This issue carries the second part of a continuing series on whether riba is a real world economic issue. It contains some of the findings of a study which indicate, among others, that commercial banks’ riba income is strongly correlated (95.9%) with total yearly inflation — that one unit of riba income of commercial banks causes a 35-basis-point increase in inflation. This is solely because of the riba element and not because of any gap between demand and supply for any or all goods and services in the economy. Report author Mohammad Aamir, an investment banker as well as a cost and management accountant, contends that this reveals the nature of riba as a “wealth destroying agent”.
This shows up a fundamental difference between conventional and Islamic finance — making money from money versus making money work. The ongoing financial and economic crisis ought to be regarded as an opportunity to reset the way things work. What the crisis has amply demonstrated is that the conventional financial sector has become too far removed from the real economy. Islamic finance has a sound general practice: In making an investment, don’t consider only asset prices. Focus on the business proposition and the people who will do it.
In the face of a rapidly shrinking world trade, the US Senate did right this week by voting to soften a controversial “Buy American” clause in a US$800 billion economic recovery package, after warnings it could spark a trade war. The clause had sought to ensure that only US iron, steel and manufactured goods are used in projects funded by the bill. The climb-down followed warnings from the European Union and Canada that the stimulus bill could trigger protectionism. The White House has said it supports giving preference to domestic manufacturers in public works programs but only if this does not violate existing trade agreements.
The message that emerges is: “Let’s get real.” It’s the real world’s economy and financial sector that are in trouble. Measures to alleviate the situation should therefore focus on what’s happening on the ground. Credit is Latin for trust and confidence. Those in the financial sector should keep this in mind. After all, in banking, reputation is everything.
With the Bank of England widely expected to reduce UK interest rates to 1% from the current 1.5%, it appears that the major developed countries are trending toward a zero interest rate regime, as is being practiced by not only Islamic finance but also by the Bank of Japan. It has been reported that scrapping interest rates is gaining widespread appeal. Mohammad Aamir’s study may have been truly worthwhile.
PLAN WELL, RETIRE WEALTHY
