What is the main difference between Islamic and Interest Base Monetary System?
28 March, 2012
Islamic monetary system is test of leadership and management of executives and economic managers and Islamic economists to apply. Islamic economic system is radically different to conventional interest based economic system. Islamic monetary system takes money as medium or mode of economic transactions not as a commodity itself. Imam Hasan Al Basri, an eminent scholar of Islam of the fist Islamic century, commented on the utility of money as:
“Money is such a friend of yours which benefits you only when it leaves you.”
This brief remark in fact makes up the whole of Islamic monetary system. The remark emanates two main points:
Money carries no intrinsic utility. It cannot be used directly to fulfill the human needs. It can only be used in exchange of some goods or services. On the other hand a commodity has its intrinsic utility. It can be used directly to meet human needs. This can be well described in economic terms: there are two types of commodities: “consumption goods” and “productive goods”. Money falls not to any of the mentioned categories. Money is not consumed itself, so it is not consumption goods, nor does it produce anything, so it is not productive good.
All the modern economists admit, now, that money is the means and medium of exchange for economic activities, not a commodity. Adam Smith called the horded money as dead stock, which produce nothing. Yet, in effect, money is treated as a commodity in itself in the interest based monetary system; and this is the basic of usury and interest.
Once admitted that money is a medium of exchange not a commodity, the logical consequent is that while exchanging it with money especially of the same denomination, it must earn no profit. It is the logical and philosophical bases for the prohibition of interest. The economists after conceding money as a medium of exchange do not take it to this logical result.
The invention of paper money was used to propel the interest based monetary system. This paper money when deposited with the banks created an imaginary kind of presumed money considered by “fractional reserve system”. This money surpassed the amount of real currency. The financial papers were invented, later, on which banking entities advanced loans on the basis of interest. This fictitious money crossed all the bounds and reached an unbelievable extent. The size of this fictitious money is twelve times more than the collective GDP of the whole world! Fictitious money is nothing but numbers fed in the computers. It is a bubble has nothing to do with the real finance.
This is what Imam Ghazali has indicated centuries ago:
“Interest is forbidden, for, it stops people from taking up real financial activities; since a person is allowed to earn interest based money… it becomes easy for him to earn interest based money and bothers not to take part in the real economic activities. This phenomenon leads to damaging real economic activities of people, as the interest of people cannot be protected without real skills of trade, industry and construction”
Here comes the test of leadership and management. Islamic monetary system based on real money. It offers its mutual venture of economic activities in which the investor and the worker, Mudarib and Rab ul Mall, share profit and loss on agreed ratio. In this way, the saver of money becomes an actual partner in the business. This system creates no fictitious money or bubble which may burst at times, as it did in the great depression of 1930s as suggested by the, then, investigatory team “Economic Crisis Committee”.
Islamic interest free monetary system can save the world from economic crises, since it allows no interest which produced fictitious money. Nonetheless, Islamic monetary system can not work in isolation from other organs of society. Unless the whole system backs it, it cannot produce its fruits in full. To achieve this goal the foremost job to be done is to focus on education in Islamic finance along with training of leadership and management and leadership development. Islamic leadership development programs need great sophistication to cope with the real world challenges.
Articles written by Mr. Irfan Shahzad.