1. Islamic Economics and Commerce:
The Solution to Monetary Injustice
Rahil Ahmed Khan

2. In the name of Allah, Most Gracious, Most Merciful.
“ISLAMIC ECONOMICS AND COMMERCE:
THE SOLUTION TO MONETARY INJUSTICE”
- Rahil Ahmed Khan
For an ebook version of this book,
or for any other information on Islam visit:
http://scanislam.com

3. No Copyrights Reserved
This book may be published and printed for sale or free distribution without any prior permission
from the author. However, the content of the book should not be edited or deleted in the least
sense.
You have open license to reproduce this book in any other language. However, when translating
for quotations from Quran or Hadiths, please do not try to translate on your own. Refer to a
standard translation.
First Edition : December 2009
Second Edition: December 2010

4. Acknowledgement
All Praise be to Allah (One True God) who has guided his slave to write this book and
who has provided me with adequate understanding on the topic of ‘Islamic Economics and
Commerce’. Everything which has rightly been mentioned by me in this book is only by the
blessings of Allah, and each and every mistake, if there exists, is only due to my ignorance.
Then I’ll like to thank Dr. Rehmatullah Ahad for his brief but essential guidance in
understanding the economic concepts. Also there are too many contributors over the years to this
project, and thus it is not possible to mention them individually.
I would like to express my gratitude and sincere thanks to my family and relatives,
especially my brother Kamil Ahmed Khan for his consistent and inevitable supports right from
the inspiration to take up this task to writing its conclusion.
Rahil Ahmed Khan

5. Preface
Economics and Commerce are usually seen as distant from religion. However
considering Islam claims to be a complete way of life, I was always interested in knowing its
connection with economics and commerce. The first such opportunity came to me when I
attended the ‘Peace Conference’ in Mumbai in 2009. It was in this Peace Conference that I
listened to brief introductions to Islamic economics. And in this same conference I purchased
first book on Islamic Economics. Soon my interest grew and I started a detailed study on the
same.
Alhamdulillah (All praise be to God), with proper books, lectures, and research I learned
a lot about this subject. The first edition of my book was thus written in early December, 2009.
This edition i.e. second edition (December 2010) was originally written for University of
Mumbai as a final year project of Management Course and with some minor corrections in the
same I am pleased to present to you the book on topic, “Islamic Economics and Commerce: The
Solution To Monetary Injustice”.
The first section of this book, which I call ‘Islamic Economics’ starts with basic
principles of Islamic Economics and then goes to explain the problems with the interest based
system. This has been done so as to create awareness about the problems. Also without
presenting the problems, it was impossible to elaborate on Islamic Solutions. The second section
of the book, deals with ‘Islamic Commerce’ and the discipline it creates within Muslims.
Some parts of this book are being mentioned with respect to India, as I am an Indian
citizen, but may actually be taken in general sense as it is applicable in most of the cases.
Just a few days before the launch of this book, my brother and I successfully
(Alhamdulillah) launched our website ‘http://scanislam.com’ with the subtitle, ‘Because even
faith must have proof’. This website provides the best multimedia and literature on Islam
available on internet for new Muslims and those non-Muslims who have an unprejudiced and
unbiased mind towards understanding Islam or true message of major religions. On the same
lines, this book explores the miraculous nature of Islam in the field of economics and commerce.
Lastly, I welcome your suggestions, feedbacks, queries and comments on this book as
well as for my website (scanislam.com). Please feel free to write on ‘contact@scanislam.com’.
May Peace, Mercy and Blessings of Allah (One True God) be upon you.
Rahil Ahmed Khan

6. INDEX
Section I – Islamic Economics
1. Introduction to Islamic Economics 1
2. Sources of Islamic Economics 3
 2.1 – Primary Sources 3
 2.2 – Secondary sources 4
 2.3 – Limitations of Data Collection 4
3. Executive Summary 5
4. Principles of Islamic Economics 7
 4.1 – Prohibition of Ar-Riba 7
 A) Difference Between Ar-Riba and Profit (8)
 B) Why Depreciation of Currency is Ar-Riba (9)
 4.2 – Hoarding is Strictly Prohibited 9
 4.3 – It is a Market Economy 10
 4.4 – Redistribution is the Essence 10
 4.5 – Opposes Monopoly in Necessity 11
 4.6 – State Plays an Important Role 12
 4.7 – Measurement of Economy 12
 4.8 – Taxation is last option for Income 12
 4.9 – Neither Communist nor Capitalist 13
 A) Private ownership (14)
 B) Public Ownership (14)
 C) State Ownership (15)
 4.10 – Zakat is Compulsory on all Muslims 15
 4.11 – Law of God is to be taken as ultimate Law 15
5. Deception by Capitalism 16
 5.1 – Fundamental mistake in definition of Demand 16
 5.2 – Money that Never Existed 16
 5.3 – Interest the root cause of improper utilization of resources 17
 5.4 – Depreciation of a Currency 17
 5.5 – Where is the Money? 18
 A) Universally Acceptable? (18)
 B) Store in Value? (18)
 C) Unit of Account? (18)
 D) Standard of Deferred Payment (19)
 5.6 – Unknown Taxes 19
 A) Inflation Tax (19)
 B) Chain taxation due to Inflation (20)

7. 6. Ill’s of interest at international level 21
7. Fraud: Integral Part of System of Interest 24
 7.1 – A Mechanism of Exploitation of Labour & Masses 25
8. Arguments for Interest are Unsustainable 26
 8.1 – Arguments 26
 8.2 – Theories 27
9. Inflation due to Depreciation of Currency and its Effects 30
 9.1- Relation Between Interest and Inflation 30
 9.2 - Inflation and Exploitation of Have Nots 30
10. Islam’s Solution#1: Currency fixed on a standard 33
 10.1 – Comparing Price changes 33
 A) Price changes in money based on gold/silver (33)
 B)Price changes in floating fiat money (33)
 C) Conclusion for Price changes (34)
 10.2 – Stability of measure of Wealth 34
 10.3 – Statistics of stability of Gold/Silver as a measure of wealth 35
 10.4 – Problems faced by nations in adapting Gold standard &their Solutions 39
 A) Refuting the argument: Correction of Fiscal Deficit (39)
 B) Refuting the argument: Financial Instability (47)
 C) Refuting the argument: Hampering of Growth (48)
11. Islam’s Solution#2: System of Zakat 50
 11.1 – The Meaning of Zakat and Its Importance 50
 11.2 – The Spirit of Zakat 51
 11.3 – The Benefits of Zakat 52
 11.4 – Main differences between Zakah in Islam and Charity 53
 11.5 – Guidelines of basic Taxation System 54
 A) Those Required to pay Zakat (55)
 B) Types of Possession that require paying Zakat (55)
 11.6 – Recipients of Zakat 58
 11.7 – Collection of Zakat 59
 11.8 – Zakatul Fitr 59
12. Islam’s Solution#3: Investment & Loans without Interest 60
 12.1 – Institutional Characteristics of an Islamic Bank 60
 A) Sources of Funds (60)
 B) Lending operations of Banks (61)
 12.2 – Is Islamic Finance Unwanted? 63
 12.3 – Islamic Banking & Role of Central Bank 64
13. Complete Prohibition of Ar-Riba 65

8. 14. Conclusion for Islamic Economics 67
Section II
15. Islamic Commerce 68
 15.1 – Islamic Rules for Business 68
 15.2 – Freedom of Enterprise 70
 15.3 – Islamic Tenants concerning Business Transactions 70
 A) Keenness to earn legitimate earnings (70)
 B) Trade through mutual consent (71)
 C) Truthfulness in Business Transactions (73)
 D) Generosity and Leniency in Business Transactions (73)
 E) Honoring and fulfilling Business Obligations (74)
 F) Fair Treatment of Workers (75)
 G) Importance to writing transactions (75)
 15.4 – Prohibited Matters in Business Transactions 76
 A) Sale of Al-Gharar (76)
 B) Free market Economy (77)
 C) Hoarding is strictly prohibited (77)
 D) Exploitation of one’s ignorance of market conditions (77)
 E) Al-Najsh - Trickery (77)
 F) Cheating and Fraud in Business Transactions (78)
 G) Swearing (79)
 H) Giving short measures (79)
 I) Dealing in Stolen Goods (80)
16. Conclusion for Islamic Commerce 81
---------------------------------------END OF SECTION II-------------------------------------------------
17. Case Study (Islamic Economics and Banking: The Crisis proof system) 82
 17.1 Key Statistics About The Crisis 82
 17.2 What Caused The Crisis 82
 A) History of Banking (82)
 B) Sub-Prime and Interest Only Mortgages (83)
 C) Interest-only adjustable-rate mortgages (83)
 17.3 Consequences for the Government 84
 17.4 Islamic Banks Weather Global Crisis 85
 17.5 What IMF has to say on Islamic banks 86
 A) Crisis Impact (86)
 B)Source of Stability (87)
18. Conclusion 88
19. Bibliography 89
20. Glossary 91

