Hifzur Rab

This part intends to explain the core issues and to create better understanding about Riba. The misunderstood and neglected aspects are highlighted. We shall discuss issues that may help us to thoroughly comprehend the problem and its reality and assist us to arrive at the right perspective.

Islam has strictly prohibited Riba and it is considered as the most serious crime so much so that Islam has declared war against it. In part 1, we discussed Riba from Quran-e-Hakim and Sunnah Mubarakah and considered practices of Qarn-e-Awwal.

Riba was defined as a measured excess of quantity of commodity lent/due that is demanded to settle the dues. Even in case of Dinar and Dirham that our jurists hold to be Asmane Khalqi (natural money), Riba is excess of quantity of gold/silver demanded against loans or dues.

The emphasis is on weight as it is weight that defines quantity of wealth. 1 kg of wheat, 10 kg of rice, and a basket of 10 kg of wheat, 5 kg of rice, a kg of salt and a gm of gold are all known and defined quantities of wealth. Defined quantity of wealth means that both quantity and Jins (genus) is specified. Stability of value/purchasing power of various wealth forms mainly depend upon its nature, composition, natural characteristics, cost of preservation, storage and transport, supply and demand and these are interconnected. Value depends also on the quality. Gold and silver are pure chemical elements and thus in pure state, they have unique qualities.

Due to this and superior physical and chemical qualities of these and because Allah Subhanahu wa Taala has created human nature that cherishes these noble metals, unit quantity of gold and silver are better and more reliable measures of value than others.

Clarity on issue of Riba is so important in Shari’ah that while recognizing change in value due to change in quality, it does not force us to exchange different qualities in equal quantity and yet in case of Amwale Ribuwiah, it does not allow these to be directly exchanged with any excess of weight (quantity) on either side. As generally understood by our scholars, this restriction was essential to stop practice of Riba by hiding behind difference in quality.

This also clarifies that known quantity of Amwale Ribuwiah is considered defined quantity of wealth and may be used as a unit of account in an appropriate case. Further, unknown quantity is not a defined quantity of wealth and it cannot be used as a unit of account. Excess demanded against dues or loans is Riba but we must measure and account correctly. Our dealing cannot be free of Riba unless we measure and account correctly.

Accordingly, measurement and accounting for wealth is the central issue in our understanding of Riba. Masalaha and Mufasids are important considerations in Islamic decision making and therefore these issues are given due consideration.

Mamluk dynasty innovated use of copper coins and initially used it as change for dinar. They gradually tried to maximize their use and then used these as substitute for dinar and dirham. Circulation of dinar and dirham was seen to hamper implementation of the scheme and their availability was restricted. Foloos of account was created and its use as unit of account was mandated. However, it did not work.

Fatawi (edict) mandating use of Foloos of account had to be rescinded and dinar had to be restored as a unit of account. The period saw great scholars and their analysis of the problems faced while replacing copper coins with dinar and restoration of dinar and dirham as currency resolved the problems. 

The problem was due to failure of copper coins to determine just and efficient prices due to significant instability of its price compared to gold and silver as well as other commodities. Great scholar of the time, Maqrizi (may Allah reward him) was instrumental in freeing the people from the harms they suffered when gold and silver was replaced with copper as base of measurement and accounting of wealth.

Foloos are first known example of symbolic money as these were accepted mainly as change for dinar and not as money in themselves and decision of Imam Yusuf (may Allah reward him) that required borrower to return as many Fils (plural of Foloos) that have same value in terms of Dinar that is, if the number of fils borrowed amounted to half a dinar, the amount required to clear the loan will be as many fils that amount to half dinar when loan is cleared. That amounted to accounting in terms of Dinar i.e., fixed quantity of gold. It was mainly an outcome of the process of improved understanding. It was decided on the basis of disregarding nominal terms.

In Around 1425, Egypt again faced massive problems.  The great thinker of the time, Asadi found that back then, the copper coins were not detrimental to economy but debasement of coins, corruption of measurement and corruption in different levels were the most important causes of the problems. In that period, there was a massive price rise of some common food items such as bread despite abundant agricultural production and good economic growth.

Economy was growing and demand of copper was high. Therefore, copper coins were not depreciating. Thus the predominance of Foloos was not a problem. Rather, it was assisting trade and commerce by fulfilling increased monetary requirement. Failure of gold coins to set prices right when these were debased, corruption in measurement of quantity of goods or good performance of Foloos during the said period of economic growth does in no way dent the superior status of gold and silver coins as most stable single commodity based measure of value and accounting unit of wealth.

However, it does indicate that complementary currencies that show remarkable consistency in particular economic environment may be used as medium of exchange to supplement currency and to boost its stability in that environment. Historical evidence shows that highest level of stability of purchasing power of measure of value and unit of account of wealth has very profound effect on economic justice, welfare and growth.

Our discussion revolves around accounting correctly that is mandated by Shari’ah and scientifically, rationally and logically. It is well known that justice is not possible if accounting is incorrect and fraudulent. It may be noted that mainstream economists hide under the assumption that change of purchasing power of money is small and may be neglected and it may be used as a unit of account. Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson (1973) write:

“The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes that the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements”.

We have significant proportion of economic and financial contracts that are spread over time span exceeding 10 years. For a transaction with time span of 10 years or more, change in purchasing power of fiat money X is normally above 50% and may even exceed 90% or even 95% in respect of many countries. How wrong it is to neglect 50% and even 90% and more, assuming it to be small. What can be more wrong than neglecting 90% based on false assumption that it is small and negligible. An example illustrates it further.

Let us consider a business with 10-year horizon where net investment in first 3 years is 10X, 8X and 6X respectively. There is no net investment in the fourth year and net gain in 5^th. 6^th, 7^th, 8th, and 9^th years is 1X, 3X, 6X, 10X and 9X respectively. Business is liquidated in 10th year with total yield of 12X. Profit according to existing practice (accounting in nominal terms) is total output (41X) less total investment (24X), that is 17X. 

Let us assume 5% yearly inflation. If accounting is done in real terms, investments in the first 3 years will be 10, 7.6 and 5.4 respectively and gain in 5^th. 6^th, 7^th, 8th, and 9^th years will be 0.8X, 2.2X, 4.0X, 6.6X and 5.7X respectively. Return in 10^th year will be 6.0X.

Thus, total investment in real terms is 23 and total return is 25.3. The overall profit is 2.3.  Thus, we see that as a consequence of neglecting change in purchasing power on the basis of the false assumption that it is negligible, profit is accounted 7.4 times higher than the actual profit.

It is really ironic that most of our contemporary Muslim economists also subscribe to this view. It is important to account for the purchasing power in intertemporal exchange which is quite a significant issue in the current times as compared to the past.