The Prohibition of Interest in Islam

[tariqkhwaja]

Welcome a_student. Assalamualaikum.

The difference between lending a truck and lending money is that with a truck I might get losses in my investment but the moment I return the truck I have to pay no more. If every month I pay the rent and then a month comes where I incur losses such that I have to return the truck then fine and well.

But with money the very thing that I borrowed is put in jeapordy if it is invested. Returning the truck (in a sufficiently same shape as when borrowed) is okay. But how can money be returned when the business has gone into a loss.

The chances of a truck being destroyed to an extent that the lender no longer accepts it is extremely low. Furthermore, insurance can cover such extreme cases.

But a loss is a loss and for a lender to earn a profit when the borrower makes a loss is simply unrealistic. Interest and Usury put the poorer borrower at a disadvantage from the get go.

That is why in the United States, for example, so much credit flows that is not real. So many people lead a life that is far from their actual by just borrowing because lenders (who think long term) are willing to give knowing that sooner or later the money will come back ... with a profit squeezed from the souls of the poor.

Capitalist systems are based on interest. But in continuation of my arguments against interest I will try to show how this "unrealistic game" that capitalism plays with reality backfires on the whole economy and cripples it.

 

[9-10ths_Penguin]

The difference between lending a truck and lending money is that with a truck I might get losses in my investment but the moment I return the truck I have to pay no more. If every month I pay the rent and then a month comes where I incur losses such that I have to return the truck then fine and well.

No, it's not, as I already pointed out. Virtually every vehicle lease that I've ever heard of includes a penalty for early termination: if you bring the truck back early, you have to pay extra... sometimes quite a bit extra.

If you get a 3 year lease for a brand new truck, it's set up so that your lease payments will cover, including other things, depreciation: at the start of the lease, you receive a brand new truck; at the end, you give back not a brand new truck but a 3-year-old used truck that's now worth much less than it did when you got it. And the depreciation rate for a truck is highest when it is new, and decreases as the truck gets older - i.e. a truck will lose more worth from year 0 (i.e. brand new) to year 1 than it will from year 2 to year 3.

Usually, a truck lease will be set up with uniform payments. The leasing company knows how much the truck is worth brand new, knows how much it should be worth at the end of your lease, and divides the difference between them over your lease. It also knows how much it needs to make on your lease to cover other costs like overhead, sales commissions, taxes, and all the other expenses they have as a business.

In the first year of your lease, a large proportion of your payments are just going toward paying for depreciation. In the third year, the depreciation is reduced, so the amount of money going toward the business' other costs is greatly increased. Effectively, the leasing company will accept less net money in your first year with the expectation that they'll get more net money in your third year.

If you end your lease early, you cheat the company out of the money that you promised to give them and that they were counting on to pay their business expenses.


But even if we ignore the problems with your overly simplified scenario, your analogy still extends to lending.

Think of it this way: you lease a truck. In exchange for this, you pay a regular fee (the lease payments). Assuming your lease doesn't have any early termination penalties, you can return the truck any time, pay any back rent due and not owe anything more.

In the same way, you borrow money, i.e. "lease" some money (the principal). In exchange for this, you pay a regular fee (the interest). Assuming your loan doesn't have any early termination penalties, you can return the principal any time, pay any back interest due and not owe anything more.

But with money the very thing that I borrowed is put in jeapordy if it is invested. Returning the truck (in a sufficiently same shape as when borrowed) is okay. But how can money be returned when the business has gone into a loss.

You cannot return the truck in "a sufficiently same shape as when borrowed". When you return it, it will be older, have higher mileage, and generally be worth less than when you first received it.

And money can often be returned even if the business goes into a loss. For one thing, usually no single loan will be for the value of the whole business. In desperate times, businesses have ways of creating cash flow: they can use their cash reserves, they can sell off things they own (i.e. anything from individual pieces of equipment to whole divisions of the company), sometimes they can issue more shares, or they can use other methods to raise money.

The chances of a truck being destroyed to an extent that the lender no longer accepts it is extremely low. Furthermore, insurance can cover such extreme cases.

But the chances of a truck being used and damaged to the extent that the lessor assigns it much less value than expected and therefore demands additional money from the lessee are extremely high, and no insurance will cover that.

But a loss is a loss and for a lender to earn a profit when the borrower makes a loss is simply unrealistic.

It's no more unrealistic than suggesting that a tenant should be able to pay the same rent every month regardless of how much his landlord pays on repairs to his building.

Interest and Usury put the poorer borrower at a disadvantage from the get go.

How do you figure? Usury (which in the West is usually defined as excessive interest or predatory lending practices), sure... but all interest?

For example, I'm 31, and I have a house with a 25-year mortgage. It would have taken me decades to save enough to buy a house with my own money. My wife and I now have our family home ready even before we have children. Without borrowing money, I would not have been able to do this until our future children had left to raise their own families.

And the fact that I'm in a position to have a mortgage and a house is due in large part to other lending at interest: my student loans. Rather than try to save up for univerity at the low-paying retail job I had after high school, I was able to borrow money to go to university, study, get my degree and now I am working to pay those loans off as an engineer much more quickly than it would have taken me if I had had to save up the money before I enrolled.