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1. Introduction to Islamic Economics
All over the world religions are defined as the relationship between God and a person; whereby
God guides humanity to justice, equality, and righteousness. But most of the major religions of the
world tend to look justice, equality and righteousness restricted to social interaction. However
Islam extends this framework to all the possible aspects of life and thus rises to be called ‘A
complete way of life’.
You must have heard about capitalistic economy, socialistic economy, mixed economy, etc.
However if I speak about “ISLAMIC COMMERCE & ECONOMICS”, one would most probably
get surprised and say, “Hello!! Islam is a religion and not book of economics”. And that’s where
people go wrong. If religion is a way of life, then one must expect a religion to provide answers in
all walks of life such as for regulatory (legal) laws, environmental laws, social laws, cultural laws,
international behavior, political environment etc. Because when you live on earth you are bound to
face dozens of conditions.
(Fig 1.1 Dinar - 4.25 grams of Gold)
As a complete way of life, Islam has provided guidelines and rules for every sphere of life and
society. Naturally, a functioning economic system is vital for a healthy society, as the
consumption of goods and services, and the facilitation of this by a common medium of exchange,
play a major role in allowing people to realize their material and other goals in life.
Islam has set some standards, based on justice and practicality, for such economic systems to be
established. These standards aim to prevent the enmity that often occurs between different
socioeconomic sections. Of course, it is true that the gathering of money concerns almost every
human being who participates in transactions with others. Yet, while these standards recognize
money as being among the most important elements in society, they do not lose sight of the fact

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that its position is secondary to the real purpose of human existence, which is the worship of God,
and hence world-peace.
An Islamic economic system is not necessarily concerned with the precise amount of financial
income and expenditure, imports and exports, GDP, GNP, NNP and other economic
statistics. While such matters are no doubt important, Islam is more concerned with the spirit of
the economic system.
A society that implements Islamic laws and promotes Islamic manners will find that it brings
together all the systems – social, economic, and so forth – that it deals with. Islam teaches that
God has created provision for every person whom He has given a life. Therefore, the competition
for natural resources that is presumed to exist among the nations of the world is an illusion. While
the earth has sufficient bounty to satisfy the needs of mankind, the challenge for humans lies in
discovering, extracting, processing, and distributing these resources to those who need them.1
In the words of Quran:-
Say: Who hath forbidden the beautiful (gifts) of God, which He has produced for His
servants, and the things, clean and pure, (which He has provided) for sustenance? Say: They
are, in the life of this world, for those who believe, (and) purely for them on the Day of
Judgment. Thus do We explain the signs in detail for those who understand.
[Quran 7:32]
Islam consists of a set of beliefs which organizes the relationship between the individual and his
Creator; between the person and other human beings; between the person and universe; and even
the relationship of the person to himself. In that sense, Islam regulates human behavior, and one
type of human behavior is economic behavior. Economic behavior is dealt by Muslims as a means
of production, distribution, and consumption of goods and services. In Islam, human behavior -
whether in the economic area or others - is not value free; nor is it value neutral. It is connected
with the ideological foundation of the faith.
1
For example food is being heavily wasted in America and Bangladeshis are dying with starvation. Also factors like
overpopulation can convincingly be proven wrong. Say you want to maintain today’s population, so every mother
must bear 2 children (common sense); however this assumption is based on fact that there are no wars, epidemics,
disasters etc which is a wrong assumption. For more details refer to study of ‘overpopulationisamyth.com’

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2. The Sources of Islamic Economics
2.1 Primary sources
The fundamental sources of Islam - the Quran and the Sunnah of the Prophet2- provide guidelines
for economic behavior and a blueprint of how the economic system of a society should be
organized. Therefore, the values and objectives of all “Islamic” economic systems must
necessarily conform to, and comply with, the principles derived from these fundamental
sources. The purpose of this report is to outline the most salient characteristics of an economic
system based on the fundamental sources of Islam. The focus here is on the principal features of
the Islamic system.
The Islamic economic system is defined by a network of rules called the Shariah. The rules which
are contained in the Shariah are both constitutive and regulative, meaning that they either lay the
rules for the creation of economic entities and systems, as well the rules which regulate existing
one. As an integral part of the revelation, the Shariah is the guide for human action which
encompasses every aspect of life – spiritual, individual, social, political, cultural, and economic. It
provides a scale by which all actions, whether on the part of the individual agents, society, and the
state, are classified in regards to their legality. Thus there are five types of actions recognized,
namely: obligatory; recommended; permissible; discouraged; and forbidden. This classification is
also inclusive of economic behavior.
The basic source of the Shariah in Islam is the Quran and the Sunnah, which include all the
necessary rules of the Shariah as guidance for mankind. The Sunnah further explains these rules
by the practical application of Prophet Muhammad, may the mercy and blessings of God be upon
him. The expansion of the regulative rules of the Shariah and their extensions to new situations in
later times was accomplished with the aid of consensus of the scholars, analogical reasoning -
which derived rules by discerning an analogy between new problems and those existing in the
primary sources - and finally, through textual reasoning of scholars specialized in the
Shariah. These five sources - the Quran, the Sunnah, consensus of the scholars, analogical
reasoning, and textual reasoning - constitute the components of the Shariah, and these components
are also used as a basis for governing economic affairs.
Thus Primary Sources Directly referred for this report includes-
1. Al-Quran.
2. Hadith Saheeh Bukhari.
3. Hadith Saheeh Muslim.
4. Hadith Sunan Abu Dawud.
The other primary sources of knowledge such as opinions of scholars are derived from fiqh books.
As far as fiqh (Islamic jurisprudence) books are concerned I have not referred to any book directly.
Such issues of fiqh are taken in this report from secondary sources.
2
The Sunnah is general body of narrations of the speech, deeds, and tacit approvals of the Prophet (PBUH) that has
been recorded and authenticated.

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2.2 Secondary Sources
The Secondary sources for this report has a vast range right from books, articles, websites,
newspapers, magazines, to even public lectures and speeches.
Extensive research and literature survey was undertaken to find the essence of ongoing and Islamic
economic and commercial fundamentals. The Islamic websites referred were checked for their
authenticity and it was ensured that all data included is true and real. However if any authentic data
such as an authentic Hadith contradicts with this report, the authentic material must be taken over
and above my opinion.
The public lectures include all speeches from weekly Friday Congregation speeches to Islamic
conferences.
Thus the sources of secondary data are so vast and spread across years that listing all of them down
is next to impossible. Thus in Bibliography too I have mentioned only the direct secondary sources
used for this report.
2.3 Limitations of Data Collection
a) There have been very few Islamic Economics Scholars for direct consultation. Though I have
tried level best to comply with scholarly opinions and Sharia laws; there may arise a conflict. In
such a scenario the Sharia law or scholar’s opinion must be considered first. Any mistake in this
report related to sharia is purely my fault and any correct mentioning of fact or any correct
interpretation is purely due to guidance of One True God.
b) The second limitation faced is the incapability of available non-muslim scholars to understand
Islamic Economics. This was mainly because Islamic Economics is never introduced in any school
or college level syllabus.
c) Third limitation in data collection is the lack of adequate statistics to compare Islamic
Economics. This is due to non-compliance of Muslim countries with sharia laws (The classic
example of that being leaving currency based on standard). However efforts are been made in
countries (like Malaysia) to rectify such mistakes but there’s no impact of these efforts until now.

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3. Executive Summary
World Assets: - Top 1% has 40%
Top 10% has 85%
Bottom half has only 1%
Do you think Slavery still exists? If you think it doesn’t then it must be thought of again. It does
exist. It is the economic slavery which exists in the current capitalist system. Let me present to you
a glimpse of the real facts and some solutions for it.
Before we start, we first need to get our economic concepts right. What is Inflation & Deflation?
Suppose a pen costing Rs 10, is being manufactured by latest computer technology and thus its
cost reduces to Rs 8, so are computers causing Deflation? Certainly not. People often have
misconceptions with regards to actual definitions. So if you have such concepts then I advise you
to clear them out3
So inflation in our example will occur only when the Rs10 you hold is not worth buying that pen,
mostly due to depreciation of currency caused by excess issue of currency by the RBI. According
to TOI report, if you had earned Rs100 in December 2008, your money is now just Rs92.82 thus
depreciating currency and thereby causing massive inflation4. Stealing money is a clear crime, so
shouldn’t RBI or Government compensate to me for my loss? (I want my Rs7.18 rupees back on
every Rs100 I had earned). Also imagine what would have happened to your Rs100 if you had
earned it right back in 20th Century. This clearly exposes the robbery on the part of Government.
Reasoning the causes of Inflation
(Everything written in abstract requires no proof, because they are generally accepted and recognized by world-wide
economists)
Here we shall discuss one of the general causes of inflation. Due to burden of interest some
entrepreneurs are under compulsion to raise prices of their products5, others want to raise prices of
their products taking advantage of the protection provided by the dominance of interest. When the
average prices are raised, people buy less.
Thus increase in prices caused due to interest, lowers consumption. Industry reduces production
and employment, pretending shortage of demand. To arrest fall in output and employment, the
government raises the money supply. Following which the quantity of commodities that money
buys falls or if they don’t people tend to buy all that they want. When more money is available but
there is no increase in supply they end up buying earlier quantities for more money6.
3
Helpful link:- http://www.youtube.com/watch?v=eN7lEMXZRMM&feature=related
4
As people tend to expend more money as money supply increases and thereby leading to rise in prices on the basis of
demand-supply principle.
5
Because they are not able clear the interest amount with actual growth. This point is proved by comparing growth
rate and interest rates in an economy. Also explained in detail in ‘Fraud: Integral Part of the System of Interest’ and
some other parts.
6
With everyone trying to buy more, but supply of the goods remaining at the previous level, they end up buying same
quantity at larger amount of money.

