Riba and Inflation

Riba and Inflation
Qazi Irfan, Islamabad – Pakistan
author@hazariba.com
November 13, 2006
The argument of inflation is often advocated to compensate for the
“loss of value” or the “depreciation in money”, and therefore any
consideration to offset this damage may well be justified. This
approach may find its way fast in conventional organism, and to
incorporate such computations may not be a problem in a mere
profit driven interest based system rather it can be looked upon as
another risk calculating element. However, it can’t and shall not go
unchecked without proper evaluation for its Islamic permissibility;
a viewpoint is required to be established off topic.
Although, the same sense has traveled to many of Islamic minds as
well except with a question mark, it equates to similar asking that
an extra “equivalent to inflation” if charged by the lender will be
considered as “Riba” or not?
Here the problem is double, there is a well-known confusion on the
subject of inflation in Western economies and when coupled with
the prevailing confusion on the subject of “Riba” in Islamic World
– it becomes horrendous!
At least there is a common settled perception that inflation is some
sort of phenomenon related to the upward trend in prices, but there
is no unanimous agreement on the definition or what causes
inflation. A wide variety of somewhat segmented classifications is
provided from different schools of thoughts and work groups, like:
1. Demand Pull Inflation (Demand Supply Phenomenon)
2. Cost Push Inflation (Due to increase in the cost of production/supply)
3. Built-in Inflation (Result of past events experienced now)
4. Hyperinflation (Inflation getting out of control), etc.

It is common and easy to understand that demand of certain things
go high during some specific period or time or event, say for
example “dates” are high-in-demand in the month of Ramadan,
therefore prices are inflated. Shortage of products and commodities
is certain in the times of wars thus prices are blown-up.
What is difficult to understand is the situation where say, I am on
my place for long; my city is calm, negligible change in habitants,
increase in demand if any is met with the increase in supply, wages
are not increased since last year, lifestyle of the city people cannot
change overnight.
No reflective change in anything, no specific period or event is
around, but prices are increasing in a regular pattern, a BIG WHY?
This big why is regularized and justified with the contraption of
“Inflation”.
What inflation is? - Answer “7.2%”
How calculated? - “from CPI which is …..”
What causes inflation? - “may be blab bla bla!”
Figures work simple is that, it works because mostly people are
interested in figures, so even if nobody knows “what causes
inflation” - it will not make a difference or just very little difference
– at least the inflation figure is known, isn’t it interesting?
W hat causes Inflation ?
An adequate amount of literature on different explanations is there
available on book-shelves and Internet; inflation is explained as a
result of “excess money supply”, a result of “paper money”, an
outcome of “increase in demand”, a burden derived from “over
expenditure of government in the form of taxes” etc.
Central banks seem more convinced with the cause of “excess
money supply” (or may be because it is their jurisdiction and they can control
it easily), anyway what ever is the reason of their persuasive cause,
the adjustment they normally do is to squeeze money supply by
increasing “interest rates” to fight “so-called inflation”. The
monetary contraction and expansion policies are well known styles
of central banks to address inflation and deflation respectively.
What are the results of all these efforts taken in the context of
“inflation”? I don’t know any but confusion. The every time
successful strategy worked again, i.e., if you can’t answer or can’t do
anything about a problem – try to confuse. But the monkey (if you
know the story) was not succeeded in confusing the complainant by
jumping from one tree to another (exerting efforts) in order to solve
the problem of plaintiff. There are people in the society not satisfied
with efforts or means undertaken to tackle inflation issue and the
projections of its causes.
What causes inflation is still not answered to their satisfaction.
Although, the mentioning of “interest” as a relative of “inflation” is
seen, but “Riba or Interest” is not labeled as the main cause of
producing inflation which in my view is the “true story”. How and
why?

“ Riba or Interest” A S THE “Cause of Inflation”
In order to explain how “Riba or Interest” becomes the main cause
of Inflation, it is mandatory to further elaborate my point of view
about “Riba” that revolves around the “non-existence” of the extraliability
created in a transaction.
At a given time of transaction when a lender and a borrower are
going to agree on interest based loan contract, there is an owner of
each penny of capital available in the economy.
Is there a contract executed at that moment with similar time span
in the economy to bring about the “change of ownership of capital”equivalent to the “Riba or Interest” in favour of borrower? Because
of the deficit he is in now due to the just concluded agreement.
No need of such a simultaneous contract, might be argued in a case
where the borrower already owns equivalent to that extra he has
committed in terms of “Riba or Interest” and is able to discharge
his total liability. Any problem now, YES! Still there is.
Whatsoever is the case, the borrower owns that much or not, his
commitment or promise is reflected in accounting books of lender
in “receivable” column and “balance sheet projection with increase
of profit”. Is there any manifestation of the contract on the part of
borrower? Yes, of course there will be.
The books of borrower will be adjusted for an increased liability, the
assets side will be re-evaluated to balance or to gain profit (profit is
the motive every where, means and rules are subjective), a check on options
available to the borrower to match the increased liability will sound
only to adjust the saleable assets prices upward.
If “Riba or Interest” was not there in the contract; absolutely there
was no requirement to adjust accounting books, and therefore no
forced increase in the prices of saleable assets (inventory). From this
single case in point, one can expand the canvas to every type of
financial contract incorporating “Riba or Interest”, the “receivable”
of lender is always reflected as increased liability on accounting
books of the borrower (an industrialist, trader, service provider, individual
etc.), accounting adjustment of that “increased liability” is only
possible by upward price adjustment of products and services. It
can happen at the start of the business, in midway or whenever
“Riba or Interest” is recorded in books.
Here, the whole economy is run like this, lending is taking place on
regular basis incorporating “Riba or Interest”, prices are increased
with each cycle of lending, there is a continuous trend of increase in
prices, study CPI and other bunch of indexes, regard it as empiricalevidence but please don’t call it a phenomenon of “Riba or Interest”
but “Inflation”.
It looks simple; true as well “the root cause of inflation is the
practice of incorporating Riba or Interest in lending”. This is totally
opposite to the belief (or mistaken belief) posed by central banks.
When central banks adopt the policy of “increasing interest rates”,
it gives an impression that by increasing interest rates, the inflation
is reduced or at least capped from further increase in it, you heard
this and kept in mind, but you can’t be convinced because there is
no logic told. Who is hiding what and why? Try to guess it.
Beyond Inflation
There are few points that require your attention in above context.
1. One should not be confused when some one quotes that “Look!
The price of computer has gone down considerably, so what
inflation or the affect of interest are you talking about, how this
industry is saved from this phenomenon?” No, it is not like this,
the above asserted cause of inflation is equally influencing this
industry as well, but the reason for decrease in prices is the
advancement in technology. The technology has a role in
pricing.
2. Price is relative, depends on many factors, price shapes itself on
natural conditions, different situations. It may change without a
difference of time period, a sudden unforeseen, disaster, war,
market conditions, geographic displacement, flood or any such
event. Comparing prices with a reference which is also changing
in its value can never produce equitable results for all. Therefore,
to best equate the value of any commodity/currency in different
ages, situations and opportunities – is the same commodity or
currency itself, nothing else.
***

Riba and Inflation by Qazi Irfan, Islamabad – Pakistan (Nov 13, 2006)