In both of these cases, borrowing money at interest gave me a distinct advantage over the situation I would have otherwise been in. Because I borrowed money, I am now able to practice a profession that I find very rewarding, and I'm no longer subject to any of the many shady landlords I've encountered over the years. Borrowing money allowed me to be able to provide for my family now, rather than at 70 or 80.

That is why in the United States, for example, so much credit flows that is not real. So many people lead a life that is far from their actual by just borrowing because lenders (who think long term) are willing to give knowing that sooner or later the money will come back ... with a profit squeezed from the souls of the poor.

I'd agree that the personal debt load of the US is unhealthily high, but I don't think that the solution is to eliminate all borrowing.

Capitalist systems are based on interest. But in continuation of my arguments against interest I will try to show how this "unrealistic game" that capitalism plays with reality backfires on the whole economy and cripples it.

Are they? There are many capitalist transactions that do not involve interest.

However, I think that elimination of all interest implies infringing on people's freedoms: in most situations, no borrower is forced at gunpoint to borrow money. If a borrower and lender mutually agree to the lending of money at interest, then I think a good reason is needed before you tell them that they can't do that.

 

[9-10ths_Penguin]

tariqkhwaja,

I recognize that the Qu'ran specifically prohibits lending money at interest, and that it specifically states that lending money at interest is different in nature from renting some physical thing... but personally, I think that this is the only difference between them. Without the Qu'ran, there's no moral or logical distinction between lending out money for profit and lending out goods for profit.

It's possible to loan money in a predatory way, but it's possible to do it morally and legitimately as well. In the same way, it's possible to rent physical things in a predatory way (remember what I said about shady landlords), but also possible to do it morally and legitimately.

If you want to believe that you shouldn't lend or borrow money because of the Qu'ran, fair enough... and if I believed in the Qu'ran, I'd be inclined to agree with that assessment as well. However, if you're arguing that money lending is immoral on its own merits separate from the Qu'ran, well, I don't think it can be done. It'd be like arguing that eating non-halal meat is bad without citing the Qu'ran.

 

[a_student]

However, if you're arguing that money lending is immoral on its own merits separate from the Qu'ran, well, I don't think it can be done. It'd be like arguing that eating non-halal meat is bad without citing the Qu'ran.

I think the issue isn't the lending but the interest. Interest is only good for the lender who has the money to begin with. As such, they're the only one being helped in the long run. The borrower is happy initially but they are thinking short term. Eventually they have to give the wealthy lender all the money back and then some. And if the borrower should have the unfortunate luck of losing money they borrowed to invest, it's a double whammie on them while the lender is unaffected. Forget about business for a second, that's just mean as a human being. Imagine if I slip and fall in your house and break my arm. In the process I knock over a lamp and break that too. I have already broken my arm and the first thing you would say is "Hey you have to pay for my lamp!" Overall it's just not good for society.

 

[9-10ths_Penguin]

I think the issue isn't the lending but the interest. Interest is only good for the lender who has the money to begin with. As such, they're the only one being helped in the long run. The borrower is happy initially but they are thinking short term. Eventually they have to give the wealthy lender all the money back and then some.

Not necessarily true. Consider an example of a mortgage for a house:

You need a place to live. For my purposes, I've used real 3-bedroom bungalows in the Scarborough neighborhood of Toronto (moderately priced by Toronto standards, but Toronto home prices tend to be quite high), both similar houses on the same street, one listed for $1750/month to rent, the other for $329,000 to purchase.

I've also assumed that you have $2,500/month to spend on either mortgage or rent plus saving for a house (high, I know, but in keeping with a double-income professional family that would likely live in one of these houses).

For both scenarios, I'm assuming annual compounding because I'm feeling lazy.

Scenario 1 - rent and save:

Assumed:
Rent: $1750/month
Available for savings: $750/month or $9,000 per year
Return on investment: 5% per year over and above inflation, on average (assumed invested in Muslim-friendly equities)

Result:
- $329,000 saved in just over 21 years.
- if you continue to invest and save that $2500 per month to year 25 (i.e. when the mortgage is paid off), you'd have an extra $103,400 over and above this.

Overall: after 25 years, $329,000 house + $103,400 = $432,400.

Scenario 2 - mortgage:

Assumed:
Price: $329,000
Mortgage term: 25 years
Mortgage rate: 5% per year
Mortgage payment: $1945/month ($329,000 @ 5% p.a. over 25 years)
Available for savings: $555/month or $6,660 per year
Return on investment: 5% per year

Result:
- $329,000 house purchased right away
- remaining money grows to $317,800 over 25 years.

Overall: after 25 years, $329,000 house + $317,800 = $646,800


So... at the end of everything, you'd end up with $214,400 more in the bank if you borrowed money for a mortgage instead of renting for two decades.

Of course, this stark difference comes from the fact that the mortgage frees you from rent, which doesn't translate into any sort of equity for you at all. And in both cases, you pay costs to third parties: in scenario 2, 25 years of interest is almost $255,000, but in scenario 1, 21 years of rent works out to $441,000.

 

[a_student]

So... at the end of everything, you'd end up with $214,400 more in the bank if you borrowed money for a mortgage instead of renting for two decades.

Of course, this stark difference comes from the fact that the mortgage frees you from rent, which doesn't translate into any sort of equity for you at all. And in both cases, you pay costs to third parties: in scenario 2, 25 years of interest is almost $255,000, but in scenario 1, 21 years of rent works out to $441,000.

