Usury and Economic Growth

A legitimate and useful disagreement exists over the definition of usury between two parties: Islamic law scholars who view interest as usury in the absolute and the economists who release interest to a certain level of usury. This release is linked to macroeconomic factors and variables. The justification for dealing with this issue at this particular time in our weekly report is that big fuss raised about the subscription in “Shamal Azzour Al-Oula” Company shares and “Boursa Kuwait” Company. Our opinion is that it would be better to give an opinion after dust calms down and settles. The basis is to search for solutions and not to rally behind emotions.

From an economic point of view, interest in the absolute is not usury because the environment and purpose at the time of its prohibition differ from our present time. In addition, there are factors that should be taken into account when judging the maximum interest limit before it becomes usury. In addition to measuring the benefits and  costs  resulting  from  employing funds -which is the distinction line between prohibition and sanctioning- other factors must be considered. Money nowadays is an intermediary for exchange and its value is influenced by inflation of goods and services which   use   money   in  their  pricing.

If  an individual borrows KD 100 from another individual for a year term and the lender recovers the KD 100 after one year, the KD 100 after one year buys only 95% of what it used to buy when was lent. The borrower has received interest which is in par with usury. Therefore, inflation is a factor that determines the level of interest without negative usury, whereas in the past metals were given and returned by metals and harvests by harvests. There is also the competition factor. If lending houses become too many, governed by supervision, they cannot impose their will or level of interest on the borrower. And to continue, they can only impose the cost of money on them or the return they give to the depositor which is close to the inflation rates, plus the management cost and a known profit margin to its shareholders.What is more important is the relationship of interest to economic growth, whose financing requires the mobilization of funds both domestic and foreign to finance development projects. The higher growth rates are, the more jobs are created and the society is protected from unemployment evils. Funds follow the competitive return anywhere in the world, subject to the stability and prosperity of the country. Realization of these benefits renders the limits of permissible interest flexible because the damage from non-competition on it is much greater than paying its cost, in the form of making the country vulnerable to political and social risks. According to a recent report about the “State of the Global Islamic Economy Report” in 2019/2020, the size of the Islamic commodity market in 2018 was around US$ 2.2 trillion and is estimated to achieve a compound growth of 6.2% to score about US$ 3.2 trillion by 2024. Size of Islamic financial assets scored US$ 2.5 trillion in the same year. The report also states that investment in products of Islamic goods and services companies scored US$ 1.2 billion in 2018, up by 399%, with 54% share for Halal companies and 42% for financial services companies. In the commodity and service fields, the share of the Islamic product is still small and does not correspond to the world’s Moslem population from the total world population or economy. Most growth in Islamic commodity production is either in non-Moslem countries that produce for Moslems or Moslem countries that adopt a flexible definition of usury, such as Malaysia, Turkey and Dubai. This (approach) obscures a lot of growth benefits from those countries that adopt a narrow definition of usury.Despite the fundamental difference between the approaches of the two religions, they agreed on defining the usury concept in general. The dispute over usury in its narrow and flexible sense was an experience in Medieval Europe during its backwardness when the Church was the source of most authorities. At that time, the Church resisted the principle of traditional banking by the “Medici” family in Florence the City State in the fourteenth century. Their situation was justified when the representatives of the table banks -Al takht- were spread in the markets to search for the neediest people to impose their conditions as in the early days of Islam. I one of the Belgian cities “Bruges”, the interest rate was estimated at 43.5% and rises to 60% in other European cities. But the fourteenth and fifteenth century promoted that banking into major banks competing across borders to finance the European Renaissance projects. That great success did not did not preempt for “Cosimo Medici”, the most prominent figure in the banking family to request forgiveness from the Pope in his late days and to emancipate his soul and protect him from an inevitable fate at the bottom of Hell. To accept that, the Pope stipulated that he should build a huge church compound. This was the beginning of the change in the Church position, i.e. the search for solutions and not for conclusive judgment.

Our opinion is to subject the usury concept to a quiet debate between a team of Islamic Shari’a scholars and an economic team, and give this debate the time it takes to settle without much interference. The goal of either team is not to win over the other but to unite the forces of reason in what is to the interest of Kuwait which is expected to face a timed and huge bomb in its labor market.