Forum
Comments:
Dr. A. Gafoor's
Model explaining Interest and Riba
Dr. Mohammad Omar Farooq
Associate Professor of Economics and Finance
Upper Iowa University
IBF-Net;
2/9/07; Message #6043
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In response to:
===========================================
Salam and greetings.
This message was originally under the thread
"Prof. Rodney Shakespeare and Prof. Muhammad Yunus", which shed
light on making Grameen Bank's operation complete riba-free.
A. About the Riba-interest Equation
Dr. A. Gafoor takes a disaggregative
approach and model to explain the practice based on prevailing interest rate
structure as understood in modern contemporary finance. As explained in his work
"Interest,
Usury, Riba, and the Operational
Costs of a Bank," he disaggregates
the modern interest rate into six components:
- Interest
- Services Cost
- Overheads cost
- Profit
- Risk premium
- Compensation for inflation
In the modern theory of interest rate structure,
all six components are subsumed in one: INTEREST. Dr. A. Gafoor finds only one
component as interest (cost of borrowing, or the return to the depositors),
which in his view should be equated with riba. Other five components,
as he explains, are not interest, and should not be equated with riba.
Question no: #1: Based on your analysis, Dr. A.
Gafoor, is it not then true that the traditional riba-interest
equation (i.e., blanketly equating interest with riba - without
understanding the modern interest structure) is inappropriate and unjustified?
Another word, you are also arguing that not all interests (as it is understood
in modern conventional banking) are riba? Right?
B. Explaining to the Ulama
Dr. A. Gafoor feels that if this disaggregative
model can be explained to our ulama then they might change their mind. He
writes: "I
believe if this model and its use are properly explained to our ulama
they will understand and approve. They are not
stupid or inordinately unreceptive to new ideas; it is simply that no one
cared to explain to them the existence of two types of (bank) interests and
how they came about."
I
am however less optimistic that our old guard
ulama can be "explained" to. World is changing incredibly much
faster than our old guards can be "explained to" to change. I
believe many of them are really brilliant, but the problem is with both the
mindset and misunderstanding that are deeper (rooted in our legalistic Fiqh)
than we often acknowledge. Indeed, Dr. Gafoor's optimism about
a proper explanation leading to our ulama's understanding and approval has not
been borne by fact, as in response to my question - "would
you kindly share with us how your approach has been received so far?”
- his response was revealing: "By
silence (!) from the old guard ...".
Dr.
Gafoor, contrary to your own assertion, is that really not a reflection of
being "inordinately unreceptive to new ideas"?
I
know sometime my portrayal of the reality might be taken as harsh,
but unfortunately, we need to recognize and acknowledge the reality as it is.
Leaders that need to be led are not true leaders. Experts that must be shown
the way by non-experts are not really the kind of experts that are genuinely
relevant. Scholars who need to be illuminated by non-scholars
(especially, when scholars are not even willing to even put any value on
non-expert views and they are without any accountability on a representative
basis) are really not the type of scholars who can foot the contemporary bill.
C.
The Profit Component
One
of the components of modern interest that Dr. Gafoor would like to reclassify
as non-interest (non-riba) is profit. He writes:
"The
proposed bank is a commercial concern providing a service — carrying money
from the lender to the borrower and back, keeping it safe, receiving from and
paying to both the depositors and the borrowers, keeping accounts, buying and
selling services from third parties (e.g. hiring a lawyer for title checking),
etc. The costs of these are taken into account in the two
preceding components. But, how about remuneration to the
courier-bank for arranging these services? Should it do it
without any benefit to itself, investing its own money, time, expertise and
effort? Is such remuneration riba? Obviously
not. However, it may give rise to concerns depending on how
it is computed. If it is computed as a percentage of the
loan amount there may be some room for doubts. But, here it
is proposed to be computed as a percentage of the costs of the services the
bank provides (i.e. the services and overheads components, seen above).
Thus it is a legitimate remuneration or profit."
I
can't expect the our Ulama and the traditional shariah experts that are giving
the cover to current Islamic finance movement can be persuaded about this. The
traditional view is that money cannot be used to make money through
lending. Allowing this profit component, whichever way it is computed, to our
ulama (and according to the traditional riba-interest equation) is
still making money with money (through lending). After all, Dr. A. Gafoor's
disaggregation, once stripped of the interest paid to the depositor, which to
him is the only interest (riba) element, would make lending money riba-free.
The only problem is that the traditional understanding still holds that
profiting from lending is riba, especially when such profit is built
into the cost structure. If Dr. Gafoor's interpretation is to be accepted then
it needs to be acknowledged that money has opportunity cost, and some kind of
pure return (for parting with one's money) is not just legitimate, but also
fair.
D.
The Semantics and Literalism
One
last point. Dr. A. Gafoor disaggregates the current interest rate structure
separating it into what he thinks as the only interest (riba)
component and what are non-interest components. He does so without dealing
with any definition of riba other than the traditional understanding.
As Dr. A. Gafoor put it:
"this
model does not define riba, it simply separates riba from other components
and would accommodate any definition of riba that is acceptable to the user.
That is the advantage of this model. It assumes
the definition of the riba that is given to it and then proceeds to
application without getting stuck with an old problem."
Unfortunately,
in my humble view, we can't get around or gloss over the issue of defining riba.
Dr. Gafoor does acknowledge: "Muslims take the word interest literally
and equate it to riba."
Dr.
Gafoor would like to strip our traditional understanding of
"interest" of all other components, except what he believes is true
riba and interest. Unfortunately, our ulama for a long time are steeped
in a very narrow literalism and legalism. Instead of turning to Islam to seek
guidance in a problem-solving manner, they have defined a lot of things in an
overly restrictive literal sense and now have real difficulty in meeting contemporary
challenges and problems.
In
his work Interest,
Usury, Riba, and the Operational
Costs of a Bank, Dr. Gafoor writes: "in money matters, any
addition to the principal sum is riba." So,
basically, this is the definition of riba he identifies and builds
his disaggregative model without touching that definition. However, let me
pose this question to Dr. Gafoor.
Question #2: The arguments and
evidences he used from the Qur'an and Hadith [Section 2.7] clearly indicates
that the prohibition is mentioned/dealt with in connection with an
element of exploitation or vulnerability to exploitation of the borrowers by
the lenders. My question is, when all the cost components in Dr. Gafoor's
model are separated from the "interest" component - or in my
expression when interest is (a) in a competitive market, (b) operating in a
regulated environment, (c) based on mutual consent and (d) that is
generally mutually beneficial - where is that exploitation or vulnerability to
warrant the inclusion of all "interests" in the blanket
prohibition of riba, as understood in riba-interest
equation?
I very much
welcome Dr. Gafoor's elucidation of the problem that arises from literal
approach and understanding. Thus, the disaggregative model helps to better
understand the problems with the traditional riba-interest equation.
However, I also look forward to further elucidation from him in regard to the
profit-compoment in financial intermediation (banking operations) and the
definition of riba that he didn't want to deal with.
Fi amanillah.
=================================
Dr.
Mohammad Omar Farooq
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