Great. Now imagine combining the 2 and calling it option 3. Pay the mortgage without the interest. How much money would you save then. Don't tell me that if there was a 3rd option you wouldn't choose it. Why should a $329,000 house cost $646,800? And who gets the difference? The borrower who was so poor (compared to the lender) he had to borrow? No. That money goes to the already wealthier lender. And the rich get richer and so on and so on. Where is the compassion?

 

[9-10ths_Penguin]

Great. Now imagine combining the 2 and calling it option 3. Pay the mortgage without the interest. How much money would you save then. Don't tell me that if there was a 3rd option you wouldn't choose it.

I wouldn't call an interest-free mortgage a combination of the two scenarios; I'd call it having your cake and eating it too. However, sure, I'd choose it in a heartbeat if it were legitimate and actually available. I'd also choose a completely free house if that option were available.

Is the option of an interest-free mortgage actually available? I've got a mortgage myself, and I'd pay any cancellation fees I needed to in order to transfer it to an interest-free one. I have trouble figuring out what reason a lender would have to offer me one, though.

Why should a $329,000 house cost $646,800?

It doesn't. $646,000 was the net worth of the person who got the mortgage. The total cost of the mortgage would be $329,000 principal plus $255,000 interest, or $584,000.

And it costs $584,000 because the alternative, i.e. renting and saving, costs $770,000, so the market will bear the price.

And who gets the difference? The borrower who was so poor (compared to the lender) he had to borrow? No. That money goes to the already wealthier lender.

Yes, but the "poor" borrower also benefits by having an option that's more advantageous than any that he would have had otherwise.

And the rich get richer and so on and so on. Where is the compassion?

The "rich" get richer, but so do the "poor". And in the meantime, the other "poor" who have invested in the bank (i.e. the "rich" lender) make a bit of money themselves, which in turn helps them to buy a home, save for their retirement, or accomplish whatever other goals they have.

 

[a_student]

I wouldn't call an interest-free mortgage a combination of the two scenarios; I'd call it having your cake and eating it too. However, sure, I'd choose it in a heartbeat if it were legitimate and actually available. I'd also choose a completely free house if that option were available.

Is the option of an interest-free mortgage actually available? I've got a mortgage myself, and I'd pay any cancellation fees I needed to in order to transfer it to an interest-free one. I have trouble figuring out what reason a lender would have to offer me one, though.

That is the whole point. It would be nice. You know, the whole "love thy neighbor" thing. By saying that would be nice you are agreeing with the principle. Obviously that option is not available because the lender wants to make a profit. In a capitalist system, you must capitalize off someone else. Would you lend like that to your brother? That's the whole idea: The world would be a better place if we weren't so cut-throat and money hungry. By saying you would choose the 3rd option if it were available, you are agreeing that an interest-free world would be better. So if you agree to that, what exactly is your argument because that's all I'm saying.

 

[9-10ths_Penguin]

That is the whole point. It would be nice. You know, the whole "love thy neighbor" thing. By saying that would be nice you are agreeing with the principle. Obviously that option is not available because the lender wants to make a profit. In a capitalist system, you must capitalize off someone else.

And your system would entail capitalizing off the lender. Lending money has costs and risks associated with it; I went through some of them before. Why should I demand that someone else give up their money and take on risk on my behalf without being compensated for it?

Would you lend like that to your brother? That's the whole idea: The world would be a better place if we weren't so cut-throat and money hungry.

And what is demanding interest-free loans but money-hungriness from the borrower instead of the lender?

By saying you would choose the 3rd option if it were available, you are agreeing that an interest-free world would be better. So if you agree to that, what exactly is your argument because that's all I'm saying.

No, an interest-free world would not be better. I can recognize the personal benefit if someone decided to loan me money for free out of the goodness of their heart, but that's not the same thing.

How exactly would you cause interest-free loans to happen? If you're talking about compelling people to loan out their money, then you're talking about a denial of freedom that I'm rather uncomfortable with.

If you simply outlaw loans at interest, then you do society a disservice: you take away scenario 2 that I presented before and force them to accept scenario 1, which gives them the same benefit at much higher cost.

If your idea is that people might be convinced to offer loans of money for free generally, well, okay... but except for a few isolated examples (e.g. Kiva - Loans that change lives), this doesn't generally happen, despite the fact that no country's laws I know of prohibit the activity.

 

[a_student]

And your system would entail capitalizing off the lender. Lending money has costs and risks associated with it; I went through some of them before. Why should I demand that someone else give up their money and take on risk on my behalf without being compensated for it?

What risk? The lender is going to get back what they gave and then some in the current system. An in interest-free system they would still get back what they gave. That's the problem, there should be a risk. Capitalism is heartless. Lenders lend for one purpose only: to make more money. Not to help. I'm not arguing this point, I know this is the case. So you're telling me that the heartless business of lending money with interest is better than genuinely trying to help someone? If there was no interest most of the lenders would find a new profession (probably selling drugs). These people are out to make money any way possible. That can't be good for the betterment of society.

And what is demanding interest-free loans but money-hungriness from the borrower instead of the lender?

