EVOLUTION OF INTEREST

The concept of "usury" has a long historical life, throughout most of which it has been understood to refer to the practice of charging financial interest in excess of the principle amount of a loan, although in some instances and more especially in more recent times, it has been interpreted as interest above the legal or socially acceptable rate. The practice of usury i.e, lending money and accumulating interest on the loan- can be traced back 4,000 years (Jain, L.C. (1929) Indigenous Banking in India, London: MacMillian & Co.),. With the expansion of trade in the 13th century, the demand for credit increased, necessitating a modification in the definition of the term. In 1545, England fixed a legal maximum interest, a practice later followed by other Western nations. Economically, the interest rate is the cost of capital and is subject to the laws of supply and demand of the money supply. But it has always been despised, condemned, restricted or banned by moral, ethical, legal or religious entities. and during its subsequent history it has been repeatedly condemned, prohibited, scorned and restricted, mainly on moral, ethical, religious and legal grounds. The first attempt to control interest rates through manipulation of the money supply was made by the French Central Bank until 1847. THE MEANING OF RIBA

The word riba has been used in the Holy Quran on several occasions. So it is necessary to know What it means or what it really stands for. Riba has been extracted from Raba. It means addition ,increase. So, riba literally means to increase, to grow to rise, to add, to swell. It is, however, not every increase or growth which has been prohibited by Islam. In the Shariah, riba technically refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity. In this sense riba has the same meaning as interest in accordance with the consensus of all jurists without any exception. So the Holy Quran and the Hadith do not make any such difference between usury and interest. Interest and usury both are taken as synonymous for the Arabic word riba.

TYPES OF RIBA

Althought the Quran did not specify any particular kind of riba, it is generally held that the word al-riba in the Quran is that kind of dealing which had been in vogue during the pre-Islamic days. Muslim jurists have classified riba in two types:

1. RIBA AL-NASIAH 2. RIBA AL-FADL.

Riba Al- Nasiah

The term nasiah means to postpone or to wait and it refers to the time period that is allowed for the borrower to repay the loan in return for the addition of the premium. Hence it refers to the interest on loans. The prohibition of riba al nasiah essentially implies that the fixing in advance of a positive return on a loan as a reward for waiting is not permitted by the Shariah.

Riba Al-Fadl

Islam, however, wishes to eliminate not merely the exploitation that is intrinsic in the institution of interest, but also that which is inherent in all forms of unjust exchange in business transactions. Riba al-fadl is the excess over and above the loan paid in kind. It lies in the payment of an addition by the debtor to the creditor in exchange of commodities of the same kind. The following tradition of the Prophet Muhammad (saw) is cited as evidence. It is related thatAbu Said al-Khurdi said: the Prophet Muhammad (saw) has said that gold in return for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, can be traded if and only if they are in the same quantity and that is should be hand to hand. If someone gives more or takes, then he is engaged in riba and accordingly has committed a sin.To sum up, riba al-nasiah and riba al-fadl are both covered by the verse, Allah has allowed trade and prohibited riba (2:275), while riba-al nasiah relates to loans and riba al-fadl relates to trade. Although trade is allowed in principle it does not mean that everything in trade is allowed.

PROHIBITION OF INTEREST IN ISLAM

Islam is the only religion that categorically forbids any transaction based on interest. The criticism of usury in Islam was well established during the Prophet Mohammed's life and reinforced by various of his teachings in the Holy Quran dating back to around 600 AD. The original word used for usury in this text was riba which literally means "excess or addition". The Islamic ban on interest does not mean that capital is costless in an Islamic system. Islam recognizes capital as a factor of production but it does not allow the factor to make a prior or predetermined claim on the productive surplus in the form of interest.

