Can we predict future?

Ragu Rajan of University of Chicago Booth School of Business tries to explain who is responsible for not forewarning about the financial crisis that has engulfed the entire financial world.

At the height of the financial crisis, the Queen of England asked my friends at the London School of Economics a simple question, but one for which there is no easy answer: Why did academic economists fail to foresee the crisis? There have been several responses to that query. One is that economists simply lacked models that could account for the behavior that led to the crisis. Another is that economists were blinkered by an ideology according to which a free and unfettered market could do no wrong. Finally, an answer that is gaining ground is that the system bribed economists to stay silent. In my view, the truth lies elsewhere. I would argue that three factors largely explain our collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.

He reluctantly accepted that forecasting future events is difficult, if not impossible. Here is another study that shows, why it is so difficult.

Stossel cited a study in the journal Economics and Portfolio Strategy that tracked 452 managed funds from 1990 to 2009, finding that only 13 beat the market average. Equating managed fund directors to “snake-oil salesmen,” Malkiel said that Wall Street is selling Main Street on the belief that experts can consistently time the market and make accurate predictions of when to buy and sell. They can’t. No one can. Not even professional economists and not even for large-scale market indicators. As economics Nobel laureate Paul Samuelson long ago noted in a 1966 Newsweek Column:  “Commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions!”

Even in a given tech area, where you might expect a greater level of specific expertise, economic forecasters fumble. On December 22, 2010, for example, the Wall Street Journal ran a piece on how the great hedge fund financier T. Boone Pickens (chair of BP Capital Management) just abandoned his “Pickens Plan” of investing in wind energy. Pickens invested $2 billion based on his prediction that the price of natural gas would stay high. It didn’t, plummeting as the drilling industry’s ability to unlock methane from shale beds improved, a turn of events even an expert such as Pickens failed to see.

Why are experts (along with us non-experts) so bad at making predictions? The world is a messy, complex and contingent place with countless intervening variables and confounding factors, which our brains are not equipped to evaluate. We evolved the capacity to make snap decisions based on short-term predictions, not rational analysis about long-term investments, and so we deceive ourselves into thinking that experts can foresee the future. This self-deception among professional prognosticators was investigated by University of California, Berkeley, professor Philip E. Tetlock, as reported in his 2005 book Expert Political Judgment. After testing 284 experts in political science, economics, history and journalism in a staggering 82,361 predictions about the future, Tetlock concluded that they did little better than “a dart-throwing chimpanzee.”

The said study concluded that expertise in one area of study leads to narrowed focus and increases confidence but also blurs the value of dissenting views and transforms data collection into belief confirmation. One way to avoid being wrong is to be skeptical whenever you catch yourself making predictions based on reducing complex phenomena into one overarching scheme.

Having said so leads us to nowhere. Since the world is a very complex phenomena and there are many intervening variables, we shall never be able to predict future whatsoever may be at our help. There will always be surprises.

A Hadith of Prophet (PBUH) - Narrated Abdullah Ibn Umar (RAA)

Allah's Apostle said, "The keys of the Unseen are five:

1. Verily with Allah (Alone) is the knowledge of the Hour,
2. He sends down the rain and
3. knows what is in the wombs.
4. No soul knows what it will earn tomorrow, and
5. no soul knows in what land it will die.

Verily, Allah is All-Knower, All-Aware." (31.34) 

Sahih Al-Bukhari  6.151

Pakistan Economy and Loopholes

A balance of payment crisis compelled Pakistan to seek $11.3 billion IMF loan in 2008. Strings attached with the loan invited harsh criticism from the political parties and business groups. The three-point reform agenda requires implementation of reformed sales tax, reduction in budget deficit and end to government subsidies. At present, Pakistan is in a peculiar situation today. Fiscal deficit is high, debt is increasing rapidly, growth is minimal and unemployment on the rise. The mounting debt and liabilities, approaching Rs11,000 billion, doubling in the last three years, is being used for non-productive expenditure. The budget deficit is set to hit 7.5 percent against the targeted 4.7 percent for fiscal 2010/11 (July-June). Pakistan badly needs to generate additional revenue to meet its budgetary deficit and conditions agreed to IMF. That is why the Govt. is doing all what it can to win favors for RGST but still it looks a far cry. While the IMF forecasts emerging economies, notably China and India, to drive the global growth, Pakistan’s economic sovereignty is facing serious challenges. The debt profile of the country is worsening day by day with fears of a looming debt trap. With over half a billion debt increase in the first quarter of FY11, shared equally by domestic and foreign components, the country’s total debt reached Rs10.7 trillion. With fiscal deficit threatening to reach Rs1.5 billion for FY11, according to the Finmin, a significant rise in the country’s debt is inevitable.

