An Open Letter to the Ulema

By Asif Punjwani July 31, 2012

Asalaamu Alaikum. Sheikh, we need to talk. Its about Riba, Banking & Currencies. I feel Islamic Scholars have been treating the symptom as the root cause in financial matters. I will share a few examples here. I have heard it multiple times from different Imams of my local masjid that currency-trading for profit is speculative and haraam. From an economic point of view, it makes complete sense. Trading financial instruments for profits creates a rentseeking environment causing social inequality. But what I fail to find is a junction (fatwa) against the Central banks that issue these currencies. Let alone a fatwa against Central Banks of NonIslamic countries, but there are signatures of brand-name Muftis endorsing the existence of the State Bank of Pakistan. We have heard many times that hoarding of goods during Ramadan is wrong and there are calls for price-control during the month. Price-controls causes shortages, hence price-hikes. The cycle feeds on itself. When the prices became high in the Prophet's time and people asked him to fix prices for them, Prophet PBUH replied Allah is the One Who fixes prices, Who withholds, Who gives lavishly, and Who provides, and I hope that when I meet Him none of you will have a claim against me for any injustice with regard to blood or property. (Reported by Ahmad, Abu Daoud, al-Tirmidhi, Ibn Majah, al-Dari and Abu Y'ala.) There is another culprit to price-fixing. Thats the Central Bank. When the medium of exchange money, is diluted, prices naturally go up. The objective itself of the Central Bank is to keep prices stable. Then we have the objective of having Riba-free loans because its the Islamic way, nevermind the fact that the very medium of exchange (currency) is inflationary in nature. Infact I would argue that someone who does not pay interest equal to inflation is accepting RIBA! For e.g. I lend you Rs10,000 today and you pay me my money back in 10 years. Value of that Rs10,000 would have eroded to less than 30% of the original wealth lent! So you see, interest-free loans using fiat currency is not RIBA-free. Only this time the debtor is accepting RIBA and the lender is paying RIBA. No longer is the debtor weak nor the lender as strong. Todays lenders are the poor savers and the biggest debtors are Central Governments and World Super powers. Its a trend to speak of creating a Welfare Islamic System propping up Government bureaucracy and national debt. Welfare of the general public, comes from the general public. Compare Edhi Foundation with Benazir Income Support Program. Welfare comes from real savings, not printed or borrowed money.

Now lets discuss the root cause of RIBA. Before that we have to understand Inflation. Currency debasement causes inflation in general. Debasement occurs in two forms. Via Central Bank to entertain fiscal deficits. Commercial Bank thru fractional reserve lending Lets look at Commercial or even Islamic Banks. If you were to do banking in Gold and Silver, the banking process would financialize all asset class, and cause debt-based inflation. Whats at play here is that the money invested by the banks do not come from real savings but thru duplicate counting and recounting of the real savings. Leverage is the term coined for this activity. Banking creates this overlapping ownership of capital, causing economic booms. Bust occurs when the overlapping ownerships are unwound. Islamic Banks use the same Reserve ratio technique, simply tinkering with the ratio requirements. It is infact this ratio that causes inflation of the money supply in the economy. Sure, Islamic Banking works on a profit sharing & renting assets model which is definitely better. But without 100% Reserve ratio, financialization will be the end result. Till Banks, Islamic or otherwise, connect themselves to the Central Banks Money-grid and do not maintain 100% reserve ratio, there will be guaranteed inequality in a society. There is an immense need for Islamic Scholars to understand the modern Financial Markets before judgments are passed. However well-intentioned, they will not bear fruits till the root cause is tackled.

Asif Punjwani trades Equities, Bonds and derivatives in the International Capital Markets. He can be reached via Twitter @AsifAmeer_AP