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Thus this excess of money supply creates illusion7 of rising prices. Since this increase in price
level does not remove the causes that lead to the price rise, the government goes on increasing
money supply and the prices continue to rise. Thus the continuing depreciation of paper currencies
produce the illusion of consistently increasing prices and it is thus called inflation. Thus inflation
and depreciation of currency are two faces of same fraud.
Fiat money has no real worth and can be depreciated without limit. Consistent and appreciable
increase in the money supply by the government/banks beyond the needs of the economy, results
in consistent fall in the quantity of wealth represented by the currency that creates illusion of
consistent increase in prices, and that is inflation.
When average rate of return of economic activities fall (financial instability), producers8 tend to
maintain it by reducing output and employment. Trying to prevent fall in output and employment,
the government raises money supply (in the pretext of growth and development) that increases rate
of inflation. This reduces real interest rate of capital borrowed in past, and reduces minimum rate
of return for the economic activity to shut-off. Thus increased rate of inflation acts as a relief for
the activities based on capital borrowed (on interest) in past. However this relief is at best,
temporary, because increase in inflation reduces real interest rate and the capitalist creditors then
increases lending rate. In case government tries to reduce lending rate, the capitalist creditors shift
capital to real estate that reduces economic activity and compels the government to allow higher
lending rates. Now, higher rate of inflation is required to maintain previous level of employment
and output 9 . Increase in disparity due to interest and inflation; reduce the aggregate human
capacity as well as the purchasing power of economy. This reduces the rate of return of the
economic activities. Finally, the stage is reached where unemployment rises despite increase in
inflation. This is known as stagflation. This forces the government to stop inflationary trend. Thus
inflation finally results in reduced output and unemployment. Clearly, temporary relief that
inflation provides is small compared to the problems that it creates and this all started due to
inflation caused by issuing more currency without proper backing.
7
The price increase is with respect to depreciating currency (freely floating fiat money) that is a variable
symbolic measure of value. When supply of money is raised, the quantity of wealth represented by this variable
symbolic money falls. Thus this increase is similar to (i) apparent increase in our weight when unit of measure,
say kg is made smaller and (ii) increase in prices when gold contained in gold coins is reduced. Thus, such
increase in prices is illusion.
8
Entrepreneurs have to pay interest on the capital borrowed for investment. Therefore, they are under compulsion to
ensure that the rate of return does not fall.
9
Many economists have studied this relation between inflation and unemployment. Empirical data confirm our
contention. Relevant data are available in standard Economics textbooks under the heading, ‘Philips Curve’.

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4.Principles of Islamic Economics
4.1 Prohibition Of Ar-Riba
O ye who believe! Fear God, and give up what remains of your demand for Al-Riba, if you
are indeed believers.
If you do it not, Take notice of war from God and His Messenger. But if you turn back, you
shall have your capital sums: Deal not unjustly, and you shall not be dealt with unjustly.
[Quran 2:278-279]
It is a well known fact that Islam condemns Interest; however interest is not a proper synonym to
Arabic word ‘Ar-Riba’. In the above verses of Qur’an it is seen that Ar-Riba is strictly condemned.
So what is ‘Ar-Riba’ which Islam forbids?
Narrated Ubadah ibn as-Samit: The Apostle of Allah (peace_be_upon_him) said: Gold is to
be paid for with gold, raw and coined, silver with silver, raw and coined (in equal weight),
wheat with wheat in equal measure, barley with barley in equal measure, dates with dates in
equal measure, salt by salt with equal measure; if anyone gives more or asks more, he has
dealt in usury. But there is no harm in selling gold for silver and silver (for gold), in unequal
weight, payment being made on the spot. Do not sell them if they are to be paid for later.
There is no harm in selling wheat for barley and barley (for wheat) in unequal measure,
payment being made on the spot. If the payment is to be made later, then do not sell
them. [Hadith Sunan Abu Dawud 22:3343]
To understand this concept there are basically four main principles to be kept in mind: -
- Any increase in demand for money without simultaneous production of Goods or Service
constitutes ‘Ar-Riba’.10
10
Same thing happens in Bank interest where interest rate is fixed though goods and services may or may not be
produced.

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- If capital by itself is generating more capital then there is ‘Ar-Riba’. Thus Capital can
generate more capital only when used with other factors. (Land, Labour and Entrepreneur)
- Prophet (PBUH) said, “There is no Riba in hand-to-hand (spot) transactions.” (Usman ibn
Zaid is the narrator: Bukhari, Muslim and Musnad Ahmed)11-12
- Everything should be real in value. No illusions allowed.
4.1.A Difference between Ar-Riba and Profit
By reading the first two principles the point that must have struck you is then what is the
difference between Riba and profit? Even profit does not make simultaneous production. By the
way then you are not the first one to say so, people used to say the same at the time of revelation of
Qur’an:-
Those who devour Ar-Riba will not stand except as stand one whom the Evil one by his touch
Has driven to madness. That is because they say: "Trade is like Ar-Riba," but God hath
permitted trade and forbidden Ar-Riba. Those who after receiving direction from their
Lord, desist, shall be pardoned for the past; their case is for God (to judge); but those who
repeat (The offence) are companions of the Fire: They will abide therein (for ever). [Quran
2:275]
However Profit is compensation of Entrepreneur’s skill and Riba is unnecessary illusion of wealth
and money though there is no simultaneous production. Profit exists in spot transactions. Profit is
decided at once and Riba is decided over a period of time and thus in Riba value changes with time
factor. Also once you apply the above principles you would clearly get the difference.
11
However there are some exceptions mentioned in Hadiths, such as 1)Money for Money where quantity is not equal,
2)Barter transaction where goods are measurable and of same kind and quantity is not equal 3)Barter transaction where
delivery from one side is deferred.
12
This is because spot transactions take place in accordance with market forces (e.g. demand-supply).

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4.1.B Why Depreciation of currency is Ar-Riba
Applying the same principles to depreciation of currency i.e. fall in the value of currency due to
excess production of notes or coins you may clearly see that Depreciation of Currency is also Ar-
Riba. The Government reduces the value of currency (when compared with the promised value)
without any simultaneous loss in value of goods, or similarly increases money supply without any
simultaneous increase in goods or services. If supply of money is regulated by actual production of
goods and services then there is no problem, however when an illusion is created, then that is
definitely Ar-Riba. In fact this is not only Ar-Riba but also theft and wrongful taxation and thus
such uninformed depreciation of currency or measure of wealth is completely forbidden in Islam.
This is also seen by one of the Hadith:-
Narrated Abdullah ibn Mas'ud: The Apostle of Allah (peace_be_upon_him) forbade to
break the coins of the Muslims current among them except for some defect.
[Hadith Sunan Abu Dawud 23:3442]
This shows how important it was 1400 years back to maintain a proper currency. Thus there was
no unnecessary increase or decrease in money supply. On the contrary Islam blocks all those
factors which lead to such illusions (to be discussed later).
4.2 Hoarding is strictly prohibited
Say: "In the bounty of Allah. And in His Mercy therein let them rejoice": that is better than
the (wealth) they hoard.
[Quran 10:58]
On the Day when heat will be produced out of that (wealth) in the fire of Hell, and with it will
be branded their foreheads, their flanks, and their backs.- "This is the (treasure) which ye
buried for yourselves: taste ye, then, the (treasures) ye buried!"
[Quran 9:35]

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4.3 It is a Market Economy
Narrated Anas ibn Malik: The people said: Apostle of Allah , prices have shot up, so fix
prices for us. Thereupon the Apostle of Allah (peace_be_upon_him) said: Allah is the one
Who fixes prices, Who withholds, gives lavishly and provides, and I hope that when I meet
Allah, none of you will have any claim on me for an injustice regarding blood or property.
[Hadith Sunan Abu Dawud 23:3444]
Thus Islam encourages Demand-Supply mechanism and does not interfere in any business unless it
is unjust and harmful for society.
4.4 Redistribution is the essence (Also failure of Trickle down system)
Conventional Economic systems are based on the ‘Trickle down system’. Proponents of these
policies claim that if the top income earners invest more into the business infrastructure and equity
markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and
lower class individuals. Proponents argue economic growth flows down from the top to the
bottom, indirectly benefiting those who do not directly benefit from the policy changes.
However Trickle down system has miserably failed. In fact this system was designed to rob people
of their wealth. There are thousands of arguments to defeat this corrupt ideology however I would
just take one such example to prove the point. In Egypt, Pharaoh used to have a lot of wealth and
property, so should a peasant working 18hrs a day to make a pyramid expect to become even
closely rich to Pharaoh? This ideology is just against the human attitude of GAINING MORE
THAN GIVING. An upper class person could probably live his whole life by earning interest on
Fixed Deposits but a lower or middle class person is actually the one who has to be productive.
The Human nature clearly indicates that, proportionate increase in upper class wealth will be much
more than others.
Reagan’s trickle down policies in the U.S. can still be felt today:
According to the Tax Policy Center, the top marginal tax rate in the U.S. stood at 70% when
Reagan was elected in 1980, falling steadily to 28% by 1989, before it began to rise modestly. The
top marginal rate now stands at 35% against a peak of 94% in 194513.
These tax cuts were implemented with the support of the Democrats in the House, which explains
why they have been upheld all these years. The result of this was, unsurprisingly, a higher
concentration of wealth in fewer hands:
13
June 30, 2009, Wall Street Journal article By Michael S. Derby

