Times then changed and the Muslims gradually began to lose political supremacy, which passed on to Europe who denied not only the authority of the church but altogether religion itself. And superficial glamour of the present Western civilisation has so captivated the common man that instead of reasoning, the expedients of the west are adjudged to be the standard of right and wrong and the appreciation and condemnation of actions.
This led to many of our young men to contemplate a radical change in numerous religious matters and several people have adopted apologetic attitude in the defence of Islam. Even modern Muslim writers started to mould Islamic principles to fit their desires rather than moulding themselves to the will of Allah as sincere Muslims, which shows the extent we are exposed to and influenced by the Western ideas. Even these modern Muslims unequivocally claimed that Riba has not been properly defined and has different meaning from interest.
They put forth various arguments in its favour and don't become shy of even misinterpreting theological traditions and sayings of the Holy Prophet. Muslims, who were not fully aware with the principles of Shariah and its economic philosophy, started to believe that abolishing Riba from the banks and financial institutions is a dangerous idea rendering them charitable and the country's economy would collapse.
But now the situation is changing as many Muslims and even non-Muslims have realised the benefits of Islamic finance.
Modern banking operates mainly by giving interest to people from whom it has borrowed money as deposits and after keeping a small percentage of it as reserves and vault cash, lending or investing the same money at a higher rate of interest or return and keeping the difference as profit, which is a major source of revenue for banks.
This is in addition to the profit made by the banks on various bank's services provided by them. The main thing to note is that, the banks charge the interest from the party and want back their interest plus the principal at any cost, even if his company goes down the drain. In Islamic Shariah, the person extending money to another person has to decide whether he desires to help the party or he wants to share in his profit of his business.
If he wants to help the person, then he should not expect any worldly return on his money. But if he is advancing money to share the profit earned by the other party, he can have it as per predetermined ratio of profit sharing out of proportion of profit actually earned by the party and must share in the loss as well. While a bank in Islam can be the treasury where the funds of the people are kept, besides rendering other services also.
FUNDS CAN BE OF THREE TYPES:
1) safe deposits, which should be kept in intact. The bank can charge service charges in connection with safety of funds.
2) 2) Permissible deposits, to whom banks can use the funds but should return on demand.
3) 3) Funds deposited for specified period.
Banks are at liberty to invest in trade or lend to commercial firms by way of mudaraba and pay back the profit as per agreed terms ie 1/3, 1/4, 1/2. So the method suggested by Islam for accomplishing close co-operation between finance and commerce is Mudaraba or Musharika (the types of Partnership in Islam).
This means that the capitalists should supply capital and the workers should contribute labour and profit should be distributed evenly as per agreed terms.
The banking on the basis of profit and loss can be termed as an Islamic one as it contains the elements of trade and risk factor. While the fixed rate of return on the investment is the actually the interest. Thus, banks can be established as per Islamic codes.
Lending to a needy person is an act of kindness while those who have the ability to repay their debts but are reluctant are tyrants. It's necessary that they pay back their debt even from inheritance after their death. Otherwise it's prohibited to participate in funeral prayer of a debtor.
Islam has allowed the government to arrange for essential credit free of any interest. Hence, during the Abbasid Caliphate loans were given from the Baitul-Mal, which could be paid back from the legacy of debtor's will. If will didn't mention of repayment of loan then the loan was repaid before dividing the property left by deceased.
Quranic verses are very explicit about the above contention. In Chapter No 3, Al-Baqar Verse, and Ayah No 110: "Those who swallow Usury cannot rise up safe as he ariseth? whom the Devil hath prostrated by touch".
That is because they say: Trade is just like Usury; whereas Allah permitteth trading and forbiddeth Usury.
In other verses 278 and 279 of Chapter No 3, Surah AlBaqar, there is a clear warning: "O ye who believe Observe your duty to Allah, and give up what remaineth from Usury, if ye are believers. And if ye do not then be warned of war from Allah and His Messenger".
From Ayah No 110 it is very much clear that ALLAH wants us to do trading and not dealing in usury/ interest.
The big question is that, what is inherent in Riba, which makes it haram that even it's termed as a war against Allah and His apostle. It is very much important to note that, Allah has not termed any evil as a war against Him and His apostle but Riba.
For understanding this we must know that, a bank is not just another business like a furniture store or a lumberyard. The decisions made by bankers quite literally permeate the entire economy, affecting the decisions made by other business people, housewives, and government.
In fact, the whole idea behind central banking and monetary policy somehow is to influence the decisions of bankers, then these decisions, in turn will influence the decisions made by everyone else and in this indirect fashion overall functioning of the economy is controlled.
Let us see the impact of interest on the society from the following examples. Suppose the interest rate is made higher by the bankers then, the businessmen who want to initiate new business, will not be in a position to bear much expense (it must be borne in mind that interest is an expense of the company or firm), thus new initiator would be deterred as the interest expense would aggravate his price of the commodity in comparison to already established businessmen.
And for the one, who wants to expand his already existing business, he will also not try to get the loan on a higher rate. If compelled then, he would try to reduce the quality of the goods and services or ultimately lay off the employees or labours. And mostly what happens that the traders usually don't find themselves in a position to reduce the quality of products because of tough competition.
So the result is that many people are unemployed and thus the overall incomes of the people are reduced which affects savings and in turn low savings lead to decreased investment and production. Because people having no or less money would want only to consume it on necessary goods so the demand for other goods would fall resulting in closure of these companies and laying off employees from these companies and reducing more saving of the economy.
So the whole economy is submerged in this process, ultimately bringing the recession in the economy. And the recession of one country affects other countries, because the businessmen of the country, which suffers from recession, would import less from the other countries.
When the bankers decide to lower the interest rate then many people come forward to avail the loan facility from the banks, including the people who were willing to get loan but couldn't because of high rate of interest. So the new businesses would be started or the existing businesses would expand their business. Thus leading towards more investment and more production. More investment and production results in tough competition, which ultimately leads to collapse of some businessmen of the industry.
Thus the people working in those companies or factories would find themselves out of job,. thus their incomes are slashed and savings as well. This results in low investment and low production ending in recession.
The above examples don't mean that interest is only the factor, which causes recession in the country, but it is a major factor to bring the destabilisation in the country's economy. It used to be the potential tool of feudal lords and Shyloks to subjugate the poor people and presently it has become the technique of the developed countries like USA to dictate its policies and conditionalities on the poor economies of the underdeveloped countries, especially through the IMF and World Bank.
People are gradually knowing the impacts of interest on the society. It is hoped others who are still unaware of the facts may read and understand the verses cited above regarding interest (Riba).