RATIONALE FOR THE PROHIBITION OF INTEREST 1. Effect on Monetary System It has been argued, for instance, that interest, being a pre- determined cost of production, tends to prevent full employment. It has also been contended that international monetary crises are largely due to the institution of interest (Khan, n.d), 2. Improper Allocation of Funds Since the returns that the bank gets on the capital sum lent by them is fixed and not linked in any way to the actual profits, there are no incentives for the banks to give priority to the ventures with the highest profit potential. In the interest based system, the banks are only interested in recovering their capital along with interest. The interest system is inherently incapable of allocating available liquid funds among firms and activities in the society according to considerations of efficiency, productivity and growth. Theoretically speaking an interest-free financial system would offer a much better substitute for allocating available funds among firms and activities. 3. Promotes Inequity Transactions based on interest violate the equity aspect of economic organization. The interest system encourages passive behaviour to develop among people having liquid funds by helping them to relinquish responsibilities and risks in investment activities. In contrast sharing in

responsibilities and risks is inherent in the profit/loss sharing methods of finance. The interest system brings about and effectively maintains a pattern of income distribution which is biased towards wealthy people and large businesses, irrespective of rational economic considerations. This way, resources tend to remain in a few hands. This perpetuates inequity in the distribution of resources. So interest gives rise to both inefficiency and inequity, the two major concerns of the discipline of economics. 4. Exploitation of Needs Interest, which is the kingpin of the modern banking and financial system, serves as a powerful tool of exploitation of one sector of the society by another. The taking of interest implies appropriating another person's property without giving him anything in exchange, because one who lends one dirham for two dirhams gets the extra dirham for nothing.

5. Hinders Productivity Dependence on interest prevents people from working to earn money, since the person with dirhams can earn an extra dirham through interest, either in advance or at a later date, without working for it. The value of work will consequently be reduced in his estimation, and he will not bother to take the trouble of running a business or risking his money in trade or industry. This will lead to depriving people of benefits, and the business of the world cannot go on without industries, trade and commerce, building and construction, all of which need capital at risk. 6. Moral Aspect of the Interest Permitting the taking of interest discourages people from doing good to one another (moral aspect of the prohibition of interest). In a society in which interest is lawful, the strong benefit from the suffering of the weak. As a result, the rich becomes richer and the poor poorer, creating socio-economic classes in the society separated by wide gulfs. To pay interest on money lent is to pay for something that no longer exists, and so the practice is nothing short of theft--which is, of course, a sin. 7. Inflation When a businessman who wants to set up a factory borrows money from the bank or from capital markets, he has to pay interest on the borrowed money even if the business is under a stressful

condition and needs to retain funds, rather than paying them out as interest. When the lender pressurizes the businessman/business entity to pay interest even in tough times, the businessman then recovers that amount of interest from the consumers by charging a higher price for his product or service. This rise in prices further aggravates inflation. Therefore, interest plays a part in aggravating inflation. 8. Deterrent to productive economy Interest is a deterrent to productive economic activity. This is evident from the commonly observable fact that when rate of interest is low, economic activity increases and people are more willing to start and expand businesses, which adds positively to the economy. In contrast, when interest rates are high, people tend to be discouraged from making real investments and are more interested in saving that money and earning interest on it. This is not good for the economy because, when a small entrepreneur gets discouraged from borrowing money and starting or expanding his business due to high interest rates, the country loses out on small scale and medium sized businesses. These small and medium sized businesses are vital to a healthy economy because they provide employment to many people. They also add to productive efficiency of the economy because due to meager resources, they cannot afford wastage and inefficiency, like the large businesses can. 9. Interest is based on expectation and not reality Interest rates have a component of risk premium. This risk premium is, to a large extent, based on perceptions of the investors regarding how a company will perform in the future. Since interest rates might be fixed well in advance of the actual performance of the company, a wellperforming company may end up paying a higher rate of interest than a poor-performing company because the expectations with the latter were higher initially, before the actual performance showed up. So a lot is dependent on prior expectations rather than actual facts that come along later on but can have only a minimal effect. This is not the case in profit and loss sharing, where equity holders can share in the profit only after the company has performed well and has actually made a profit. This way, the profit and loss sharing system rewards the owners of the business when a business performs well, while in an interest based system, actual good performance of the business has little effect on a pre-determined interest rate.

