The dominance of the system of interest and its use of consistently depreciating currency has made Riba a complex issue. It may not be possible to resolve the issue unless we understand its reality. The prevailing currency that floats freely has no reality other than the representative national product basket that it buys, and the weight of the said basket that is its reality is seen to be falling consistently.
During the periods of Prophet Muhammad ﷺand Khulafa-i-Rashidun (the Rightly Guided Caliphs), Riba was quantitative excess. In case of dinar and dirham, it is excess of quantity of gold and silver respectively. Even generally,Riba is quantitative excess in respect of Ribawi commodities. This excess was called interest orsoodin Urdu.
Clearly,Riba is real (quantitative) excess and it is not proper to call it ‘nominal interest’. Even when we had currency linked to gold/ silver, an excess with respect to currency amounted to a real quantitative excess with respect to gold/silver. Even if a currency is linked to fixed quantity of national product basket, an excess with respect to it will be real quantitative excess.
Our Fuqaha knew only this real excess that was called interest orsood.They rightly considered interest and sood same as Riba. Thus, clearly interest or sood as known to our Fuqaha was real quantitative excess. It was real quantitative excess that was called Riba, interest orsood.
In case of freely floating fiat money, real quantitative excess is called real interest.Therefore, by analogy, it is clear that in this case Riba is real interest. Nominal excess with respect to freely floating fiat money is not same as real quantitative excess with respect to fiat money and therefore it is not same as Riba and also it is not same as interest or sood that our Fuqaha called Riba.
Reality is that the system of interest cannot be sustained if accounting is done in real terms e.g., in terms of real dollar. Therefore, interest seeking controllers of the system of interest deceptively used the term interest for nominal interest and profit for nominal profit instead of using these for real interest and real profit.
Our contemporary Ulama and scholars seem to be totally unaware of this changed terminology. That has led them to hold nominal interest now called ‘interest’ or soodas Riba. This has resulted in dominance of the system of interest and marginalisation of justice and righteousness as well as the institutions based on and controlled by the righteous.
For example, if we had real currency or we had been accounting in real terms average net rate of return may be assumed to be around 2 to 3%. The maximum rate of interest that business will be able to support will be around 1%. This leaves 1 to 2% profit to business owners and they will not agree for anything less as they have to bear the risk. The spread that bank and financial institutions will earn will be around 0.6% (assuming that 0.4% is paid to depositors) and the rate of unemployment will be around 60%. Thus, the system of interest will become unsustainable and inflation as a means of financing will not be sustained. This because accounting in real terms cancels most of the deception caused by inflation which in free float based monetary system amounts to monetary manipulation.
Now if accounting is done in nominal terms, assuming rate of inflation to be 6%, the average nominal rate of return will be 8 to 9%.Thus, banking and financial institutions can easily charge about 5% nominal interest.
Profit after deducting interest for business owners will be around 3 to 4%. The spread for the banking and financial institutions for the money created by double entry book keeping system will be about 6%. Thus, total average return to business owners and capital providers will be about 8% while total gain to economy is only 2 to 3% and thus this mechanism of accounting in nominal terms raises return for the rich by a factor of almost 3. Who bears the loss? It is well-known that the loss is borne by the poor as inflation tax plus loss due to differential price and wage change caused by inflation.
Clearly, inflationary economic policy together with accounting in nominal terms is a mechanism to deceptively suck the blood of the poor and transfer it to the rich. Clearly, inflation and nominal accounting are means to perpetuate gross injustice against the poor and this fraud is responsible for growing injustice and exploitation, poverty and deprivation as well as the marginalisation of justice and righteousness.
May Allah guide us to see the reality as it is and to form opinion about it according to its reality. Aameen!