19. P a g e | 11
Source :-Congressional Budget Office (www.cbo.gov)
Dan Andrews- Harvard University - John F. Kennedy School of Government
Christopher Jencks- Harvard University - John F. Kennedy School of Government and
Andrew Leigh- Australian National University - Economics Program, Research School of Social
Sciences. Analysed statistics of whole 20th century and found no proof to support Trickle down
system.14
Coming back to point, economic system is by default a TRICKLE UP system. Thus Islam
redistributes the income in the best way possible.
4.5 Opposes Monopoly in Necessity
Though no example for the above was found by me in the minimum amount of literature survey
done, to show restriction on Monopoly in the lifetime of Prophet Mohammed (Peace Be Upon
Him); Absence of example at the time of prophet in no ways shows that he accepted monopoly in
every case; rather it shows that such a situation didn’t arrive in his lifetime. Also there are
numerous examples where he said that hoarding for prices to rise is a grave sin and thus giving a
framework for monopolized market.
One more noteworthy point is that scholars have an opinion that according to Sharia government
must interfere only if monopoly is in the section of necessity. For example, if someone
monopolizes diamond jewellery market, the ruler must not be concerned with it. However
monopolization of wheat market requires ruler to intervene.
14
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1077730

20. P a g e | 12
4.6 State plays a major role
State in an Islamic Economic system has a major role to play. It’s important to note at this point
that a Khalifa (Viceroy) is not the one who makes laws in an Islamic State; he is just an
implementer. Islam is of the belief that laws are made by God alone and that all the decisions if not
directly conveyed should be at least be made in accordance of God’s laws (Sharia). Islam appoints
a direct role on state to channelize the economic growth and welfare of the country15.
4.7 Measurement of Economy
Today, the world measures its economy in terms of GDP, GNP, NNP, NDP etc. Though these
figures are important, Islam will never accept it at the cost of poverty, injustice, inequality,
unemployment etc. An Islamic state is successful only if it implements the teaching of Islam
effectively and the teachings are very clear about this issue16.
4.8 Taxation is the last option available as a source of income for government17
The following Hadith gives us a picture of taxation in Islam. This is originally a long Hadith of
which I have taken a part, reported by 'Abdullah b. Buraida on the authority of his father:-
... [Prophet Muhammad (PBUH) said] By Him in Whose Hand is my life, she has made such
a repentance that even if a wrongful tax-collector were to repent, he would have been
forgiven. Then giving command regarding her, he prayed over her and she was
buried. [Hadith Muslim 17:4206]
In the above Hadith the Prophet is comparing the sin of a married woman who had illegal sexual
relations to the sin of the wrongful tax-collector. Also he goes on to indicate that the sin of
wrongfully collecting taxes is bigger than the sin which she did18. In the above Hadith, ‘wrongful
tax-collector’ is originally, in Arabic, spelt ‘Sahabul Maks’. This phrase ‘Sahabul Maks’ refers to
mainly two types of taxes existing in those days, which are SALES TAX and TOLL TAX.
15
Narrated Abdullah bin 'Umar: I heard Allah's Apostle saying, "Every one of you is a guardian, and responsible for
what is in his custody. The ruler is a guardian of his subjects and responsible for them; a husband is a guardian of
his family and is responsible for it; a lady is a guardian of her husband's house and is responsible for it, and a servant is
a guardian of his master's property and is responsible for it." I heard that from Allah's Apostle and I think that the
Prophet also said, "A man is a guardian of his father's property and is responsible for it, so all of you are guardians and
responsible for your wards and things under your care." (41:592) Bukhari
16
A worth mentioning Hadith: - Narrated Abu Huraira: The Prophet said, "If someone leaves some property, it will be
for the inheritors, and if he leaves some weak offspring, it will be for us to support them."(41:583) Bukhari
17
Taxation here does not include Zakah. Zakah is not a tax imposed by government. Rather it is enjoined by God on
humanity and only collected by a righteous ruler. This point only talks about taxation imposed by government.
18
Married person having illegal sexual relations is such a grave sin in Islam that it’s punishment is directly ‘stone to
death’.

21. P a g e | 13
The obvious inferences which can be drawn from this above Hadith are that, taxes must be just and
must not violate a person’s right to use his natural environment. For example, in India Gandhiji
held a march famously known as, “Dandi March”. His march was absolutely justified because in
that case British government enacted salt tax, thus taxing production of salt, which is naturally and
abundantly available and in its production British government had no share. In the same way a
person earns his livelihood by business; society cannot exist without business. So selling and
buying activities are part of nature and no human can survive without it. Also usually governments
have no role in facilitating private selling and buying. Thus in the same sense government has no
right to charge sales tax19. Similarly, land is available naturally and no one can charge a person
who uses it for travelling. However, if government maintains it and has no option but to recover
money it is a different scenario. In such a case too there has to exist a freeway to reach place B
from A. Something like Sales tax, income tax etc is as illogical as taxing on the number of breathes
one takes, because just as breathing is unavoidable, doing business is also unavoidable. All taxes
imposed must be in accordance with this ideology.
In the opinion of scholars, even the taxes which are justified can be enacted only if all the wealth
from all the available treasuries, if taken together too does not fulfil the requirement.
4.9 Islamic Economy is neither a communist nor a capitalist philosophy
The communist philosophy, ‘to each according to his/her need and from each according to his/her
capacity is in direct conflict with the human nature. People are not willing to work hard and excel
when the fruits of their work is distributed in the society without any respect to their preferences.
In order to enforce the aforesaid utopian principle, Communism denies the people the right to
ownership and inheritance but this unnecessary restriction against human selfness results in loss of
motivation that is essential to cause people to strive to excel. That reduces capital formation as
well as productivity of the resources; resulting fall in production of capital goods halts economic
progress.20
Also under Capitalist Economy there are numerous flaws which are to be discussed from next
chapter onwards.
Thus system of economy must be capable of motivating the people to strive to produce the desired
growth. However the economy propelled by interest is characterized by unemployment, injustice,
exploitation, fraud, corruption and gross disparity of income and wealth and trade cycles
(explained in further chapters).
19
Unless, in anyways it causes expenditure on part of the government.
20
History itself gives the proof of what happened after the collapse of USSR.

22. P a g e | 14
Keeping the above factor in mind Islam about 1430 years back divided the ownership issue under
three main heads:
4.9.A Private ownership
Islam has made ownership legal right for the individual, and it does not impose limit on wealth one
can own. Accordingly, people may own moveable property, such as livestock, money, cars and
clothes, or immovable property such as land, houses or factories. However Sharia controls the
means of ownership such that people acquire the right to wealth in a just manner, and it also
regulates the way in which it is disposed of.
Means of ownership: - There are variety of ways in which ownership of wealth can be achieved.
Out of them working is the best way. In the words of Prophet:
Narrated Al-Miqdam: The Prophet said, "Nobody has ever eaten a better meal than that
which one has earned by working with one's own hands. The Prophet of Allah, David(PBUH)
used to eat from the earnings of his manual labor.
[Hadith Bukhari 34:286]
Other means of ownership which Islam has permitted include inheritance, grants of states property
to citizens, gifts, blood money and marriage transfers. Islam restricts the means in which wealth
can be earned or invested by forbidding pursuits such as fraud, gambling, theft and bribery or
trading of forbidden items. The worst means of gaining wealth is debt in form of loan21
4.9.B Public Ownership
This is defined as commodities which Islam has made property of citizens as a whole, such that
individuals are allowed to utilize them, but are forbidden from owning them as their own property.
These commodities come under three main categories:-
- The utilities of the community without which the everyday life of community cannot properly
function. Under the category comes things like water, oil reserves, machinery for drawing water
for public as whole, public water pipes, power stations etc.
- Commodities that by nature cannot be individual property like seas, river, public parks, places of
worship, public highways etc
- Natural uncounted minerals. These include many minerals such as salt or sand which are vast in
quantity. These are property of all citizens and individual or corporate ownership is forbidden.
21
Narrated AbuMusa al-Ash'ari: The Prophet (peace_be_upon_him) said: After the grave sins which Allah has
prohibited the greatest sin is that a man dies while he has debt due from him and does not leave anything to pay it off,
and meets Him with it.(22:3336) Sunan Abu Dawud

23. P a g e | 15
Since the public property is property of all citizens it is accordingly right of all to utilise it. In case
of properties like rivers, seas etc there is no problem however in case of mines State must
undertake proper distribution
.
4.9 C State ownership:-
This includes every property which is connected to the right of public but is not included under
public ownership. It includes properties like unclaimed land, captured land, Government
departments, schools, hospitals etc. This ensures proper distribution of necessary needs.22
Interestingly this three dimensional ownership model was applied formally only in 1950s by
countries like India, Egypt and some others after the Khalifah periods though it was proposed by
Islam in 8th Century.
Though India calls itself as taking a middle way in economics, it has not failed in picking up flaws
of both the systems. Henceforth thus we will be discussing those flaws in detail and see what
solution Islam provides for it.
4.10 Zakat compulsory upon all Muslims
Zakat is compulsory on all Muslims who fit in the eligibility criteria. It is paid and used in
accordance with sharia law. This topic has been explained in detail in Chapter 11.
4.11 Law of God is to be taken as the Ultimate Law
It is not fitting for a Believer, man or woman, when a matter has been decided by God and
His Messenger to have any option about their decision: if any one disobeys God and His
Messenger, he is indeed on a clearly wrong Path.
[Quran 33:36]
22
Under capitalist system people are considered as units of production and theoretically those who can’t produce (e.g.
handicapped) must not even exist.

