Hifz ur Rab

The acceptance of any commodity as a common medium of exchange makes it the most widely traded commodity and imparts stability to its purchasing power. So prevalent is its acceptance by the people that even a value-less, depreciating currency has come to seem like an acceptable measure of wealth.

However, the actions of the government and centres of economic power, such as the greedy capitalists, can significantly change the relative prices of goods.

The following example illustrates this: Let us consider the situation resulting from a decision by farmers to reduce the production of food grains to half. Since there does not exist any other competitive procedure for the production of food grains or their substitutes, and because food grains are essential goods for sustaining life, the prices of food grains, as well as those of other food products, will shoot up. Conversely, the prices of most other goods, including so-called superior goods and the products of activities based on the most modern and advanced technology, will crumble down.

The rate of return for most non-agricultural activities will fall to naught, while the rate of return for farming will soar high. The organized sector, assisted by interest-driven financing, keeps prices of its products and services high by controlling production and employment. Due to the confusion created by the illusion of consistently rising prices, commoners fail to respond effectively.

Thus, there is a relative increase in the price level of products and services from the organized sector with respect to the unorganized sector. This severely harms the interests of those connected with the unorganized sector, mainly the commoners, but they fail to act together to correct this massive injustice. Furthermore, they fail to register effective participation in the market to correct this market failure.

Conversely, it is also possible to ensure that the prices of some goods, especially those that constitute a good measure of wealth, can be made highly stable to ensure they discharge the measure of wealth function satisfactorily. Viewed in this perspective, gold and silver, which constitute the best-known measures of wealth, may be made to behave as almost ideal measures of wealth/value.

Shari’ah restricts certain uses of gold and silver and prohibits the cutting or melting of coins. Another simple stipulation that strengthens the stability of the prices of these metals is the enforcement of a 2.5% tax (Zakat) on the quantity withheld, provided the quantity withheld exceeds some minimum limit (Nisab) that is exempt from Zakat. This stipulation will reduce hoarding and ensure a stable supply.

The exemption below the limit (Nisab) will ensure that people are free to hold the currency required to meet their necessities and needs. However, the precious metals like gold and silver are subject to Zakat. Thus, anyone holding these metals in idle state will suffer an annual loss of 2.5% (in every lunar year). This increases circulation of wealth and tends to ensure an adequate supply of the medium of exchange. Thus, Naqdain (gold and silver coins) constituted an ideal measure of wealth in Qarn Awwal.

The remaining four commodities mentioned in Hadith-e-Riba have a much lower stability of purchasing power. These were not used as a unit of account, except in transactions (Muamalat) related to any of these, for example, for Qard Hasan (interest-free loan), where the quantity borrowed equalled the quantity payable to clear the loan.

The system of interest continues to cheat the masses while pretending to show utmost concern for price stability. The reality is that it has forced the governments to adopt free floats—that is, it has adopted monetary depreciation as a tool to sustain itself—disregarding its grossly anti-human, anti-social, and anti-environmental consequences.

Price Measurement/Discovery by Market

Let us discuss the process of price discovery by the market and how the surplus produced by economic activities is distributed among various factors of production. Prices determine the entitlements of these factors.

The market determines (or discovers) prices using data: on one side is the quantity of the common medium of exchange, and on the other is the quantity of goods and services that people exchange as per their preference.

Assimilation and integration of data produced by trillions of such transactions, occurring over days, months, and years across millions of markets, lead to the determination of price based on people’s economic choices in economic exchange.

Errors in measurement on either side will corrupt this process and will have a similar effect on the failure to determine just prices. Short-term variation in the purchasing power of the medium of exchange will make data too complex to lead to any consistent price. Even significant long-term variation will create massive complexity, making it impossible for commoners to make informed decisions based on their preference.

Furthermore, a free and open market is also an important requirement for determining prices correctly. The determination of an efficient price by the market is a very important function of the common medium of exchange, as there is no other mechanism for the just determination of price. Efficient price determination is essential for maintaining economic balances and enabling justice in exchange. The price determined by the market distributes the surplus produced among the factors of production.

Moreover, this framework ensures that the rate of return relates to the utility of the enterprise for the economy, and that the profit motive acts as an efficient driver of investment. A small error in price has a large effect on economic justice, rate of return, and wealth distribution. Efficient market operation, economic growth, and justice are possible only when the market determines just/efficient prices. Clearly, the highest level of stability of the purchasing power of the common medium of exchange is an essential requirement of justice.

Following Hadith shows that corrupt market practices used to manipulate prices may be a serious crime and even lead to Riba, which is the worst crime.

(i) From Abdullah Ibn Abi Awfa: Prophet (P.B.U.H.) is reported to have said that a Najish (one who serves as an agent to bid up prices in an auction) is a cursed taker of Ar-Riba. (It is quoted on the authority of Tabarini’s Al-Kabir.)

(ii) From Anas Ibn Malik: The Prophet (P.B.U.H.) said that deceiving a Mustarsal (an unknown entrant to the market) is Ar-Riba. (On the authority of Sunan Al-Bahaqi.)

Shari’ah prescribes special provisions for gold and silver—metals that are natural measures of value—to strengthen the stability of their purchasing power. These provisions include maintaining the quantity of noble metal content of the coins and measures that lead to an increase in their availability to serve as a medium of exchange.

Thus, Shari’ah has instituted special measures to provide for an adequate supply of gold and silver-based money, as these measures lead to price stability, justice, and economic wellbeing. We have seen that just measurement and right accounting for wealth are essential conditions for economic justice. This shows that ensuring price stability may be included among the wisdom (Hikmah) leading to the banning of Riba. Shari’ah relies on market prices, provides for the Mustahib to keep the market free and fair, and bans price manipulation.