Zakat vs Riba | Riba Exposed Series – 2

Two forces have been at odds since the beginning of time; the forces of good and the forces of evil. These battles are manifest in every arena of life, including the economic arena. And it is this economic face/off which is captured in the following verse of Surah al-Rum:

“Whatever Riba you give, so that it may increase in the wealth of the people, it does not increase with Allah; and whatever Zakat you give, seeking Allah’s pleasure with it, (it is multiplied by Allah, and) it is such people who multiply (their wealth in real terms.)” [Qur’an 31:39]

Riba is the devil in the economy. Riba is pure evil. Riba has a predatory nature to it, where the borrower is prey to the lender and is forced to pay regardless of their financial situation. It is Riba which weaponises money, as lending – for those who do not seek reward from Allah – becomes attractive and incentivised when it is profitable with Riba. Thus, lenders earn interest as debt piles on borrowers. Riba impacts behaviour and rewires the mind of lenders. Riba induces greed and a desire of winning at the expense of others. Riba reduces empathy and creates a predatory mentality. The ability to borrow and charge Riba can lead to excessive leverage in business which can lead to business failures. The Global Financial Crisis in 2008 illustrates the carnage Riba can cause at a global level. The crisis was fuelled as a result of Riba-based interest rates, Riba-based lending, Riba-based financial instruments, Riba-based mindsets, and Riba-nurtured greed.

Zakat is the antithesis of Riba, and Zakat opposes Riba in all of its operations. Just as Riba is a vicious and lethal cycle, Zakat is a virtuous and circular cycle. Zakat money is directly pumped into the economy which allows the beneficiaries to purchase goods and services. Money given as Zakat to recipients is traded, invested and used to fulfil needs. These activities, in turn, give capital to businesses generally earning profits and thus, they invest further and expand. Expansion leads to job creation and employment opportunities. Consequently, the new employees increase overall demand for goods and services. Subsequently, the additional demand further develops growth and economic activity of a country which strengthens the currency. Thus, the Zakat payers end up benefiting from the circular benefits of their Zakat.

Constant Zakat payments fuel circulation of wealth helping the community and economy. What starts as a Zakat payment to a needy recipient ends up embracing the entire community and economy. The vulnerable are primarily strengthened but the fruits are plucked by all. Zakat has a trickling effect in the economy.

In societies where Zakat ceases to exist, the precipice between the rich and the poor widens to the point where the love and appreciation shown by the poor is replaced by abhorrence and hatred, and the compassion and charity displayed by the rich is replaced by disdain and scorn.

Zakat helps in reducing the economic gap between the spectrum of classes not only by the capital Zakat payment, but more so with the opportunities a Zakat payment gives to the recipient. 

Zakat is a bridge used for passing over economic strife and when the whole community makes use of this bridge, class conflicts have the potential to become part of history. This bridge also constructs a stable middle class through which increasingly more recipients of Zakat can become payers and a possible clash between the rich and the poor is prevented.

From an economic lens, Zakat discourages hoarding and encourages investment in the real economy, it is like a negative interest rate of 2.5%. Negative interest rates require capital holders to pay for having their funds in accounts. The distinction between Zakat and Riba is at several levels. Riba pays the capital owner for just owning and holding capital even if it is idle or non-productive. On the other hand, Zakat incentivises owners to invest and not hoard. Zakat encourages people to keep excess wealth at a minimum and have the surplus flow in the veins of the economy[1].

When a capital owner’s wealth increases, they have two choices: to either continue to save or to invest. If they continue to save, they must pay 2.5%. This 2.5% will be beneficial and assist individuals and flow through the economy. If they decide to invest, this will also assist the economy and individuals. As such, Zakat ensures redistribution of wealth and the use of wealth for the greater good of all, whilst ensuring the capital owner is not unreasonably disadvantaged or deprived from benefiting from their own wealth. Whereas Riba curtails and dissuades the redistribution of wealth.

The more a pound is circulated in the economy, the greater the impact, and the greater number of goods and services being produced as a result. Zakat brings greater velocity of money. The velocity of money is important for measuring the rate at which money in circulation is being used for purchasing goods and services. It is used to help economists and investors gauge the health and vitality of an economy. High money velocity is usually associated with a healthy, expanding economy. Low money velocity is usually associated with recessions and contractions. Furthermore, the marginal utility of 2.5% in the hands of a poor person is much higher and greater than being in the hands of a billionaire. A billionaire gets very little benefit from 2.5% of his wealth, whilst this 2.5% for a needy person can transform their life. Riba does just that, in general terms, it adds very little marginal utility compared to Zakat. The 2.5% does not make any significant and material change in the life of a Riba earner, it is simply loose change for them. 

Further, as Zakat ensures greater liquidity in the market due to the flowing of capital across the economy through Zakat, there would be a reduced need for printing money. Money would be circulating in the economy annually, in fact constantly through Zakat payments. As such, this could arguably help in reducing inflation.

Imam al-Sarakhsi (rahimahullah) states that transactions are of two types: Halal and Haram; the Halal transactions are Bay’ and the Haram transactions are Riba. These two forces are opposites. We can add to these forces Zakat and harmful and unmanageable debt. Zakat supports Bay’, as the Zakat recipients use the Zakat to buy, sell, invest, pay debt and exchange. This reduces Riba and has a direct impact on the level of debt. Whereas Riba incentivises debt, and they work together. The more debt and Riba, the less there is Zakat and Bay’. The more Zakat and Bay’, hopefully, the less the harmful debt and Riba.

Of course, manageable and halal debt is permissible, and credit sales are permissible. It is when debt is intertwined with Riba that it becomes a recipe for disaster. Therefore, Zakat and Bay’ need to be increased to combat Riba and harmful debt.

From my book: Zakat Made Easy

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[1] Arif, A.D. (2019). Why Zakat is the Antithesis of Interest. Available online at: https://rationalreligion.co.uk/why-zakat-is-the-antithesis-of-interest-explaining-islamic-economics/