24. P a g e | 16
5. Deception by capitalism.
5.1 Fundamental mistake in definition of
Demand
When a person wants to buy something to satisfy his/her
necessity or need, it has to be agreed that there is a
demand. For example: a person who wants to buy bread to
satisfy hunger has a valid demand even if the person is not
able to buy it for want of money. However, the economists
define demand as the quantity sold at the prevailing price
that automatically ignores the demand of the poor who
may not be able to afford to buy. Thus the economists have
contributed to the exploitation of the poor by ignoring the
valid claim of the poor over the resources.
5.2 Money that never existed
A major part of net income of most of the developing and under developed countries gets
transferred to the greedy capitalists. The following example nicely explains the severity of this
problem:
Amount lent at 15% yearly compound interest doubles in less than 5 years, it multiplies 10 fold
every 16.5, and it multiplies 1,000 fold every 49.5 years and 1,174,313 fold every 100 years. Net
real rate of growth of world is below 2% 23 . Therefore, even if capital worth 15% of the total
resources of the world could be invested at 15% interest compounded yearly, the over-all growth
of the economy will not be enough even for clearing the interest24. Really, money borrowed on
interest is enough to kill any economy. Yet short sighted, corrupt and incompetent politicians are
seen to be trying to borrow larger and larger amount on interest 25 . These are the real traitors
although some of them may not be aware of this treachery.
Thus, suppose there is 100units of money in economy and bank lends 50units through deposits at
10% annual interest, so next year bank would demand 5 units extra, making total money required
in economy to be 105 units. But as already mentioned average world GDP is about 2%. In short,
demand of money in our case would be 105 units whereas supply would be 102 units after
considering growth, making money shortage of 3 units. So form where will the borrower pay his
debt when money does not exist? By taking more debt/loan? For a short-term you might say others
will lose their money and thus the debtor to bank will pay Rs3, but in that case you would clearly
observe that within a few years all resources will end up in bank’s pocket. At the Macro level, such
multiplying levels of money cause something like Dubai Debt crisis or forces the government to
23
As per Central Intelligence Agency’s World Fact Book.
24
Hifzur Rab
25
As per RBI combined Debt of central and state governments has reached 76.6% for 2009-10 of GDP due to excess
of interest rate over growth rate.

25. P a g e | 17
depreciate the currency i.e. issue more currency and thereby reduce the value of each unit and at
the micro level either farmers sell their land for illusionary money to pay the debt or they attempt
suicide. This is a new form of colonialism or call it Economic slavery.
5.3 Interest, the root cause of improper utilization of resources
Interest is the root cause of shortage of supply, unemployment, inflation and exploitation and
growing disparity of income and wealth. The following example clearly demonstrates it:
Suppose that our cement factories are producing at 70% of their capacity. Now if their production
is raised to 85% of capacity, then the cement price will fall (Demand-Supply Theory). Suppose that
price per bag prior to and after increase in production are rupees 110 and 100 respectively. Let cost
of production per bag excluding interest paid on capital borrowed prior to and after the increase in
production be Rs 100 and Rs 95 respectively and the interest paid per bag is Rs8 and Rs7
respectively (Interest rate will fall slowly as capital is needed for expansion, most of the times
interest payable per bag actually increases). Note that prior to increase in production the cement
factories were having a net profit of rupees 2 per bag but when the production is raised there is net
loss of rupees 2 per bag. This loss is due to interest, as in the absence of interest the factories
would have been making a profit of rupees 5 per bag even after increasing production. Clearly, it is
due to interest that the companies (who have taken loans on interest) will not increase production.
Thus, it is due to interest, that most of our industries produce far below their capacity and employ
lesser labour. Due to interest, entrepreneurs can’t get capital for investment unless they are willing
to pay the prevailing rate of interest. Therefore, there is no investment in a business that is not
expected to produce profits much higher than the prevailing interest rate. If the interest rate is
abolished, industries will be set upon profit sharing basis and then the completion from the
entrepreneurs who will be willing to produce for lower profit margins it would increase the rate
increase in employment, labor wage and increased production will reduce prices.
5.4 Depreciation of a currency
Depreciation of a currency produces an illusion of increasing prices and it is what constitutes
inflation. Depreciation of the currency is the same as reduction in the quantity of wealth
represented by measure of wealth. Currency is a measure of value, therefore measure and its
depreciation constitutes worst fraud against humanity. It is used as a unit of account. That results
in part of capital being accounted as profit or interest.
A large number of industries in the organized sector are based on the capital entrepreneurs who
have borrowed on interest. Entrepreneurs are said to be the owners. Rate of return can fall below
expected value due to large number of causes and new causes may develop. After the loan is
contracted they are under compulsion to keep the cost of produce high. This is because they agreed
to pay prior to setting up the industry, when they could not have taken into considerations the fall
in rate of return due to factors that might not have existed then.
Shortage of supply causes the price to rise and abundance causes price to fall. This is very natural
and it leads to price increase and fall in prices respectively; but it has nothing to do with inflation
that is a consequence of fraudulent reduction in quantity of wealth that (fiat) money is

26. P a g e | 18
(Depreciation of Currency). This causes severe losses to the have-nots. Planned inflationary
economy constitutes an institutionalized exploitation of the masses and the labor (To study
exploitation caused due to depreciation of currency, read the topic “Mechanism of Exploitation of
Labour & Masses” and “Inflation”).
5.5 Where is the Money?
Money is any object that is generally accepted as payment for goods and services and repayment
of debts in a given country or socio-economic context. The main functions of money are
distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a
standard of deferred payment. Thus we could list down few properties of money as defined by
Reserve banks across the Globe: -
A. Universally acceptable.
B. Store of value.
C. Unit of Account.
D. Standard of deferred payment.
Now we would compare today’s money with the definition given:-
5.5.A Universally Acceptable
It is worth mentioning here that paper is not universally accepted! It is the gold backed currency
which people accepted. Once you remove gold backing from currencies it no longer remains
universally accepted. No one exchanges a piece of paper for something. A piece of paper is as
cheap as a stone lying on road. Rather what now remains is just FORCED ACCEPTANCE. If
given a choice people will still conduct trade in gold backed currencies because universal
acceptance arises due to intrinsic value of element and not by force.
5.5.B Store of value
No sane person in this world would agree that today’s so called, “Money” has store of value. Value
of money continuously goes on depreciating due to over issue of currency by government
(constituting Ar-Riba in Islam). C.Rangarajan 26 in his book ‘India: Monetary Policy Financial
Stability and other Essays’ mentions that India is issuing 20% more currency annually from past 3
years and if you lessen Growth rate from it, you get 11-12% extra money. So every next year your
money reduces by about 11%. So does anyone still think that our current money has store in value?
5.5.C Unit of account
Money in general has always been unit of account. However the current fiat money system was
never really given this status. Let’s take an example, suppose a business in terms of current units of
money (n India Rupees) earns 10% Profit; and in the same year government depreciated currency
by net 12%. So the business actually will be in an illusion of earning profits however in reality it is
in 2% loss. Indeed Prophet Mohammed (PBUH) rightly prophesied: -
26
Former Governor of RBI (1992-1997), Former Governor of Andhra Pradesh (1997-2003), Head of Twelfth Finance
Commission (2003-04) and currently Rajya Sabha member.

