Abstract
The prologue is our starting premise. The Qur’an (2: 275) declares, “As for those who devour interest, they behave as the one whom Satan has confounded with his touch. Seized in this state they say: ‘Trade is but a kind of interest’, even though Allah has made trade lawful, and interest unlawful”. Keynes (1930, p. 368) picked up such wisdom of the inverse relationship between trade and interest and wrote, “The strenuous purposeful moneymakers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.” Such are the messages of moral highness and wisdom picked up in this paper. The fundamental point here is to establish the fact that the only way of phasing out interest rate from Islamic activities is to understand and implement the formalism of the inverse relationship that permanently exists between trade in the good things of life and the rate of interest as the impediment to the free flow of resources into such tradable activities. The central bank and commercial banks and fi nancial intermediaries as practitioners must understand this organic relational concept of intellection in relation to money and the real economy. The monetary system and the real economy with the financial instruments between would thus be shown to formalize the intellection paradigm – which indeed is a truly scientific revolution. The result is replacement of the fractional reserve requirement monetary system by the 100 per cent reserve requirement monetary system backed by the gold standard. Likewise, the organic relationships of such a monetary arrangement including its monetary policy and transmission mechanism would structurally change the nature of markets and its institutional relations and individual preferences. The result at the end will be a phased down interest rate regime into a trade-related one by the rise of the tradable relationships that are generated. The foundational methodology that enters this kind of organically relational worldview with the episteme of unity of knowledge (the divine law in Islam) provides the functional ontology of the socially and morally constructed money, production and real economy circular causation. It models the legitimacy of trade as the resource mobilization instrument, while rejecting interest as the permanent impediment of resource mobilization. Keywords: Monetary economics, Islamic economics and finance, Islamic political economy and world-system, social economics, ethics and economics.
Highlights
Often in recent economic and financial experience it has been proven that a low rate of interest by bank regulation, macroeconomic policy objectives, and market forces have ended in fiasco in stabilizing the economy
The recent macroeconomic policy to drive the nominal rate of interest to zero in Japan, as an example, resulted in non-performing loans that were abundantly provided to borrowers
Islamic banks insulated from the global financial crisis due to their operations that do not involve the stock market and speculative financing, have not gained advantage of the situation to contribute to the ummah future, and thereby, to show the path out of the crisis for the rest of the world, except by pointing out the zerointerest agenda and the alternative trade financing instruments
Summary
Often in recent economic and financial experience it has been proven that a low rate of interest by bank regulation, macroeconomic policy objectives, and market forces have ended in fiasco in stabilizing the economy. The recent macroeconomic policy to drive the nominal rate of interest to zero in Japan, as an example, resulted in non-performing loans that were abundantly provided to borrowers. The subprime mortgage rates on real estate in southern United States resulted in an aggressive spirit of borrowing to fuel the housing boom that turned sour.. The inference drawn is that a low or zero rate of interest is a necessary but not a sufficient condition for the road to economic bliss. Structural changes in the relationships between money, finance and market exchange must be established simultaneously with reduction in the rate of interest
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