It's called fair. If my brother asked me to borrow $100 I would gladly lend it to him. A week later he gives it back. Fine. I don't see how that makes him money hungry. I see a person in a bind, maybe I can help him out. Now if I say "Sure you can borrow the $100 but I want $125 back next week." that would make me money hungry. He would probably take the loan anyway because he needs the money. That's why he asked to borrow it in the first place. As a lender, I would see his situation and try to take advantage of it. That's greedy and

No, an interest-free world would not be better. I can recognize the personal benefit if someone decided to loan me money for free out of the goodness of their heart, but that's not the same thing.

Ah but that is the goal! That's where we're trying to get. To a world where people do things out of the goodness of their hearts. You wouldn't want to live in a world like that?

How exactly would you cause interest-free loans to happen? If you're talking about compelling people to loan out their money, then you're talking about a denial of freedom that I'm rather uncomfortable with.

If you simply outlaw loans at interest, then you do society a disservice: you take away scenario 2 that I presented before and force them to accept scenario 1, which gives them the same benefit at much higher cost.

No you'd just take the sharks out of lending and leave it to those with good intentions. If you lived in an interest-free society you would think interest was absurd and corrupt and evil. It still is, you're just used to it. You can't fathom the concept of "human beings... acting... humanly."

If your idea is that people might be convinced to offer loans of money for free generally, well, okay... but except for a few isolated examples (e.g. Kiva - Loans that change lives), this doesn't generally happen, despite the fact that no country's laws I know of prohibit the activity.

That's because we've grown accustomed to the way things are. I had a friend who started a clothing company. When we were in college he would make these really cool shirts and pretty much give them away. In fact that's exactly what he did. One day I asked him for 2 shirts and gave him $50. Next thing you know, he had a business and the shirts were no longer free. People will make money if the opportunity is there. You can't see it because it's not what you're used to, it's not what you know. Believe it or not these types of loans do take place. Usually through Churches or Mosques, family or friends, or other organizations with good people trying to help others. Not the heartless ******** who only lend money to make money. It's not really a "favor."

 

[9-10ths_Penguin]

What risk? The lender is going to get back what they gave and then some in the current system. An in interest-free system they would still get back what they gave.

Hopefully, but not always. Sometimes, people can't pay back their loans. In the banking world, this is reflected in the rates people pay on their loans: the higher the risk, then more the person pays. This is to offset the cost to the bank of people who don't pay the money back either fully or partly.

That's the problem, there should be a risk. Capitalism is heartless. Lenders lend for one purpose only: to make more money. Not to help.

Yes... and despite the fact that they're perfectly free to lend money for free if they chose to do so, they don't. And so far, you haven't suggested any way to change this.

I'm not arguing this point, I know this is the case. So you're telling me that the heartless business of lending money with interest is better than genuinely trying to help someone?

No, I'm not saying that. I'm saying that given the actual options available, there's no good reason (other than commandments from God in certain scriptures, if you happen to believe in them) to ban lending at interest.

You say it would be better for people to lend each other money for free... sounds fine if it's voluntary, but how are you going to make this happen? Right now, people are completely free to do it if they want, but they don't.

If there was no interest most of the lenders would find a new profession (probably selling drugs). These people are out to make money any way possible. That can't be good for the betterment of society.

If I were a greedy, amoral money-lender and I were forced to abandon lending money at interest, I'd probably become a deadbeat landlord.

Do you think lending money is the only way that vulnerable people can be taken advantage of? In many cases, the ability to borrow means freedom from being taken advantage of; I know it has in my case. I've dealt with several bad landlords, but never a bad lender.

It's called fair. If my brother asked me to borrow $100 I would gladly lend it to him. A week later he gives it back. Fine. I don't see how that makes him money hungry.

You could do plenty of things with that $100. For example, if you have a business, you could use it to buy inventory and maybe translate it into $150 in revenue. You could buy some item with it that's worth more that $100 to you (say $120, for discussion's sake).

If you feel that helping your brother meet his needs is the best value for your $100, great... I'd probably do the same. However, giving it to your brother means you've foregone that extra $20 of benefit from buying that item that you had your eye on, or the extra $50 in revenue from your business. This represents a cost to you, which your brother has not paid you for.

I see a person in a bind, maybe I can help him out. Now if I say "Sure you can borrow the $100 but I want $125 back next week." that would make me money hungry. He would probably take the loan anyway because he needs the money. That's why he asked to borrow it in the first place. As a lender, I would see his situation and try to take advantage of it. That's greedy and

25% per week is well over the interest rate that's considered criminal where I live.

How about this situation: you have saved $20,000 that you plan to use as seed money for a side business to pay for your children's college fund. You figure you have another 10 years before they'll need the money, and your goal is $100,000. Your brother asks for a loan to expand his house (he's got twins on the way, so he needs the space); he wants to borrow the $20,000 and pay you back over the next two years.

If you loan him the money, it will mean that you can't start the business for another two years, which will mean you'll only have 8 years to work to pay for your children's college. This will mean you will have to work much, much harder in the shorter time to make the money you'll need.

Is it right that your brother impose this burden on you? In exchange, should he maybe help you by working with you at your business?

Ah but that is the goal! That's where we're trying to get. To a world where people do things out of the goodness of their hearts. You wouldn't want to live in a world like that?

I'm not holding my breath that the world will be magically transformed into a land where everyone values my personal well-being over and above their own. In the meantime, I think it's much more reasonable and practical to use a system that generally relies on people's own self-interest.