27. P a g e | 19
Abū Bakr ibn Abi Maryam reported that he heard the Messenger of Allah (PBUH) say: "A
time is certainly coming over mankind in which there will be nothing (left) that will be of use
(or benefit) save a Dinār (i.e., a gold coin) and a Dirham (i.e., a silver coin)[Both have
intrinsic values].”
[Hadith Musnad Ahmad]
5.5.D Standard of deferred payment
There is really no way in which one could call something like Euro, Rupees or Dollars anywhere
close to a standard for deferred payment. Suppose I took 100 rupees from someone in 1950s and I
have to return it now to him. In no ways will I be doing justice if I return today’s 100 rupees back.
This is because of continuous excess issue of currency (Ar-Riba) undertaken by governments. In
fact, organized businesses have actually nowadays developed systems to cope this problem of time
value of money. Indeed the Hadith stands true:-
Narrated Abu Hurayrah: The Prophet (peace_be_upon_him) said: A time is certainly
coming to mankind when only the receiver of usury will remain, and if he does not receive it,
some of its vapour will reach him. Ibn Isa said: Some of its dust will reach him.
[Hadith Sunan Abu Dawud 22:3325]
So the question arises, where is the real money? This important question has been discussed in
detail in Quran and the Sunnah (tradition of Prophet s.a.w) and mentioned later in chapter 10.
(Constancy/Stability of Gold).
5.6 The Unknown Taxes
5.6.A Inflation tax
When central banks print notes and issue credit, they increase the amount of money available in
the economy. This is sometimes done as a reaction to worsening economic conditions. It is
generally held that in the long run, an increase in the money supply causes inflation. In effect,
increasing the money supply and causing the holders of money to pay an inflation tax is a form of
taxation
If the annual inflation rate in the United States is 5%, one dollar will buy $1 worth of goods and
services this year, but it would require $1.05 to buy the same goods or services the next year; this
has the same effect as a 5% annual tax on cash holdings, provided there is 0% economic growth, or
other price-reducing factors, such as efficiency-enhancing technology. With price reducing factors
at play, a 5% inflation rate indicates a tax rate of higher than 5%.
Governments are almost always net debtors (that is, most of the time a government owes more
money than others owe to it). Inflation reduces the relative value of previous borrowing, and at the
same time it increases the amount of revenue from taxes. Thus it follows that a government can
improve the debt-to-revenue ratio by employing inflationary measures.

28. P a g e | 20
An inflation tax is the economic disadvantage suffered by holders of cash and cash equivalents in
one denomination of currency due to the effects of Expansionary monetary policy, which acts as a
hidden tax that subtracts value from those assets. Many economists hold that the inflation tax
affects the lower and middle classes more than the rich, as they hold a larger fraction of their
income in cash, they are much less likely to receive the newly created monies before the market
has adjusted with inflated prices, and more often have fixed incomes, wages or pensions
5.6.B Chain taxation due to inflation
Things do not end at Inflation tax. If due to inflation, value of capital assets such as real estate,
metals etc increase then surely you will again be taxed in the banner of ‘Capital Gains’ tax. The
chain still does not end, again due to inflation if your returns increase e.g. your salary increases as
compensation to inflation then you will be subjected to income tax. It depends on countries
taxation policies of how much a chain stretches. This is just a big scam to which people are
unaware.

29. P a g e | 21
6. Ills of Interest at International level
International trade between inflationary economies leads to fraudulent transfer of wealth of the less
developed economy towards the more developed ones.
For e.g.: Currencies of the developed world have higher stability and they command worldwide
acceptance and recognition. Everyone likes to have dollars but no one, not even Indians prefer to
have Indian rupees. This causes massive loss to the less developed economies. Majority of have-
nots live in less developed countries and it results in the exploitation of the have-nots. Thus the so
called champions of the human rights (developed countries) are the worst exploiters of the have-
nots. It exposes their hypocrisy.
On an international level, the
situation is much more devastating
and dangerous. There is no
question that when looked at from
an international perspective,
interest kills people. The debt
servicing of lesser developed
countries today is so great that
they must sacrifice essential health
and nutritional needs. It is
dumbfounding to think that untold
numbers of children are dying
daily in lesser-developed countries
due to the “tool” of modern
capitalism: interest. Some African
governments are forced to spend
more on debt servicing than they
spend on health or education.
In this context, the United Nations
Development Programme, UNDP
(1998) predicted that if the external debt of the 20 poorest countries of the world was written off, it
could save the lives of 20 million people before the year 2000. In other words, it means that
uncancelled debt was responsible for the deaths of 130,000 children per week up until the year
2000.
Ken Livingston, Former Mayor of London, claimed that global capitalism kills more people each
year then the number of people killed by Adolf Hitler. He blamed the IMF and World Bank for
deaths of millions due to their refusal to ease the debt burden. Susan George stated that every year
since 1981 between 15 and 20 million people died unnecessarily due to debt burden “because
Third World governments have had to cut back on clean water and health programs to meet their
repayments.”
Debt, with its increasing amount of interest compounded upon it, is dangerous for any nation
because it means loss of sovereignty and control. This aspect, incidentally, is no accident. Lesser

30. P a g e | 22
developed countries—especially their elites and corrupt rulers—are not free of guilt when it comes
to the issue of the debt that they have accumulated. At the same time, if they did not borrow and
get in debt, pressure would definitely be put on them to do so. Caufield noted:
Thus it has been with the World Bank; refunding operations have become more and more of the
total of its lending. The result has been an accumulation of debt by the Bank’s borrowers—and a
gradual loss of sovereignty as well. No creditor is willing to keep refunding forever without
asserting some control over the way the debtor conducts business. In earlier times, the great
powers did not hesitate to use military force to bend recalcitrant debtors to their will.
In his classic essay, “Public Debts,” published in 1887, the American economist Henry Carter
Adams wrote that “the granting of foreign credits is the first step toward the establishment of an
aggressive foreign policy, and under certain conditions, leads inevitably to conquest and
occupation.”
The Bank’s approach to its debtors is not so crude. Instead of sending in the Marines, it offers
advice on how countries should manage their finances, make their laws, provide services to their
people, and conduct themselves in the international market. Its powers of persuasion are great, due
to the universal conviction that, should it decide to ostracize a borrower, all other major national
and international powers will follow its lead. Thus, by the excessive lending—born of an
underlying inconsistency in its mission—the Bank has added to its own power and depleted that of
its borrowers.
John Perkins’ now famous “Confessions of an Economic Hit Man” details contemporary economic
intrigues. While describing his job of evaluating projects, he wrote:
The unspoken aspect of every one of these projects was that they were intended to create large
profits for the contractors, and to make a handful of wealthy and influential families in the
receiving countries very happy, while assuring the long-term financial dependence and therefore
the political loyalty of governments around the world. The larger the loan, the better. The fact
that the debt burden placed on a country would deprive its poorest citizens of health, education,
and other social services for decades to come was not taken into consideration.
Perkins’ work has now been followed up by “A Game as Old as Empire: The Secret World of
Economic Hit Men” and “Web of Global Corruption” edited by Steven Hiatt. Hiatt writes,
Debt keeps Third World countries under control. Dependent on aid, loan reschedulings, and debt
rollovers to survive—never mind actually develop— they have been forced to restructure their
economies and rewrite their laws to meet conditions laid down in IMF structural adjustment
programs and World Bank conditionalities.
The current debt situation, with the major role that interest is playing in it, is potentially very
devastating for the world as a whole. In “Global Trends 2015”, the Central Intelligence Agency
(CIA) recognized:
The rising tide of the global economy will create many economic winners, but it will not lift all
boats. [It will] spawn conflicts at home and abroad ensuring an ever-wider gap between regional
winners and losers than exists today. [Globalization’s] evolution will be rocky, marked by chronic
financial volatility and a widening economic divide. Regions, countries and groups feeling left

31. P a g e | 23
behind will face deepening economic stagnation, political instability and cultural alienation. They
will foster political, ethnic, ideological and religious extremism, along with the violence that often
accompanies it.
Noreena Hertz has an excellent chapter in her work, “The Debt Threat: How debt is destroying the
developing world… and threatening us all”, delineating many of the dangers that the massive
debt—and, again, which would not be as massive without the ever-growing aspect of interest—
poses for the world today. She details the dangers of extremism, terrorism, depletion of the
world’s natural resources, and more. To cite just one aspect, she writes:
Debt’s ugly progeny—poverty, inequality, and injustice—are also called upon to justify, and even
legitimize, acts of the greatest violence. Only a few weeks after the World Trade Center was
attacked, leading African commentator Michael Fortin wrote: “We have to recognize that this
deplorable act of aggression may have been, at least in part, an act of revenge on the part of
desperate and humiliated people, crushed by the weight of the economic oppression practiced by
the peoples of the West.” Fortin’s language—“crushed,” “oppression,” “desperate,”
“humiliated”—is deliberately evocative. And it is manifestly clear that there is an audience with
whom such words powerfully resonate.
In reality, there are yet other ills related to interest that could be discussed but the above should
suffice for the purposes here.

