of the modern economy. Islam, being a practical religion, recognizes the principle of necessity and permits eating pork in extreme situations for survival. The same principle of necessity should be applied to interest-based transactions and the laws permitting interest should not be declared repugnant to Islamic injunctions.

Refutation

This argument asserts itself based on the doctrine of necessity. While Islam is realistic and does not demand the impossible — the doctrine of necessity is not a vague concept but in fact one founded on sound principles. It requires a certain criteria be met before it is considered applicable to a given situation. The necessity must be real; one that cannot be met with except by the impermissible.

Based on this understanding, the doctrine of necessity does not apply to interest. Let’s see how.

There is a common misconception that eradicating interest is synonymous to converting banks and financial institutions to charities; no return for the bank or depositors. This is untrue. While the concept of a loan as it exists in the modern economy today has no basis in an Islamic economic system- the shift from conventional to Islamic finance does not entail extending interest-free loans rather it is basing transactions on well worked out modes of finance which are not without return and of which profit and loss sharing is one.

Another misconception is that Islamic finance is not yet developed or practiced widely enough to be depended upon to support an entire economy.

Islamic banking and finance is not an idea in theory but in fact a system that has been worked upon by jurists and economists for the last half century. The results of these efforts started turning into a reality in the 70s — since then Islamic banks have grown in number now reaching more than 200 across 65 countries of the world with US$90 billion capital at a growth rate of 15% per annum.

The Islamic Development Bank’s views on the feasibility of a paradigm shift from conventional to Islamic banking:

"The experience accumulated by Islamic banks, in general, and the Islamic Development Bank in particular, as well as attempts made in a number of Muslim countries to apply an Islamic financial system, indicate that the application of such an Islamic system by any Muslim country, at the national level, is feasible. According to the data compiled by the International Union of Islamic Banks, there are 176 Islamic banks and institutions in the world. In terms of number, 47% of these institutions are concentrated in South and South East Asia, 27% in GCC and Middle East, 20% in Africa and 6% in the Western countries. In terms of deposits, amounting to US $112.6 billion and total assets amounting to US $147.7 billion. 73% of the activities of these institutions are concentrated in the GCC and the Middle East. IDB alone, since its inception from 1976 to 1999, has provided financing in the range of US $21.0 billion. As against a growth rate of 7% per annum recorded by the global financial services industry, Islamic banking is growing at a rate of 10-15% per annum and accounts for 50-60% of the share of the market in the GCC and Middle East."

"Islamic banking is distinctive in two respects: concentrating on the real sector of the economy, it imparts tremendous stability to the economic system by achieving an identity between monetary flows and goods and services, and by operating on a system of profit and loss sharing in its evolved state, it insulates the society from the debt-mountain on the analogy that if the economies enter into recessionary or deflationary phases, the principles of profit and loss sharing protects the states and economic operators from the evils of accumulation of interest and minimizes defaults and bankruptcies."

No doubt the Islamic finance industry is still a nascent industry dealing with a numerous issues at various levels but there is sufficient evidence to disprove that it is unable to sustain an economy.

The fact is that though the elimination of interest from an entire economy is a great deal more challenging than from an institution alone — it is possible. There are many places where abolishing interest is much easier for governments than it is for private Islamic banks. This is because many Islamic banks in various parts of the world have no support from governments or central banks at all where adherence to non-Islamic local regulatory frameworks is a necessary prerequisite to their functions.

In places where an interest-free system and regulatory framework is introduced and established by the government, Islamic banks will be unimpeded as will the government in ensuring an economy based on the equitable principles of Islam.

Without this overriding enforcement at government level, Islamic banks struggle to compete with conventional banks. When no banks offer interest-based financing — this problem is overcome.

As far as foreign debt at government level is concerned its conversion to Islamic financing modes has been elaborated upon in the IDB’s reports. The thrust of the reports is that project-financing is not only a Shariah-compliant alternative but will also go a long way to curb corruption and fund misappropriation.

(To examine the features of Islamic banking in detail, please look at our modules designed on specific Islamic banking products available here. To see the devastating effect of foreign debt on the economies of developing countries watch our video: Why Islamic Finance?)

Many leading bankers and highly qualified international finance practitioners are unanimous that Islamic financing modes are not only feasible but in fact geared to ensuring a stable and thriving economy — there are reports based on real facts and figures to corroborate their views.

Based on this discussion, the claim that the interest-based system qualifies as permissible on the grounds of the doctrine of necessity is dismissed.
The conversion to Islamic finance may take time but as the evidence suggests, it is a practicable and viable alternative to conventional interest-based finance.

Previous parts of this series can be accessed here:

Part 1 of 5: Is the Definition of Riba Ambiguous?

Part 2 of 5: Does the Word 'Riba' Only Refer to Excessive Interest?

Part 3 of 5: Does the ‘Riba’ in the Quran Also Refer to Modern Commercial Loans?

Part 4 of 5: Are There Interest-Based Loans the Quran Permits?

Source: The Historic Judgment on Interest, Mufti Taqi Usmani, et al., Supreme Court of Pakistan

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