No you'd just take the sharks out of lending and leave it to those with good intentions. If you lived in an interest-free society you would think interest was absurd and corrupt and evil. It still is, you're just used to it. You can't fathom the concept of "human beings... acting... humanly."

Sure I can... I just recognize that people don't do this (at least in the definition of "humanly" that you're implying), even though they're free to do so.

That's because we've grown accustomed to the way things are. I had a friend who started a clothing company. When we were in college he would make these really cool shirts and pretty much give them away. In fact that's exactly what he did. One day I asked him for 2 shirts and gave him $50. Next thing you know, he had a business and the shirts were no longer free. You can't see it because it's not what you're used to, it's not what you know. Believe it or not these types of loans do take place. Usually through Churches or Mosques, family or friends, or other organizations with good people trying to help others. Not the heartless ******** who only lend money to make money. It's not really a "favor."

There's a well-used quote from Adam Smith that describes the basis for capitalism: "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest." Some people are greedy and heartless, but the capitalist market allows us to translate one person's greed into another person's benefit.

If people can get loans for the things they want and need through their mosque friends or through family, great. However, the fact that the banks are still doing quite a bit of business says to me that not everyone has the friends or family with sufficient wealth to rely on the goodwill and money of the people they know to meet their needs.

Anyhow, what are you actually suggesting? Is it instituting the prohibition of lending at interest, period, or is it the fostering of love and friendship that eliminates the demand for lending at interest? If it's the former, then I don't see how the method will bring about the circumstances you're talking about. If it's the latter, then I don't see the need to prohibit interest... if what you're suggesting would actually happen, then demand for loans would disappear like demand for buggy whips or whale oil all on its own with no change to the law needed at all.

 

[a_student]

Hopefully, but not always. Sometimes, people can't pay back their loans. In the banking world, this is reflected in the rates people pay on their loans: the higher the risk, then more the person pays. This is to offset the cost to the bank of people who don't pay the money back either fully or partly.

Yes... and despite the fact that they're perfectly free to lend money for free if they chose to do so, they don't. And so far, you haven't suggested any way to change this.

I don't plan on single-handedly changing this economy anytime soon. I just said it would be better for society as a whole. I think the world would be better if people stopped killing and raping too but that doesn't mean I'm going to go out and stop it all. To the simple question "Would the world be better if....?" My answer is yes. That's all.

No, I'm not saying that. I'm saying that given the actual options available, there's no good reason (other than commandments from God in certain scriptures, if you happen to believe in them) to ban lending at interest.

You could make the argument that there's no good reason to keep it either. All I'm saying is the world would be better. Do you disagree with that? Because that is the only thing that I'm saying (over and over again).

You say it would be better for people to lend each other money for free... sounds fine if it's voluntary, but how are you going to make this happen? Right now, people are completely free to do it if they want, but they don't.

Again, I am not trying to reform the economy. People say they want Peace on Earth. If they knew how to achieve it I'm sure they would but you can't shoot down their dream because it doesn't seem feasible. And it's probably not, at least right now. I'm perfectly fine with that.

If you feel that helping your brother meet his needs is the best value for your $100, great... I'd probably do the same. However, giving it to your brother means you've foregone that extra $20 of benefit from buying that item that you had your eye on, or the extra $50 in revenue from your business. This represents a cost to you, which your brother has not paid you for.

If I wasn't in a position to lend it, I wouldn't lend it, simple as that. If he makes $50 great! He pays me my $100 back and now he has $50 so maybe he won't have to ask me again. He might even give me $20 as a token of appreciation. Now if he wants to borrow again I'd be more than delighted to (see how this utopian lending society works). Let's say next time he takes a loss and can only pay $80. A $20 loss is not going to kill me. I took a risk, he took a risk, we lost. Not he took a risk, but so what gimme my money anyway! I don't care if you have to sell your first born.

25% per week is well over the interest rate that's considered criminal where I live.

Lol. Obviously I'm not using real figures.

How about this situation: you have saved $20,000 that you plan to use as seed money for a side business to pay for your children's college fund. You figure you have another 10 years before they'll need the money, and your goal is $100,000. Your brother asks for a loan to expand his house (he's got twins on the way, so he needs the space); he wants to borrow the $20,000 and pay you back over the next two years.

If you loan him the money, it will mean that you can't start the business for another two years, which will mean you'll only have 8 years to work to pay for your children's college. This will mean you will have to work much, much harder in the shorter time to make the money you'll need.

Is it right that your brother impose this burden on you? In exchange, should he maybe help you by working with you at your business?

I would tell my brother "Sorry. I don't have $20,000 to loan you." That simple. But if I did loan it, then yes he could help me but that would be as optional as me lending him the money in the first place.

I'm not holding my breath that the world will be magically transformed into a land where everyone values my personal well-being over and above their own. In the meantime, I think it's much more reasonable and practical to use a system that generally relies on people's own self-interest.

Again, the whole idea is helping one another. This is an Islamic principle and Islam stresses brotherhood and helping one another.

Sure I can... I just recognize that people don't do this (at least in the definition of "humanly" that you're implying), even though they're free to do so.

But people do do this. Granted, it's uncommon because most people just want to make money (and they're free to do so) but there are people who help people all the time.