But on the other hand there are many loopholes that if plugged can generate all the necessary revenue without resorting to increase in power tariff and RGST. One such case is “ISAF Missing Containers”.

The International Security Assistance Force (ISAF) is a NATO-led security mission in Afghanistan established by the United Nations Security Council on 20 December 2001 by Resolution 1386 as envisaged by the Bonn Agreement. It is engaged in the War in Afghanistan (2001–present).

ISAF started importing goods through Karachi and established Forward Mounting Base (FMB) unit at Karachi in 2002 as part of co-ordination mechanism by designating one of the its officers at Karachi to regularly co-ordinate customs clearance matters with Additional Collector Customs Karachi Port. But this co-ordination system fizzled out when the FMB was shifted by ISAF to Kabul within a year of its establishment at Karachi. In June 2010, it was leaked to media that over 11,000 ISAF containers with equipment worth Rs220 billion went missing during the last two years or so.

The FBR data showed that during the period June 2005-2010, a total of 558,141 containers were transited to Afghanistan. Of these, 166,949 (30 percent) containers belonged to the US Military; 52,929 (9 percent) to ISAF/Nato and the remaining 338,263 (61 percent) were commercial ATT consignments. The biggest aspect of the ISAF Containers Scam is the non-availability of the data on the movement of ISAF containers. The FTO report on the scam shows that in response to data requisitioned from FBR for the period January 1, 2007 to October 15, 2010, Pakistan Revenue Automation Limited (PRAL) confirmed that Karachi Customs had handled a total of 306,267 transit containers during this period. For 71,202 containers, there is no information regarding either their departure from Karachi or their arrival at the border customs stations. In case of 27,871 containers, that did arrive at the destinations, their departure information from Karachi is not available. Another 55,140 containers are shown to have left Karachi but have no entries of arrival at the border stations. A total of 152,054 containers have records for departure from Karachi and arrival at the border customs station, but no record of crossing into Afghanistan. Finally, not a single container, out of 306,267, is recorded to have ever crossed over to Afghanistan during the almost four-year period under reference. According to one informed insider, the arrival or otherwise of the ‘missing containers’ could be verified from the ISAF Kabul officials. The containers that were meant to go missing after availing of ISAF duty-tax free clearance by Customs were never meant to reach ISAF warehouses in Kabul and therefore the ISAF headquarters could easily confirm whether they ever arrived in Kabul or not.

It is estimated very conservatively that the scandal involving the ISAF containers have caused a huge loss of over Rs 37 billion to the economy. Chief Justice Iftikhar Mohammad Chaudhary on Wednesday hearing the embezzlement of billions of rupees in International Security Assistance Force (ISAF) containers case observed that revelations made in the Federal Tax Ombudsman report is just the tip of the iceberg, as further investigations could divulge much more. He said because of smuggling the national exchequer faces a loss of $2 billion every year.  The Chief Justice further said that even the Islamabad markets are flooded with the smuggled goods. Justice Ramday said that the domestic barrowing have reached Rs4008 billion since 2008 to 2010. The court wondered that besides the smuggling of alcohol and arms, what else is being smuggled on the pretext of Afghan trade.

The Afghan Transit Trade Agreement (ATTA) scam is bleeding our beleaguered economy dry to the tune of up to Rs37 billion per year . The ATTA allows goods destined for Afghanistan to transit through Pakistan duty free but ATTA goods, amounting to an estimated $2 billion, either stay in Pakistan or are smuggled back in. Described as the “main source of smuggling” in Pakistan, the ATTA scam is hemorrhaging our economy on several fronts. The ATTA has become an unmitigated source of customs duty evasion. When the Federal Board of Revenue (FBR) enhances duties on any product, official imports to Pakistan decline as people shift to import the same product, fraudulently, under the ATTA. Such was the case with stainless steel imports, which doubled under ATTA within six months, immediately after duties were increased on it. So the ATTA has dented the FBR authorities’ ability to accrue revenue via customs duties which, when combined with the stranglehold of the feudal and political classes on preventing income tax collection, has stymied Pakistan’s tax-to-GDP ratio to an eye-watering nine per cent. This is a critical issue for the nation’s economic future. The extent of the problem with ATTA is borne out by the fact that Afghanistan’s per capita imports are 72 per cent higher than Pakistan, even though its GDP per capita is almost 300 per cent lower. The statistics reveal the extent of smuggling into Pakistan. The Afghan economy cannot sustain such high imports. In fact, 80 per cent of these goods are smuggled into Pakistan, damaging local industry and destroying legal businesses here. Worse still, Pakistan’s high-value edibles are smuggled into Afghanistan, bleeding our exchequer further, as both fertilizers and flour are heavily subsidized by the government. The resultant shortage in Pakistan drives up prices — another body blow for the Pakistani people, already bludgeoned by food inflation.