10. Oligopolistic situation Going by a purely economic argument, productive economic resources concentrated in a few hands would lead to an oligopolistic situation and competition would be reduced, while we all agree that competition is very important for efficiency. In a capitalistic system, too much emphasis and dependence is on people who already possess capital and productive resources (one need not go into details that capitalistic system propagates unethical practices when the only concern of people is to get the possession of capital by hook or by crook). But in awarding unnecessarily high importance to the capitalists, contemporary economists forget that beyond a certain level, incentive ceases to be an incentive. It becomes a cover for inefficiency. This inefficiency today can be seen in both the production by the rich capital owners and their consumption. This is because they can afford to waste. These large corporations can afford to pay high interest rates. They can also get the interest rates negotiated due to their monopolistic bargaining power. This increases economic dependence of a country on a few large corporations and stifles growth of small and medium sized businesses, which are essential for a country's economic health and also for competition. Often these large corporations are the giant multinational companies (MNCs) with huge resources at their disposal. If these MNCs come into a monopolistic position, by crushing the small industrial base of the country, it can have very bad repercussions for the sovereignty, culture and tradition of that country. ANALYTICAL JUSTIFICATION OF PROHIBITION OF INTEREST

Today many Muslim and non-Muslim economists, social scientists, socialists and even a number of capitalist economists have questioned about the so-called positive impact of interest from both theoretical and technical points. They often stress an important point that money capital cannot be treated as capital goods on the same basis as productive factors. Lending of money for interest was disliked and, in most cases, prohibited by all the monotheistic religions. An eminent Western economist, Harrods (1973) recommended the abolition of interest in order to collapse of capitalism. Not only this, he speaks with great admiration for an interest-less society in his work Towards a Dynamic Economics. Harrod also clarified that, It is not the profit itself, earned by services, by assiduity, by imagination, or by courage, but the continued interest accruing from the accumulation t hat makes that profit take eventually appear parasit ical. H e f u r t he r s t a t e s t h a t a n interest-free society which

will be a totally new kind of society would be the correct and f i n a l a n s w e r t o a l l t h a t i s j u s t l y a d v a n c e d b y t h e c r it i c s o f c a p it a l i s m . The interest based society and economy are abusive. How terrible the interest is it c a n o n l y b e u n d e r s t o o d fr o m o ne o f t h e P r o p h e t s H a d it h w h e r e h e s a ys , T h e i nt e r e s t ha s seventy levels of sins and the lowest level is equal to committing adultery with ones own mother (Baihaki and Miskat). It is really a matter of thinking that why Islam has strictly forbidden int erest and it s related act ivit ies. In fact, the int erest has a great negative impact on the society, economy and morality as well. If we look at the matter deeply, the f i r s t h a r m w e n o t i c e b e h i n d i n t e r e s t i s it s eco no mic har m. It s t ypes ma y be as fo llo ws:.

People earn money by int erest wit hout any effort. A person is getting $120

in place of $100 after a fixed period by interest means that he is actually selling $100 for $120. In t his case, the person gets extra $20 wit hout exchanging anyt hing and m a k i n g a n y e f fo r t . S o t h i s i s u n d o u bt e d l y a n e c o no m i c e x p l o it a t io n.  Earning money by interest makes a person reluctant to labor and people lo se

their mot ivat ion to earn money through labor. As a result, people lose their int erest in agriculture, industry, trading and construct ion, etc. which influence and hamper the total welfare of a society. A person will be interested to run his business with his own capital if he does not have the wide scope to take loan from interest based bank. This will force him to increase his capital and hence the extent of gross business will also increase. By t his way, the unemp lo yment problem may be reduced to some extent through expanding work facilities and finally, there will be a positive impact on the total economy of the country. Most often the whole nation fall into ruin because of the interest based banking system.Suppose, a person has $10,000 as his capital and he takes $90,000 more as loan from a public bank and runs a business based on that $100,000. For any inevitable reason, if the person beco mes bankrupt by losing cent percent of his business capital, t hen only 10 percent o f his loss will go for him and t he rest 90percent will go for the total nation, because the bank is a public property. In t he societ y, the wide scope to take loan can be explo ited by a selfish class of p e o p l e w ho t a k e m i l l i o n s o f m o n e y i n t h e n a m e o f r u n n i n g b u s i n e s s , b u t i n reality they use that money for their self-interest. They do not feel to refund the original money to the bank. As a result, billions of money of the country is kept in the