If people can get loans for the things they want and need through their mosque friends or through family, great. However, the fact that the banks are still doing quite a bit of business says to me that not everyone has the friends or family with sufficient wealth to rely on the goodwill and money of the people they know to meet their needs.

That's because they're all in debt to the banks

Anyhow, what are you actually suggesting? Is it instituting the prohibition of lending at interest, period, or is it the fostering of love and friendship that eliminates the demand for lending at interest? If it's the former, then I don't see how the method will bring about the circumstances you're talking about. If it's the latter, then I don't see the need to prohibit interest... if what you're suggesting would actually happen, then demand for loans would disappear like demand for buggy whips or whale oil all on its own with no change to the law needed at all.

It's the latter. That's the whole idea. If people act like they care about each other, that would solve a lot of problems in society.

 

[9-10ths_Penguin]

You could make the argument that there's no good reason to keep it either.

No, you can't. "Not keeping" lending at interest would imply preventing people from doing so: it would mean limiting the freedom of people to act as they see fit. At present, people borrow and lend voluntarily; nobody forces anyone at gunpoint to borrow money (not in the legitimate lending world, anyhow, and if that sort of thing does go on, I'd be just as much against it as you).

IMO, any limitation on people's freedom must be justified by clear and significant reasons. In any case where limitation of freedom is considered, if the balance of argument can't be clearly tipped to the "pro" side, the proper thing to do is to allow the freedom to continue.

You are the one suggesting the limitation on individual freedom. Because of that, it's up to you to present an overwhelming case in favour of your position. It's not enough for you just to not accept my contrary position; your position must be successfully argued on its own merits.

All I'm saying is the world would be better. Do you disagree with that? Because that is the only thing that I'm saying (over and over again).

I'm not sure if things would be better if everybody voluntarily loaned everybody else money interest-free. I am sure that things would be worse if people were forced to do so.

Again, I am not trying to reform the economy. People say they want Peace on Earth. If they knew how to achieve it I'm sure they would but you can't shoot down their dream because it doesn't seem feasible. And it's probably not, at least right now. I'm perfectly fine with that.

Great. So you can dream of a world without greed where everyone lends to everyone else for free, and I'll dream of a world with 18-year-old single malt rain. I think the two things will happen around the same time.

If I wasn't in a position to lend it, I wouldn't lend it, simple as that. If he makes $50 great! He pays me my $100 back and now he has $50 so maybe he won't have to ask me again. He might even give me $20 as a token of appreciation. Now if he wants to borrow again I'd be more than delighted to (see how this utopian lending society works).

Yes, I see how it works: de facto interest instead of de jure interest. How much of a "token" (but don't call it interest ) he pays will affect his ability to borrow from you (and likely people you associate with as well) in future.

Let's say next time he takes a loss and can only pay $80. A $20 loss is not going to kill me. I took a risk, he took a risk, we lost. Not he took a risk, but so what gimme my money anyway! I don't care if you have to sell your first born.

But here's the thing: what you suggest would put loans in the category of optional or disposable money. Knowing that when you loan $100, you might only get $80 (or $0) back and won't be compensated for your risk and trouble, you will only loan money you can afford to lose. The supply of money to borrow shrinks dramatically, which causes two things:

- some people will not be able to borrow at all. Some of the people who used to be able to get a residential mortgage, a car loan or a student loan will not be able to get it, and they'll go without the thing they would have used their money for, whether it's a family home, a car to travel to a better job, or the education they need to better their situation. They'll be forced to continue with their status quo, whether it's a too-small apartment owned by a dishonest landlord, or a dead-end job for a bad manager at the only employer within walking or transit range.

- for those who can borrow, the effective cost of borrowing will go up. Supply of money to loan has shrunk, but demand for money to borrow is unchanged. From basic microeconomics, we know that this will create a new, higher equilibrium price. People might not pay all of this in money, but those who do borrow will be willing to expend some combination of money, time, effort, hassle, and other types of "expenditure" to get so-called "free" money to borrow... more than they ever did when money loaned at interest was readily available.

I would tell my brother "Sorry. I don't have $20,000 to loan you." That simple. But if I did loan it, then yes he could help me but that would be as optional as me lending him the money in the first place.

Ah - so interest would be voluntary, just as it is now: borrowers and lenders aren't forced to enter the agreements they make. Both do it for their own benefit.

Again, the whole idea is helping one another. This is an Islamic principle and Islam stresses brotherhood and helping one another.

Which is fine... and I'm sure there will always be a small portion of society who have the wealth and the generosity to do what you suggest... but such people cannot meet the needs of all. Personally, I know several friends and family who would have loaned me the money for me to buy my house if they had it... but none of them actually have so much money that they could spare the price of a house for the time that it would take for me to pay it back.

If you create a system where people can make lending money a business, then you open up credit to many other people, and with it, you provide them with the opportunities that credit can provide, including homes, businesses, education, and mobility. A company who lends money for profit, even a greedy one, will lend money to anyone who has the ability to repay it. In the system you suggest, the only people who have access to the credit that could truly better their situation are those with generous, wealthy friends and relatives. This might work fine for the middle-class professional in the suburbs, but the person who lives in a hovel, comes from a poor family, works as a labourer in a factory and does not go to the "right" mosque has much less opportunity to create a better life than he would in a society where lending at interest is permitted.