Revenue loss on account of smuggling of Afghan transit trade alone, as estimated by the World Bank, amounted to US$ 35 billion during nine years from 2001 to 2009. It is no secret that Pakistani tax evaders have been transferring to Swiss banks huge amounts of money generated through illegal activities by some politicians, bureaucrats, terrorist networks and businessmen to Swiss banks. White-collar crimes are also responsible for facilitating transfer of capital towards informal economy either from the black market or the formal economy with the connivance of FRB’s officials. Due to Pakistan’s low productivity resulting from massive exemptions, poor administration, low threshold, and lack of transparency and enforcement, the country faces a massive challenge of balancing low revenues and the avaricious politicians, corrupt bureaucrats, and greedy businessmen, who are mostly crook, corrupt and tax evaders, succeed to remit this black money to their hidden accounts in Switzerland and other European countries. On the one hand parallel economy in Pakistan is growing at an alarming rate of 20 percent per annum and on the other hand, according to an estimate, the money lying in Swiss banks of Pakistanis has reached to the tune of US $200 billion. The volume of black money generated in the year 2008-09 alone has been measured by the independent sources which is not less than $ 40 billion. The rent-seekers and beneficiaries of loan write-offs in Pakistan have also shifted funds worth billions of dollars to Switzerland.

What caused food inflation?

In 2008, the government pushed the procurement price of wheat up from Rs. 625 per 40 kg to Rs. 950 per 40 kg. This action immediately triggered inflationary pressures that have continued to persist as food accounts for just over 40% of Pakistan's consumer price index. According to State Bank of Pakistan (SBP) analysis, cumulative price of wheat surged by 120 per cent since 2008, far higher than the 40 per cent between 2003 and 2007. it is also many times greater than the international market price increase of 22 per cent for wheat in the same period. Similarly,sugar prices have surged 184 per cent higher since 2008, compared with 46 per cent increase during 2003-07.

Some have attributed this rise in prices to recent flood and global food crisis. Yet some relate this price increase to poor harvest and strong demand from emerging economies.

This food inflation is a cause of concern for the policy makers and it is suggested that underlying the sudden, volatile uprising in Egypt and Tunisia is a growing global crisis sparked by soaring food prices.

Here is an excerpt from an article that throws flood light on to the causes of food price escalation.

The cause of the recent jump in global food prices remains a matter of debate. Some analysts blame the Federal Reserve’s “quantitative easing” program (increasing the money supply with credit created with accounting entries), which they warn is sparking hyperinflation. Too much money chasing too few goods is the classic explanation for rising prices.

The problem with that theory is that the global money supply has actually shrunk since 2006, when food prices began their dramatic rise. Virtually all money today is created on the books of banks as “credit” or “debt,” and overall lending has shrunk. This has occurred in an accelerating process of deleveraging (paying down or writing off loans and not making new ones), as the subprime housing market has collapsed and bank capital requirements have been raised. Although it seems counterintuitive, the more debt there is, the more money there is in the system. As debt shrinks, the money supply shrinks in tandem.

That is why government debt today is not actually the bugaboo it is being made out to be by the deficit terrorists. The flipside of debt is credit, and businesses run on it. When credit collapses, trade collapses. When private debt shrinks, public debt must therefore step in to replace it. The “good” credit or debt is the kind used for building infrastructure and other productive capacity, increasing the Gross Domestic Product and wages; and this is the kind governments are in a position to employ. The parasitic forms of credit or debt are the gamblers’ money-making-money schemes, which add nothing to GDP.

Prices have been driven up by too much money chasing too few goods, but the money is chasing only certain selected goods. Food and fuel prices are up, but housing prices are down. The net result is that overall price inflation remains low.

While quantitative easing may not be the culprit, Fed action has driven the rush into commodities. In response to the banking crisis of 2008, the Federal Reserve dropped the Fed funds rate (the rate at which banks borrow from each other) nearly to zero. This has allowed banks and their customers to borrow in the U.S. at very low rates and invest abroad for higher returns, creating a dollar “carry trade.”

Meanwhile, interest rates on federal securities were also driven to very low levels, leaving investors without that safe, stable option for funding their retirements. “Hot money” – investment seeking higher returns – fled from the collapsed housing market into anything but the dollar, which generally meant fleeing into commodities.

