How interest reduces and charity increases?

Allah SWT has mentioned categorically in Quran that Interest is banned/Haram. Although Allah SWT don’t need any explanation or reasoning just the saying “Allah has permitted trade and has forbidden interest” (Surah Al-Baqarah, 2:275)” is enough injunction for a believer. But still, it is qur’anic way to appeal to the people of wisdom and to the consciousness of human being so the next ayah lays down the reason for its ban. The Ayah states as follows;

“Allah destroys interest and gives increase for charities. (Surah Al-Baqarah, 2:276).”

The literal meaning is very clear the interest is bound to destroy and charities are meant to increase. But someone with knowledge of finance would say how is this going to happen? Because apparently one who lends money on interest gets back his original money along with interest so the money is increased and one who gives away charity does not get anything back so his wealth decreases. The question seems valid and it’s difficult to convince someone without understanding the underlying phenomenon which is being referred in this ayah.

We need to dissect the economic system which operates on interest. The term we use for this system is capitalism. Where capitalist i.e a banker lends his money to an entrepreneur who combines factors of production and generates value. It gives back interest over the money and compensation to other factors of production.

The capitalist takes away its cut from value chain before it has even generated some value or in worst case negative value i.e. loss from operations. The money that is being withdrawn in the form of interest gives a permanent dent to value engine and it continues to retard its capacity by squeezing its breath little by little. That is one side of the picture.

In true economic sense when interest is being charged on capital the business would have to increase the prices of its product and reduce the expenditure which is mainly labor cost. The low compensation of labor reduces their purchasing power who cannot afford to buy goods because prices are going up thus widening the gap in both ways. The demand for the produce goes down. The productions are cut and people are laid off, production capacity is not fully utilized, resultantly there is an increase in unemployment and further reduction in purchasing power. The vicious circle of poverty sets in.

On the other hand, to earn the desired profit and cover the debt obligation on reduced demand business has to further raise its prices and sometimes destroy the excess produce so that its price may not go down due to oversupply. This phenomenon repeat itself until we have reached at the stage of “Two million shirts unsold with two million people with their backs uncovered.” Just google how many goods are wasted each year to keep the prices at the same level and how many people are starving to death being unable to afford basic necessities of life. The maelstrom of interest sucks in every goodness from society. This is why Allah SWT says the Interest destroys.

As we can see interest increases prices, retards production, restrict utilization of resources and increase unemployment. More unemployment leads to corruption and crimes and every so-called evil, we can check for statistics the countries having higher unemployment rate have higher crimes rate. The underlying factor for every recession is interest but economist cannot admit it because it goes against those in power. (The topic needs separate space will be covered later some time Inshallah)

Now let’s come toward charity or sadakah. It’s totally opposite of what interest does to the economy. Simply put, when money is given to someone in need it would raise its purchasing power either he spends it or invests it. If he spends it, it will increase demand of products which will create pull over the production, the producer has to increase its production to meet the demand. He has to deploy more resources to meet production gap resultantly there is increase in capacity utilization as well as employment. The effect goes on increasing as employed people will spend more and create more demand over and over. The prices also go down as economies of scales are reached. Resultantly a prosperous and welfare state is reached.

Other way if someone invests the money received from charity has no obligation to pay it back, fuels the value creation engine with its positive energy (Barakat). It will not only increase production and but also increase employment. The same cycle of positive growth is triggered. We can see clearly one system is oppressive, self-destructive filled with selfishness and criminal mindset while the other one is based on selflessness filled with light, hope, positivity and growth.

The person who originally made charity did not get it back right away but he gets back many folds in the form of increased wealth due to economic prosperity. The same effect has been explained by Allah SWT;

“The example of those who spend their wealth in the way of Allah is like a seed [of grain] which grows seven spikes; in each spike is a hundred grains. And Allah multiplies [His reward] for whom He wills. And Allah is all-Encompassing and knowing. (Surah Al-Baqarah, 2:261).”

It is so beautiful to call sadakah a “seed” which bears fruit and as a result it multiplies beyond imagination. This is the real power of sadakah, we must appreciate it. Similar thing is explained by Quran at another place in more direct way;

“Who is it that would loan Allah a goodly loan so He may multiply it for him many times over? And it is Allah who withholds and grants abundance, and to Him, you will be returned” (Surah Al-Baqarah, 2:245).”

Summing up, Interest is a curse and plague to the economy while sadakah is a seed for growth; we have to get replace the system of darkness with the system of light if we really want to achieve prosperity.