But people do do this. Granted, it's uncommon because most people just want to make money (and they're free to do so) but there are people who help people all the time.

But not enough to meet the need.

That's because they're all in debt to the banks

But people only enter into debt voluntarily. If someone is in debt, it's because they've decided that debt+interest+the things they went into debt to obtain are more valuable to them than the alternative.

It's the latter. That's the whole idea. If people act like they care about each other, that would solve a lot of problems in society.

But it's unrealistic, and it's a standard that I don't see you using for other areas of human life. Take food: everybody needs to eat. Why not say that nobody should pay for their food?

Instead, we could each grow a bit of our own and trade back and forth: I'll raise chickens and give eggs to all my family and friends; you can do the same with vegetables from your garden. Farmers would disappear (since you can't make a living on a product that you can't sell), but everyone would have free food, and we'd all eat like kings! Right?

Out where I am, maybe we would: everyone in my neighborhood has a large enough yard to grow or raise something, so we might do okay. If I still lived in an apartment in Toronto, though, I'd be very worried for my survival.

What you suggest would work in a similar way: money wouldn't tend to move very far; rich people would lend to slightly less rich people, not to the poorest of the poor. The ability of the disadvantaged to improve their situation would be hampered.

What you need is a few groups of people who would be willing to lend money to anyone if it'll help them get a profit. In that case, if those people lend to the poor out of the goodness of their hearts, great... if they lend to the poor out of abject greed, that's okay too: whatever the motivation, it will still help the poor buy a home, educate themselves, and generally improve their lot in life.

The answer isn't to pretend like people will never be greedy, it's to harness that greed and make it do what's good for society.

If you find a way to get rid of greed, great; it would make me very happy. In the meantime, though, I think I'll stick with the system we have.

 

[9-10ths_Penguin]

I think I need to go back to an earlier post. Please note the section I bolded:

That's because we've grown accustomed to the way things are. I had a friend who started a clothing company. When we were in college he would make these really cool shirts and pretty much give them away. In fact that's exactly what he did. One day I asked him for 2 shirts and gave him $50. Next thing you know, he had a business and the shirts were no longer free. People will make money if the opportunity is there. You can't see it because it's not what you're used to, it's not what you know. Believe it or not these types of loans do take place. Usually through Churches or Mosques, family or friends, or other organizations with good people trying to help others. Not the heartless ******** who only lend money to make money. It's not really a "favor."

It sounds like your friend enjoyed making his shirts. Are you really suggesting that he specifically or the world in general would be better off if he did not have the opportunity to make money doing what he enjoys?

Say you managed to get a law passed: No person may make shirts and sell them. Your friend and people like him no longer have the opportunity to make shirts as a business. Two things would happen:

- some people stop making shirts altogether. Some of the people who make shirts for money aren't interested in making them for free.

- some people keep making shirts, but give them away for free. This likely means that they can't make nearly as many shirts, since now they must have some other job to support themselves and pay for their shirt-making hobby.

So... the end result is that there are fewer of those really cool shirts to go around, since the only supply are the free shirts that your friend could have given away to friends anyway, even while making shirts as a business. You're no better off, and your friend now has to spend his day at some other job instead of running and growing the business he chose.

 

[a_student]

I think I need to go back to an earlier post. Please note the section I bolded:


It sounds like your friend enjoyed making his shirts. Are you really suggesting that he specifically or the world in general would be better off if he did not have the opportunity to make money doing what he enjoys?

Say you managed to get a law passed: No person may make shirts and sell them. Your friend and people like him no longer have the opportunity to make shirts as a business. Two things would happen:

- some people stop making shirts altogether. Some of the people who make shirts for money aren't interested in making them for free.

- some people keep making shirts, but give them away for free. This likely means that they can't make nearly as many shirts, since now they must have some other job to support themselves and pay for their shirt-making hobby.

So... the end result is that there are fewer of those really cool shirts to go around, since the only supply are the free shirts that your friend could have given away to friends anyway, even while making shirts as a business. You're no better off, and your friend now has to spend his day at some other job instead of running and growing the business he chose.

I touched on this a bit in my last post regarding the "value" of money. To make a shirt, it takes time, effort, and skill. These things all have value or worth. Money is simply paper used as a median in the exchange of goods and services.

 

[9-10ths_Penguin]

I touched on this a bit in my last post regarding the "value" of money. To make a shirt, it takes time, effort, and skill. These things all have value or worth.

Yes... and in demanding that shirt for free, you deny the value and worth of the time, effort, and skill that went into it, not to mention the materials.

Money is simply paper used as a median in the exchange of goods and services.

Money has worth as well, because we mutually agree that it does. If it doesn't have intrinsic worth beyond that, well... so what? We could use something else as currency that does.

My work takes time, effort and skill as well, but personally I prefer to be paid in money rather than goats, cigarettes, land, or other items with intrinsic value - cash fits more easily in my wallet.

 

[a_student]

Yes... and in demanding that shirt for free, you deny the value and worth of the time, effort, and skill that went into it, not to mention the materials.

I never demanded free shirts. You can't demand free shirts because as we just agreed, the shirt has value.

Money has worth as well, because we mutually agree that it does. If it doesn't have intrinsic worth beyond that, well... so what? We could use something else as currency that does.