hands o f a few dishonest people for unlimit ed t ime. As a result, t he total economy of the country is captured by some loan defaulters and hence the whole nation is being highly affected financially. These are the main reasons of interest being prohibited from economic point of view. The second harm behind the interest is the social harm. Normally, we see that in case of loan, t he poor and needy borrow from the rich. In this situat ion, t he rich get scope to have extra money in the name of interest because of the existence of interest system. Inconsequence, the rich become richer and the poor become poorer. The class distinction therefore grows and takes the shape of class conflict in course of t ime. Fro m societal point of view, this is one of the main reasons of interest being prohibited. The third harm associated with interest is a moral harm. If the interest system exists in the society, the interestfree loan giving and taking is being collapsed. Nobody wants to lend money to anybody without interest. If the question of lending money comes, the question of the possible int erest comes even before than that. As a consequence, the kindness, affection, love, fellow-feeling, amity, sense of brotherhood and the mentality of helping others gradually disappear from the society. This is the moral reason of interest being forbidden.See for a more detailed discussion Al-Qardawi (1984).There are some other solid reasons that also prove that interest is an evil system for the human being and societ y as whole for all t imes.

They are given below

It takes away t he sense of feeling of human pain. Instead of helping the

needy and poor, people want to make a fortune out of it.The outlook of interest hampers spending money and inspired to put that money in a bank or lend to someone. Such attitude severely impedes the basic economic formula which is spending increases demand, demand increases product ion, production increases employment and employment increases overall income of the country.The attitude of interest also hampers the nations economy as people do not want to invest their money, and they prefer it to mult iply in banks. This takes away the entrepreneurs spirit of investment and taking risks wit h the invest ments.  In todays world credit s have become a very significant part of our life. But

in realit y, it is an evil system that makes a person it s slave. If someone tends to

outstretch his capabilit ies and spends on borrowings, thus end up living in a cycle of earning and paying debt s for everyt hing that he owns..The western economies that are inflated due to consumer borrowings are a farce. It can fall down anyt ime because no body has t he real money. According to a r e c e n t capit a credit in USA is $17,000. report the per

T h e r e c e n t f a l l o f internat io nal

stock market was due to such increased credit s.. Interest is one of the main causes why societies are currently deprived from basic needs. Sayyed Maudoodi (1987) commented about the bad impact of interest as Interest cuts the roots of human love, brotherhood and fellow-feeling, and undermines the welfare and happiness of human society, and that his enrichment is at the expense of the well-being of many other human beings. From the above discussion, it is clear that interest is one kind of illegal earning which affects peoples personality, humanity, honor, sense of cultural value, belief, faith and character. Apart fro m these, t he illegal earners will also be deprived from Baraka and the blessings o f Allah. None of his good deeds will be accepted and rewarded. Even, the wealth earned illegally will not be accepted to Allah if it is spent in the charity work . B e c a u s e , t h e P r o p h e t s a i d , A l l a h i s s a c r e d a n d H e a c c e p t s o n l y t h e s a c r e d s . Apart from the above reasons, there may have many other reasons of interest being prohibited which o nly Allah knows. Above all, Allah prohibit s only t hose things for humankind which creates more harm t han welfare. So it is our responsibilit y to keep ourselves far away from earning money by interest. At the same time, we should lead all our economic act ivit ies following t he Islamic Shariah and leaving dealings of an y kind including borrowing or keeping deposit s from any int erest based bank.

ISLAMIC SOLUTION TO THE ISSUE OF INTEREST

The Islamic scholars prescribed solut ions to the issue of int erest that can be based upon the following two basic principles, see for example Zarabozo (2007):

(1) If an individual/country wishes to lend money to a person/anot her country for help ing purpose, this act must be based on brotherly principles and it is abso lutely unacceptable to charge any int erest in such a case. This principle helps

to improve relat ions among different individuals and nat ions. If this important principle is applied today, countries will truly give aid and assistance to other countries, rather than sucking t hem into a pattern of dependency and debt burden.

