Since the last post, the estimated number of people to be made homeless by the COVID-19 economic crisis has risen from 28 million to 40 million. This post takes a closer look at how interest-based lending is a key culprit in the COVID-19 Economic Crisis, Indian farmer suicides, as well as the continued colonialism of Nigeria.
What insight can a doctor have about compound interest?
Exponential growth is a killer. When Dr. Michael Warner was asked early in the COVID-19 crisis about the impact of failing to implement mandatory social distancing rules (e.g. limiting social gatherings, etc.), he warned that COVID-19 will spread exponentially. To explain the danger, he said:
“It’s [exponential spread of COVID-19] a concept similar to compound interest, where patients infect patients, infect more patients. If that happens, it will have a deluge of patients come into hospitals all at the same time. There is no system on earth that can handle that.” [Emphasis added]
Great analogy. COVID-19 spreads exponentially, people get sick and overwhelm the hospitals. Interest grows exponentially, but it outpaces incomes. People go bankrupt and the creditors take what they can. This causes more to go bankrupt. And the “interest” contagion spreads through the whole economy.
We have a front-row seat to this catastrophe as the economic effects of COVID-19 unfold. Staples, Cheesecake Factory, Urban Outfitters and others have refused to pay the rent. They have no revenues and no way to make these payments. This spells exponential trouble for the commercial mortgages, which amount to $4.6 trillion. As the banker quoted in the Vanity Fair article says, “The lenders, banks, and probably nonbanks, which are more leveraged…start seeing delinquencies and defaults on their assets… It just ripples through the entire financial economy.” The problem is that the leverage – buying investments on borrowed money – results in a house of cards that will collapse.
Farmer suicides and interest
In current times, we see this have tragic at an individual level. This takes us to the tragic end of Ramachandra Raut. The bankers came to collect. Why couldn’t he pay? The crop failed two years in a row. He ended his life. He left behind his wife and family to deal with the $3,400 USD in debt (150,000 Rupees). His life is one tragedy amongst the many. Over 300,000 Indian farmer have killed themselves. These farmers pay "interest at rates anywhere between 36 and 60 per cent" and are unable to keep up with the mounting debt, thanks to compound interest. And that’s the problem. The interest is due regardless of what happens on the farms, factories or the shops. The debt grows and grows like a cancer, devouring the farmers, workers and small businesses.
How does interest maintain colonialism?
According to the New York Times: "Nigeria...borrowed $5 billion, has paid back $16 billion and still owes $32 billion on the same debt". Interest takes over, where colonialism left off. The rich Capitalist colonialist nations use the debt to siphon off wealth generated by Nigeria (and others); just like they did during the colonial era.
An Islamic approach to debt
Islam stops the exponential growth of debt by making interest illegal. Pre-Islamic civilizations also recognized there was a problem with interest and its ability to grow out of control. The Babylonians realized this, and they would regularly cancel debts. For example, when Samsuiluna became the King of Babylon all state debts were written off.
When it comes to non-interest bearing debt, Islam has a very different attitude. The Prophet (saw) would pray for protection from debt:
"O Allah I seek refuge in You from worry and grief, I seek refuge in You from hopelessness and laziness, I seek refuge in You from miserliness and cowardice and I seek refuge in You from overwhelming debt and from the force of men". [Abu Dawood; emphasis added]
In Islam, debt is something that each individual tries to get out of as fast as they can – even if they are borrowing for good reason. And what happens if someone falls behind because things are not working out?
They are eligible for a bailout. Islam requires, the wealthy to pay 2.5% of their assets to 8 categories. One of these categories are the indebted.
This is quite the contrast to the CARES Act that was passed in 2020 in response to the COVID-19. The media made loud claims for the 1,200 that the 99% got. However, the CARES act loosened restrictions around what people making over $250,000 (for couples that’s $500,000) can deduct; i.e. enabling them to deduct more losses to get bigger tax breaks. The result? An average tax break of $1.6M for the 43,000 rich people who earned more a million bucks a year.
Islam, also encourages loaning to people repeatedly because it is seen as charity:
“No Muslim would give another Muslim a loan twice, except that one would be written for him as charity.” [Ibn Hibban]
Quite a contrast to payday loans! Payday loans effectively enslave serial borrowers with interest rates "typically... between 300% - 900% and, not infrequently, more than 1,000%".
How does Islam help us rethink the Capitalist Consumer Economy?
The American consumer in 2019 was carrying a total debt load of $14 trillion. This was doomed to collapse. Islam is not about just eliminating interest and slavery to the banks. It is also about rethinking debt-driven consumer economics. The average person in society should not be forced to borrow $14 trillion just to live a normal life! They should be able to afford these things through their incomes.
Furthermore, commerce has its place in society, but it is not a substitute for spirituality. Islam explains that there is more to life than just endless consumption. As Allah (swt), the Creator of all things, explains that the life of this world is temporary like farm crops: we are fresh, young and vibrant. Then we get old and are gone, just like the debris left after the harvest. What really matters is what happens after we die. That is where the real success lies. Truly, this life is just the enjoyment of delusion.
“Know that the life of this world is but amusement and diversion and adornment and boasting to one another and competition in increase of wealth and children - like the example of a rain whose [resulting] plant growth pleases the tillers; then it dries and you see it turned yellow; then it becomes [scattered] debris. And in the Hereafter is severe punishment and forgiveness from Allah and approval. And what is the worldly life except the enjoyment of delusion”. [TMQ 57:20]
Consequently, Islam will have a sustainable economy that is shaped by this mentality, instead of the endless misery of consumerism that has trapped the society in a mountain of unsustainable debt that is now collapsing. COVID-19 didn’t cause this debt-crisis. It merely exposed the rot that was always there.
In sha Allah, in the next post, we will explore how Capitalism has taught us to think about the homeless and the Islamic alternative to such an erroneous outlook.