Money is unique and really can't be compared to a good or service.

My work takes time, effort and skill as well, but personally I prefer to be paid in money rather than goats, cigarettes, land, or other items with intrinsic value - cash fits more easily in my wallet.

Lol. Agreed. However, the money is used to obtain other things. What if your company made your house payments for you instead of giving you the money and then you paying it? You can't eat money when you're hungry, wear money when you're cold, or sleep under money when it's raining. You can simply use it to obtain these things that have the real value.

 

[9-10ths_Penguin]

I never demanded free shirts. You can't demand free shirts because as we just agreed, the shirt has value.

No, you just lamented the fact that he was free to charge for them.

Money is unique and really can't be compared to a good or service.

Sure it can. That's the whole point of currency: it provides a common point of comparison for all the goods and services that we might like to provide or use.

Lol. Agreed. However, the money is used to obtain other things. What if your company made your house payments for you instead of giving you the money and then you paying it?

Sometimes people come to arrangements like this. I know in some lines of work, it's common for an employer to provide employees each with a company car that they're allowed to use for personal business. This is still a form of payment, though.

You can't eat money when you're hungry, wear money when you're cold, or sleep under money when it's raining. You can simply use it to obtain these things that have the real value.

And because you have the ability to use money in this way, it has value itself.

I can't sleep under money, but money will allow me to purchase or rent a roof to sleep under. The same way, I can't sleep under my hammer, but a hammer will allow me to build a roof to sleep under. Both are tools that allow us the end product, not the end product themselves.

 

[a_student]

Sure it can. That's the whole point of currency: it provides a common point of comparison for all the goods and services that we might like to provide or use.

To compare the goods themselves. Money just makes the barter system more flexible. If the US treasury was blown up tomorrow and there was nothing to back up the US dollar, I couldn't trade these bills for toilet paper.

Sometimes people come to arrangements like this. I know in some lines of work, it's common for an employer to provide employees each with a company car that they're allowed to use for personal business. This is still a form of payment, though.

Yes but it's more direct. If you are using the money to pay a mortgage, why not simplify and just drop the mortgage payment? I'm speaking hypothetically about a situation where instead of giving you money to buy certain goods, skip the money and just give you the goods that you would buy anyway. Would you miss the money? It would be spent on the exact same things if it were given to you so what's the difference. It's not the money that we all covet, it's the things money can buy.

And because you have the ability to use money in this way, it has value itself.

Well it certainly serves a purpose. But in most parts of the US they won't except Canadian currency. However, gold is valued everywhere. Money holds no weight on it's own. It must be backed by something.

I can't sleep under money, but money will allow me to purchase or rent a roof to sleep under. The same way, I can't sleep under my hammer, but a hammer will allow me to build a roof to sleep under. Both are tools that allow us the end product, not the end product themselves.

So are you comparing money to a house or a hammer? The house clearly has more value than the hammer. The money only has value because it is backed by something (your effort at work or whatever). When you buy a house you are trading your effort for a house. Money is just the translator. You can;t give your effort and in return get a house. You must go through this "middle man" like at the pawn shop.

 

[9-10ths_Penguin]

To compare the goods themselves. Money just makes the barter system more flexible. If the US treasury was blown up tomorrow and there was nothing to back up the US dollar, I couldn't trade these bills for toilet paper.

No, but the treasury hasn't been blown up and you can trade the bills for items of value.

If you had your wealth in the form of cattle, an outbreak of disease could destroy your wealth. If you had it as toilet paper, it could be destroyed by a flood. No form of wealth is immune to devaluation.

Yes but it's more direct. If you are using the money to pay a mortgage, why not simplify and just drop the mortgage payment? I'm speaking hypothetically about a situation where instead of giving you money to buy certain goods, skip the money and just give you the goods that you would buy anyway. Would you miss the money? It would be spent on the exact same things if it were given to you so what's the difference. It's not the money that we all covet, it's the things money can buy.

Money makes things more flexible. My employer might have a house in town 'A' that I could live in, but I prefer to live closer to my family in town 'B'. Also, I'd prefer to know that if I were to change jobs, I wouldn't be evicted from my house.

Well it certainly serves a purpose. But in most parts of the US they won't except Canadian currency. However, gold is valued everywhere. Money holds no weight on it's own. It must be backed by something.

Why does gold have value?

It's a very good electrical conductor, but that only accounts for a small part of its worth, and it was highly valued even before electricity was discovered.

What gives gold its value, except for the same type of mutual agreement that gives paper money value?

So are you comparing money to a house or a hammer? The house clearly has more value than the hammer.

I was comparing the money to the hammer. Both are tools; neither are the thing you ultimately want, but both enable you to get it.

The money only has value because it is backed by something (your effort at work or whatever). When you buy a house you are trading your effort for a house. Money is just the translator. You can;t give your effort and in return get a house. You must go through this "middle man" like at the pawn shop.

You don't have to. If I found someone who needed engineering services and had a house I liked he was willing to part with, I could trade my services for his goods. However, it can be difficult to make this work, so money is much more convenient.

Nobody's prohibited from bartering; it just makes more sense to use a common medium of exchange like money. If a plumber wants breakfast, it's much easier for her just to pay cash for it than to search for a restaurant with a stuck drain to offer her services to.