This is an opinion editorial by Muslim Bitcoiner, the host of the “Muslim Bitcoiner Podcast” and a contributor for Bitcoin Magazine.
Before diving into the topic of Bitcoin, it’s important to explore what the sin of “riba” actually is, and how it’s entrenched in the current global monetary system. Riba is an Arabic word which most commonly refers to “usury, or charging an amount of interest on a loan.” However, riba encapsulates more than just profiting from a loan, it also can mean exchanging of the same type of item in unequal amounts. There are different types of riba, but for the purpose of this essay, we’ll focus on that aspect of riba that includes profiting through the act of lending, without putting in any kind of work.
Riba is prohibited in Islam, and the Quran and Hadith use some very strong language against this heinous sin. In the Quran, Allah says:
“Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, ‘Trade is [just] like interest.’ But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns [to dealing in interest or usury] — those are the companions of the Fire; they will abide eternally therein.” (Quran 2:275)
Prophet Muhammad also warned muslims about the danger of the sin of riba:
“The Messenger of Allah cursed the one who accepted usury, the one who paid it, the witness to it and the one who recorded it.” — Narrated by Abdullah ibn Mas’ud, Sunan Abi Dawud 3333, Book 23, Hadith 8
In another Hadith, prophet Muhammad describes the severity of engaging with riba:
“There are seventy degrees of usury, the least of which is equivalent to a man having intercourse with his mother.” — Narrated from Abu Hurairah, Sunan Ibn Majah 2274
Clearly, riba is a sin to be avoided at all costs and Muslims should come nowhere close to it! Riba is considered a major sin in Islam; it can be considered to be on the same level as other major sins such as committing adultery. Although, when considering the aforementioned Hadith, the case can be made that riba is in fact much worse than adultery.
In any case, when you ask an average Muslim why riba is “haram” (forbidden), they’ll typically say something like, “It exploits the poor.” However, riba is something that is far more destructive than just “exploiting the poor”; such a statement misses the big picture of the corruption and depravity of riba, especially in the context of modern fiat money. In order to understand the role of riba in the current monetary system, we must first examine how riba is the key mechanism in the creation of fiat itself. Let’s explore how fiat is created and disseminated in our current global economic system.
The Current Fiat System
When we question how dollars are created, we typically think of the Federal Reserve “printing money.” The printed paper dollar bills only make up a small fraction of the total dollar supply. The majority of the dollar supply is actually created by commercial banks rather than the central bank. A commercial bank is where you would open up a checking and/or savings account. The actual money creation mechanism is conducted through the act of lending by the commercial bank. Whenever the bank issues a loan to an individual looking to finance a house, education or business, that money did not exist before the act of lending. Essentially, the loaned money, through a few keystrokes, is brought into existence at the time of loan issuance. The act of lending is the main mechanism by which more dollars are created and there was no “money” backing that loan that should have been sitting in a vault somewhere.
There are two problems with this abomination of a process of currency creation. First, dollars are essentially created through debt and to make that business of debt issuance profitable, it must have riba tied to it somewhere. Riba is simply the profit-making mechanism that allows banks to prosper.
The second problem concerns inflation. When more loans are issued, more dollars are introduced into the money supply, which decreases the value or purchasing power of all the dollars that already exist. People that hold dollars witness their purchasing power decrease as the banks issue more loans. In the current fiat system, people cannot put their savings in dollars because the dollar is a terrible store of value. Individuals must work harder to manage their wealth by investing it in assets and financial instruments just to beat inflation. Inflation in the fiat system is especially detrimental to the average Muslim, as it puts them in a dilemma.
With an unpredictably inflationary currency, people tend to be reckless with their depreciating cash. In an inflationary economic landscape, people will want to “make their money work” and cannot hold on to their fiat currency since it’s constantly being devalued. One way to make the money work is to lend it and make a steady income from the interest. Typically, in a fiat system, this is considered a “low-risk” venture since banks are always guaranteed to make loans and barely have any risk of default since they will likely be bailed out. Inflation causes people to get rid of their depreciating cash to acquire any financial instrument that will yield a return, even if it’s unethical. Not only will people be incentivized to consume interest, but they’ll also be incentivized to make risky investments, as long as it brings some kind of revenue.
While banks are certainly motivated to issue as many loans as possible, they’re not actually issuing loans recklessly and with no oversight. This is because the Fed manipulates the interest rate by which commercial banks can borrow and lend. One of the goals of the Fed is to achieve a target interest rate through the buying and selling of government bonds on the open market. By achieving a certain rate, the Fed can effectively influence the growth and contraction of the total money supply. Interest rates and borrowing follow an inverse relationship. If they raise the interest rate, people will borrow less. If they lower the interest rate, people will borrow more.
When a Muslim looks at this fiat system at a cursory level, they might be tempted to conclude, “Well, let’s just get rid of interest rates since that’s riba and everything will be fixed!” However, in this current fiat configuration, driving interest rates down to zero makes things a lot worse. Let’s run through a scenario:
Let’s say that the members of the Fed board all decide to take their “shahadah” — declaration of belief in the oneness of Allahu ta’âlâ and acceptance of Muhammad as God’s prophet — and convert to Islam. Now that they’re Muslim, they decide that they are not going to have interest rates anymore because it’s haram. Jerome Powell, sorry, Sheik Jerome Powell, announces that interest rates will henceforth be zero and the board abolishes interest rates. Now everyone realizes that they can just borrow money since they don’t have to pay any interest on any loans, but remember, the act of lending is the mechanism that creates money. So now, because of everyone’s excessive borrowing, rampant inflation occurs and the purchasing power of the dollar plummets as the price of goods and services increases massively.
This silly scenario illustrates that the interest rate on debt in the fiat system cannot simply be removed. Our current fiat money is specifically designed to not have riba be removed from its source code. Many Muslims think that we should just use Islamic banks to get rid of interest and practice “riba-free banking,” but under the fiat standard, you cannot simply remove interest when the underlying currency is debt. All Islamic banks can do is to use sophisticated financial jargon combined with cool-sounding Arabic words to attempt to hide the riba, and they have already become experts at hiding it. As a prominent critic of Islamic banks on Twitter succinctly wrote:
“Islamic banking relies on legal contracts to hide the real substance [of] their transactions which is riba.” — Safdar Alam
As we can see from our analysis, the Fed uses interest rates as a way to control the money supply. Riba is what makes the debt-denominated fiat system so profitable for those in control and involved in the business of producing and issuing dollars. The important point to remember is that riba is the underlying mechanism that makes fiat work. Before jumping into the subject of Bitcoin, let’s discuss the destructive effects of this modern, riba-powered system.
The Corruption Of Riba
Now that we understand that riba is the underlying protocol that makes the modern monetary system function, let’s explore the repercussions. Banks are incentivized to issue as much debt as possible and profit from the people who are saddled with debt. The longer the person is in debt, the greater the chance for the interest to compound and for the debt to spiral out of control. This type of scenario is prevalent in modern society, especially when you consider the difficulty of paying off debts with a loan-enabled inflationary currency like the dollar. Once a person defaults on their debts, their assets become eligible for the bank to pillage. Under a debt-based currency, individuals become serfs to the bankers, who can conjure up fiat from nothing and profit the most from riba.
Another destructive element of riba is the human labor that is needed to pay back the interest on loans. When a bank issues a loan — and remember that this is the main money-creation mechanism — interest must be paid back. But where does that money come from to pay the interest? Well, one could borrow more money to pay the interest, but this puts them in a spiral of debt. Typically…