32. P a g e | 24
7. Fraud: Integral Part of the System of Interest
As already said, amount lent at 15% yearly compound interest doubles in less than 5 years, it
multiplies 10 fold every 16.5, and it multiplies 1,000 fold every 49.5 years and 1,174,313 fold
every 100 years. Net real rate of growth of world is below 2%. Therefore, even if capital worth
15% of the total resources of the world could be invested at 15% interest compounded yearly, the
over-all growth of the economy will not be enough even for clearing the interest. Leary, money
borrowed on interest is enough to kill any economy. Yet short sighted, corrupt and incompetent
politicians are seen to be trying to borrow larger and larger amount on interest. These are the real
traitors although some of them may not be aware of this treachery. At the Macro level such
multiplying levels of money cause something like Dubai Debt crisis or forces the government to
depreciate the currency i.e issue more currency and thereby reduce the value of each unit and at the
micro level either farmers sell their land to pay the debt or they attempt suicide.
The amount that is returned by previous borrowers is again lent on interest to new borrowers and
therefore this process of doubling of dues continues despite the fact that many borrowers are able
to repay the loan within a few years. Interest is a mechanism to enslave the people and any law that
enforces its payment is unjust and inhuman.
Further, since it is not possible for any economy to continue to grow like this, it will have to go on
reducing its yardstick of measurement of wealth i.e., currency. Considering that wealth is most
widely sought after, it is clear that manipulation of its unit represents a massive fraud. Moreover
currency is normally used as unit of accounts; its manipulation corrupts the accounting process and
thus, incorporates elements of
fraud in all our dealings. It
confounds truth with falsehood
and masses fail to distinguish
between right & wrong.
Considering that the system of
interest cannot survive unless
currency is consistently
depreciated (i.e., quantity of
wealth expressed by currency is
reduced) it is clear that fraud is
an integral part of the system of
interest. (Depreciating
currency is like saying that
from now on 500gms will
represent 1kg. I mean this is
clearly a crime not known to
us). Thus interest saves
inflation and inflation saves
interest.

33. P a g e | 25
7.1 A mechanism of exploitation of the labour and the masses
In the capitalist system, the entrepreneurs are considered as the owners and this result in gross
understatement of the rate of return of the economic activities. For example, if the actual rate of
return of the activity set up on capital borrowed on 12% interest is 13%, then due to adoption of
this fraudulent definition of ownership, the rate of return will be shown as just 1%. By showing the
rate of profit to be much less than what it really is, the entrepreneurs are able to compel the
laborers to accept lower wages and similarly the suppliers of raw materials are also persuaded and
compelled to accept lower prices. Further the entrepreneurs raise the price of their product on the
ground of very poor profit margin.
Now suppose that the farmers also start summing up the cost of supply of land, in that case the cost
of production of the food grains will come to be much higher than prevailing prices of the food
grains. As there is no substitute for food grains, we will have to buy these at whatever prices they
sell. This will cause the cost of food grains to multiply. Since people need food to sustain them,
they will be compelled to cut most other requirements so as to satisfy hunger. In such a case,
agricultural sector alone will flourish while all other sectors will tremble. In such a scenario, the
farmers will earn much higher wages than specialists and farm laborers will earn much higher
wages than what engineers earn. This demonstrates how deductions of interest in the form of cost
of supply of capital help, the owners derive undue benefits.
Interest based investment compels the entrepreneurs to raise the rate of return of the economic
activities under their control up to the rate of interest of the capital borrowed. Further, normally it
allows them to raise the rate of return to twice the prevailing interest rate, as no investment can be
made in activities having lesser rate of return for their owners than twice the prevailing interest
rate. Entrepreneurs can do this by increasing the price of their products or by reducing the labour
wages, or by causing the raw materials prices to fall or a combination of the above methods. All
this results in exploitation of the masses and this is due to the prevalence of interest.
In this perspective, the cost-push argument of the proponents of the capitalist system is irrelevant
because it is interest that causes the cost of production to rise. The proponents of interest justify it
on the ground that the entrepreneurs and creditors agree to it on their free will and then allow
massive injustice and exploitation on the ground that it is essential to sustain the economy. It is
also noted that by adopting these fraudulent procedures, the masses and the laborers are made to
pay a major part of the interest that is agreed between the creditors and entrepreneurs. Clearly, use
of interest as a basis of sharing of profits between the creditors and the entrepreneurs is unjust,
exploitative and oppressive.

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8. Arguments for Interest are unsustainable
The advocates of interest do not have any substantial argument to support their contention. They
ought to correct themselves and the following reasons may be enough to convince those who seek
justice.
8.1 Arguments
A. Economist often justifies interest as fixed charge on capital. Comparing with fixed labour wage,
they justify it on the ground that both are factors of production. Proponents of this anti-human
concept ought to realize that labour, being members of human race, have a right to sustenance.
Most efficient way of fulfilling this right is to guarantee payment of just wages irrespective of
whether their employers make profit or loss. However, capital has no such rights and therefore,
there is no reason to allow a predetermined charge for capital. Also in most case wages are too
subjected to fines, cuts etc depending on performance.
B. Capitalist creditor has nothing to do with the conduct of business as his or her interest lies only
in interest of and the ability of the entrepreneurs to provide collateral alone that matters. Thus
incompetent entrepreneurs who can provide collateral get the loans, while the entrepreneurs who
fail to provide collateral due to their poverty do not get loan despite their competence. Thus,
interest based mechanism result in selection of rich entrepreneurs who may be incompetent instead
of competent entrepreneurs who are poor.
C. It is well known that in a market based economy, rate of return of economic activities
constituting economy is widely distributed. Rate of return on investment varies widely. No profit
can be earned without some form of investment. Productivity of capital is only due to its
investment and therefore, it can’t be independent on the rate of return on its investment. When the
rate of return of investment falls, the amount payable to the creditor must also fall. Rate of return
on investment is subject to natural laws of distribution and therefore, it is not possible to assign a
fixed rate of return on capital. Frequently there is sudden fall in the rate of return for some
enterprises due to reasons that are beyond the control of the entrepreneurs; there is no reason why
they should bear the loss. Therefore the creditor must provide the capital either free of cost or must
also share the losses. Creditors are owners of capital and thus have better capacity to bear the loss.
Thus, interest based mechanism creates inefficiency by assigning losses to entrepreneurs who have
lower capacity to bear the losses.
D. The interest based mechanism tends to ensure that the rich will ever remain rich because most
of gains arising out of economic activity pass to them in form of interest. Thus they continue to
grow richer, while the poor do not have an opportunity even to get higher education and training
that is essential to compete for well- paid jobs. Thus interest allows greedy capitalists to control
economic resources even if they are not fit to ensure proper economic growth. Clearly the interest
of humanity lies in its ability to provide opportunities to its efficient members to rise to the top,
and interest acts as an artificial barrier against the natural process of rewarding the efficient.(You
deposit more in accounts you get more interest and thus more control on economy)

35. P a g e | 27
E. Interest can’t be justified as time value of money. When future value of money is defined at its
present value plus profit expected to be made by its investment in the intervening period, it will be
more than the value of equal amount of future money. If this difference is defined as time value of
money it is not correct to hold that time value of money does not exist. However, in the case, time
value of money will depend upon its investment and thus it is uncertain. Therefore, it cannot
justify a fixed charge (just imagine food prices if farmers start adding time value of land!!).
F. It is well known that interest has to be paid by everyone, as it is included as a cost in the price of
the products. It is well known. It forms 40 to 50 percent of the cost in most of the countries.
Entrepreneur-creditor combine has no right to force everyone to pay interest that they mutually
agree. Therefore it ought to be strictly banned.
G. Some incompetent economists try and compare interest to rent paid for using capital. However
they must be made aware that one can take hammer on rent but not nails. Rent is given when the
object is used and given back in its original form. E.g.:- While taking house on rent, you return
same house back and not a new one. Similarly, capital is used up to generate more and thus it loses
its original form. It’s just the case where you cannot take rice on rent.
H. Interest grows exponentially and all other things are subject to law of growth and decay. Thus
its conflict with nature is obvious and therefore systems driven with interest can never be efficient.
As discussed above fraud is an integral part of interest and therefore it can only lead to growing
fraud and corruption, injustice and exploitation. Thus it can never lead o human welfare.
I. Cost of Capital argument does not have any substance in it because the currency consists of
printed piece of paper only and cost of its production is negligible compared to interest that is
charged year after year.
J. Prevailing interest acts as a ceiling and the resources that cannot be so employed as to ensure
rate of return higher than prevailing interest rate, remain unemployed. This produces
unemployment of material resources that produces corresponding unemployment of labour. Thus
the system ails to properly utilize its productive capacity.
8.2 Theories
The mere plethora of opinions attempting to explain the existence of interest and justify its
payment—accompanied by the credible critiques of all of these views by noted and respected
economists —should be a sign to everyone that something is not quite right. In the history of
economic thought, one can find the following theories justifying interest (among others):
A. The “Colorless” Theories (as Boehm-Bawerk calls them): These were advanced by Adam
Smith, Ricardo and other early economists. This theory has many flaws, including confusing
interest with gross profit on capital. Ricardo further traced all value of capital back to labor—but
somehow he failed to note that it was never labor that was receiving the payment for said value.
B. The Abstinence Theories: These kinds of theories have popped up every now and
then. Economists discovered that “abstinence” may not be a good word to use and would often