(2) If an individual wishes to use his money to make more money, t hen he must be willing to put his money at risk. If he puts his money at risk, he can deserve some share of the profits. This implies that he must accept losses if losses occur. This is a system that is based on justice. It also has numerous benefits. The one who invests money would be concerned about the results of his investment and cannot demand his dollar off lesh regardless of what may occur to the debtor. These solut ions can work for individuals as well as for societ y as a whole. Banks are essent ially financia l intermed iaries. They take money from those who have excess money (savings) and turn it o ver to those who need money for invest ment purposes. Interest is not necessary at all for such a system to work. The bank and its depositors (shareholders) invest, rather than simply provide loan to their holdings. The money is put at risk and the return to the depositors will be based on the amount of profits made in the respective investments. Under normal circumstances of a growing economy, if the bank is big enough and it diversifies its portfolio, the bank is virtually guaranteed a positive return on its total investments. Thus, those who invest their money with the bank will also receive a positive return on their money without it being guaranteed or fixed ahead of t ime. Numerous Islamic financial institutions such as Islami Bank Bangladesh Limited,Bank Islam Malaysia Berhad, Dobai Islamic Bank, Jordan Islamic Bank, Al-Baraka Investment Bank of Bahrain, Bahrain Islamic Bank, Faysal Islamic Bank of Bahrain,Emirates Islamic Bank, Kuwait Finance House, Qatar Islamic Bank, Faysal Islamic Bank o f E g y p t ,Isla mic Bank o f Br it a in a nd so on, ha ve bee n set up t hrough o ut t h e w o r l d t o d a y . They have been established based on the Islamic Shariah the principle of avoiding i n t e r e s t a n d ha v e b e e n v e r y s u c c e s s f u l a n d f lo u r i s h e d t o d a y (Fr a nk a ndSa mu e l, 19 98).

PROHIBITION OF USURY IN VARIOUS RELIGIONS Hinduism The earliest such record derives from the Vedic texts of Ancient India (2,000-1,400 BC) in which the "usurer" (kusidin) is mentioned several times and interpreted as any lender at interest. More frequent and detailed references to interest payment are to be found in the later Sutra texts (700-100 BC), as well as the Buddhist Jatakas (600-400 BC). It is during this latter period that the first sentiments of contempt for usury are expressed. For example, Vasishtha, a well known Hindu law-maker of that time, made a special law which forbade the higher castes of Brahmanas (priests) and Kshatriyas (warriors) from being usurers or lenders at interest. Also, in the Jatakas, usury is referred to in a demeaning manner: "hypocritical ascetics are accused of practising it".

Christianity Usury has always been viewed negatively by the Roman Catholic Church. The Second Lateran Council condemned any repayment of a debt with more money than was originally loaned, the Council of Vienna explicitly prohibited usury and declared any legislation tolerant of usury to be heretical, and the first scholastics reproved the charging of interest. In the medieval economy, loans were entirely a consequence of necessity (bad harvests, fire in a workplace) and, under those conditions, it was considered morally reproachable to charge interest.Therefore, to charge interest was considered to commerce with God's property. Also, St. Thomas Aquinas, the leading theologian of the Catholic Church, argued that the charging of interest is wrong because it amounts to "double charging", charging for both the thing and the use of the thing.

Judaism Criticism of usury in Judaism has its roots in several Biblical passages in which the taking of interest is either forbidden, discouraged or scorned. The Hebrew word for interest is neshekh, literally meaning "a bite" and is believed to refer to the exaction of interest from the point of view of the debtor. In the associated Exodus and Leviticus texts, the word almost certainly applies only to lending to the poor and destitute, while in Deuteronomy, the prohibition is extended to include all money lending, excluding only business dealings with foreigners. In the

levitical text, the words tarbit or marbit are also used to refer to the recovery of interest by the creditor. Conclusion A very simple consequence of the prohibition of interest is that it produces a balance and uniformity in the distribution of wealth, a more equitable distribution of income and wealth, and increased equity participation in the economy. It has been argued that profit-sharing can help allocate resources efficiently, as the profit-sharing ratio can be influenced by market forces so that capital will flow into those sectors in early history which offer the highest profit- sharing ratio to the investor, other things being equal. Interest has been condemned across the religions and there are numerous evidences to support the claim that an interest-free economy would lead to widespread prosperity and productivity.