36. P a g e | 28
change it to other terms, such as “waiting” (a la Marshall). Interest is, in essence, the wage one
receives for “waiting” or “abstaining” from immediate consumption. This theory failed because it
seems to think that savings are solely a function of interest, which has been found not to be true.
C. Productivity Theories: The proponents of this theory see productivity as being inherent in
capital and therefore interest is simply the payment for that productivity. The theory, as put
forward by Say, assumes that capital produces surplus value but, again, there is no proof to support
that claim. The most that one can claim is that some value has been created, which is a payment to
capital, but one cannot prove that excess or surplus value has been created, which is the essence of
their claim that interest is justified. Of course, these theories also complete ignore the monetary
factors when analyzing interest.
D. Use Theories: “Boehm rejected the validity of the assumption that there was beside each capital
good a ‘use’ thereof which was an independent economic good possessing independent value. He
further emphasized that ‘in the first place, there simply is no such thing as an independent use of
capital,’ and, consequently, it can not have independent value, nor by its participation give rise
to the ‘phenomenon of excess value.’ To assume such a use is to create an unwarrantable fiction
that contravenes all fact.”
E. Remuneration Theories: This group of economists sees interest as the remuneration of “labor
performed” by the capitalist. Although supported by English, French and German economists,
perhaps this view needs no comment.
F. The Eclectic (combination of earlier theories, such as Productivity and Abstinence) Theories:
Afzal-ur-Rahman writes:
This line of thought seems to reveal a symptom of dissatisfaction with the doctrine of interest as
presented and discussed by the economists of the past and the present. And, as no single theory on
the subject is in itself considered satisfactory, people have tried to find a combination of elements
from several theories in order to find a satisfactory solution of the problem.
G. Modern Fructification Theory: Henry George was the developer of this theory but it never
carried enough weight to have many, if any, followers.
H. Modified Abstinence Theory: Yet another unique theory, proposed by Schellwien; it never had
much impact.
I. The Austrian Theory (The Agio or Time-Preference Theory): This is the view that Boehm-
Bawerk himself endorses. According to this theory, interest arises “from a difference in value
between present and future goods.” Cassel has critiqued this theory in detail. It boils down to
being a fancy “waiting” theory.
J. Monetary Theories (the Loanable Funds Theory, the Liquidity Preference Theory, the Stocks
and Flows Theory, the Assets-Preference Approach): More recently, economists have tried to
introduce and emphasize the influence of monetary factors into the issue of interest. In reality,
though, the emphasis here begins to be switched from why interest is paid to what determines the
prevailing rate of interest. “According to Robertson, interest in liquidity preference theory is

37. P a g e | 29
reduced to nothing more than a risk-premium against fluctuations about which we are not
certain. It leaves interest suspended, so to speak in a void, there being interest because there is
interest.” Similar critiques have been made of the other views in this family of theories.
K. Exploitation theory: Incidentally, socialist economists have always considered interest as
nothing but exploitation. It should be recalled that the “founding fathers” of capitalist theory,
Adam Smith and Ricardo, believed that the source of all value is nothing but labor. If that is true,
then all payments should be made to labor and interest is nothing but exploitation.

38. P a g e | 30
9. Inflation due to depreciation of Currency and its Effects
Consider the following example. Suppose that the
number of grams that constitute a kg is reduced to 500.
Then, with respect to the new ‘kg’, our weights will be
found to have doubled. This doubling of our weight is an
illusion. Similarly, with respect to the new ‘kg’’ the
prices will fall to half their previous level. Clearly this
fall in prices is no more than an illusion. Similarly, if a
unit of currency represents 10mg of gold and later it is
made to represent 5mg of gold, compared to previous
value, the price of goods will double with respect to later
coins. Clearly, this price increase is illusory as the
doubling of weights and the fall of prices.
Economists define inflation to include increase in
the prices due to natural causes. However, in order to
differentiate increase in prices due to natural causes from the increase in prices due to artificial
reduction in the quantity of goods represented by currency, we ought to define inflation as the
increase in prices due to artificial reduction in the quantity of goods represented by currency.
Accordingly, if the currency was real or linked to a basket of real goods, it will always represent
definite quantity or quantities of goods. Thus, inflation will not exist.
9.1 Relation between interest and inflation
Increased rate of inflation acts as a relief for the activities based on capital borrowed in the past. If
the prevailing interest rate is near the balanced rate of interest, it will require lower relief and
minor increase in the rate of inflation will be enough. Similarly, if the prevailing rate of interest is
sufficiently higher than the balanced rate of interest, it will require higher increase in money
supply (to prevent fall in output and employment) that will create more inflation.
9.2 Inflation & exploitation of have-nots
Inflation is the worst tool of injustice, exploitation and oppression that humanity ever invented.
There are many ways in which it harms the poor and the oppressed. In its absence the interest
based capitalist system would have collapsed and therefore, it is responsible for the massive
exploitation and oppression produced by interest. Some of the mechanisms by which inflation
harms the poor are given below:-
A. Prior to 1920-30 the prices as well as labour were more or less fixed and the masses actively
participated in the market mechanism of price determination. Any effort by industry/
commerce to increase the price of the products of the organized sector or to lower the labour
wages or the prices of raw materials was strongly resisted. The massive response it used to
generate prevented the owners of the organized sector from indulging in injustice and
exploitation.

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Inflation eliminates the active participation of the masses in the mechanism of price
determination by the market. This allows the owners of the activities in the organized sector to
manipulate the prices to their advantage that results in the massive transfer of the earnings and
the wealth to the rich.
B. It allows the developed and powerful economies to exploit the under-developed and
developing economies. Currencies of developed economies have higher stability than the
currencies of the under-developed and the developing economies and command worldwide
acceptance and recognition. For example, everyone likes to have USA’s dollars but no one
prefers to have Indian currency. This causes massive loss to the developing and the under-
developed economies. For example, let us assume that the USA’s dollars held by the Indian
government and by the Indians amount to 10 billion. Clearly, India and Indians can get these
dollars only by selling off some goods or services or as a loan. In the first case, Indians are
deprived of the resources and in the second case; they have to pay interest on it.
Further in the absence of inflation, the producers will not be able to exploit the masses and
labour and therefore, average rate of return of the economic activities will be lower than the
average rate of return in the inflationary situation. Lower rate of return of the economic activity
implies lower interest rates as well as lower cost of technology transfer. The under developed
and the developing economies buy capital as well as technology from the developed economies
and therefore, this increases the rate of transfer of earnings and wealth of the masses of the
under-developed and the developing countries to the developed countries. Majority of the
masses live in developing and under developing countries and exploitation of their economies
amount to their exploitation.
C. It eats away small savings of the poor. Major part of the earnings of the poor is consumed
by their immediate requirements and therefore, to meet their heavier experiences they are
required to save over a long period of time. For example, they save over 15-20 years for
owning a house, for 5 to 10 years of marriage, 10-15 years for marriage of their children.
Meanwhile, inflation goes on eating away their marriage.
Those who deal in interest may partially reduce the losses for example, either by buying the
house by supplementing the savings with borrowings on interest that are freely available or by
partially reducing the effect of depreciation by keeping the savings in the time deposit scheme.
D. It reduces the availability of interest free loans to almost nil. This results in severe loss to
the masses as they pay higher interest when they borrow but receive little or no interest when
they lend. If someone tries to avoid interest bearing loans, he/she is required to save over long
period of time and meanwhile inflation eats away most of their savings. Inflation has killed the
spirit of mutual help and that aggravates the exploitative potential of the capitalist creditors.
E. It assists the greedy capitalists and their agents in divesting the masses of their control over
the resources. Due to the gross disparity, the masses have lost the capacity to derive proper
benefits from the resources owned by them. The rate of return of the resources owned by the
masses stands further reduced due to price differential created by inflation. Additionally the
masses are not fully aware of the extent of depreciation and know that currency to be worth
more than what it is. Accordingly, they consider the worth of the resources owned by them to
be worth less than what they are. The rich are aware of the real worth of these resources. Thus

40. P a g e | 32
when the poor are offered the right prices they wrongly feel it more and therefore, get allured
into selling off the resources that are under their control. Value free advertising products a
highly alluring picture of the industrial products and services that tempt the masses to buy
them. The temptation of higher prices and strong desire to own the products made alluring due
to the value free advertising, prompt the masses to sell off the resources under their control to
buy those products.
F. Inflation is fraud and the worst tool of injustice, exploitation and oppression and it creates
massive fraud and corruption and makes it impossible to do injustice. The transfer of earning
and wealth of the poor to the rich produced by inflation, results in increasing poverty and
growing disparity. ‘For the period 1952-1965, inflation rate averaged about 1% per year this
low-inflation product strong inflation-adjusted family income growth. In the mid-1960’s
inflation rates began a dramatic rise, for the next 2 decades. Once the inflation rates exceeded
about 3%, real family incomes and savings rates ceases to grow.’ Thus, increase in the rate of
inflation is invariably accompanied by increase in poverty as well as disparity.
G. The failure of the economy to solve the problem of unemployment is due to increase in its
severity due to mutually reinforcing effect of interest and inflation. Increasing disparity goes
on reducing the proportion of people who own enough resources to employ themselves. As the
people get poorer they are not able to employ themselves and hence they are not able to
provide collateral required for availing interest based finance. In the economy based on
interest, any economic activity that is not able to produce surplus at a rate higher than rate of
interest cannot be run as it results in loss to its owner.
Thus, increase in the rate of inflation is invariably accompanied by increase in poverty as well as
disparity and even rate of unemployment increases in the long run. Thus, even under capitalism,
inflation is extremely harmful to the poor and does not help them to the least.