At one time food was considered a poor speculative investment, because it was too perishable to be stored until market conditions were right for resale. But that changed with the development of ETFs (exchange-traded funds) and other financial innovations.

As first devised, speculation in food futures was fairly innocuous, since when the contract expired, somebody actually had to buy the product at the “spot” or cash price. This forced the fanciful futures price and the more realistic spot price into alignment. But that changed in 1991. In a revealing July 2010 report in Harper’s Magazine titled “The Food Bubble: How Wall Street Starved Millions and Got Away with It,” Frederick Kaufman wrote:

The history of food took an ominous turn in 1991, at a time when no one was paying much attention. That was the year Goldman Sachs decided our daily bread might make an excellent investment. . . .

Robber barons, gold bugs, and financiers of every stripe had long dreamed of controlling all of something everybody needed or desired, then holding back the supply as demand drove up prices.

Strange Coincidence By RK Kaushik

In history, sometimes along with human beings institutions also migrate. In the year 1947, one such institution, which migrated from Amritsar to Lahore was Muslim Anglo-Oriental (MAO) College. This college had a very famous Principal, who was also the first person from Punjab to get a PhD in English from Cambridge University of England.

It was one day in the summer of 1937 that he, a bachelor, went for shopping in Hall Bazaar of Amritsar. As ill luck would have it, he forgot his purse in the shop and came back. A British lady by the name of Ms. Christable picked up the purse and went next day to return it to Prof. Mohammed Din in his college.

Since the British lady had also been a Cambridge student, an instant friendship started. May be, that was love at first sight. Later, they decided to get married and their Nikah ceremony was performed by Sir Allama Iqbal.

Prof. Mohammed Din had three children — two daughters followed by a son, who was born in 1946. Christable’s younger sister Alys also started visiting Amritsar and developed a liking for a lecturer of English at MAO College named Faiz Ahmed Faiz. The younger sister followed the elder one and married Faiz.

At the time of Partition, most of the Muslim students and teachers of MAO College of Amritsar moved to Pakistan along with the college. The college itself got shifted to the premises of DAV College of Lahore located in the lower Mall. It still runs there.

Prof Mohammed Din was handsome and a voracious reader, besides being a famous Urdu poet, with the surname of Taseer. He took over the Principalship of Islamia College, Lahore. Prof. Mohammed Din Taseer had an early death in the late 50s. His son and two daughters were brought up by his wife Christable — now converted to Islam with the new name Bilquees. The daughters settled in England after marriage in Muslim families and the son, Salman Taseer, became a chartered accountant. He later joined politics and became a famous leader of the Pakistan People’s Party. He became the Governor of Punjab province of Pakistan in May 2008 and was murdered a few days ago by a fanatic.

Sometimes I think that had Prof Mohammed Din not lost his purse in the shop in Hall Bazaar, Amritsar, and had that not been found by the British damsel, many such events would not have happened.

Salman Taseer was murdered because of his stand on the blasphemy law regarding Holy Prophet. There is a strange coincidence. His father too had praised, defended and arranged for the funeral of Illamddin in 1929 because Illamddin, who had killed Rajpal Malhotra, the owner of Hind Pocket Books and father of former Punjab Governor Surender Nath because of his comments on Holy Prophet.

Raymond Davis, Diplomatic Immunity and Hypocrisy of USA

Article 31(1) of Vienna Convention on Diplomatic Relations 1961 states

A diplomatic agent shall enjoy immunity from the criminal jurisdiction of the receiving State. He shall also enjoy immunity from its civil and administrative jurisdiction, except in the case of: …….

Article 41(1) of the convention states

Without prejudice to their privileges and immunities, it is the duty of all persons enjoying such privileges and immunities to respect the laws and regulations of the receiving State. They also have a duty not to interfere in the internal affairs of that State.

Raymond Davis, an employee of the American Consulate in Lahore, shot dead two Pakistanis on Jan. 27, claiming that he had acted in self-defense. Davis, driving a white-color car, was later arrested as his car was stuck up in the traffic after his brazen attack. Another Pakistani was crushed to death by the U.S. consulate car, when it arrived at the scene for Davis help. The police registered a double-murder case against the U.S. national on the requests by families of the slain men. The police said the accused had also been charged for carrying illegal arms as he failed to show license for his pistol.
Davis had introduced himself to the police as Technical Advisor in the American Consulate in Lahore.

The Davis incident brings up many questions. Firstly, who IS Raymond Davis? Reports are still mixed. According to ABC News, Davis is a private security officer. The U.S. Embassy in Islamabad calls Davis a "diplomat". The truth is anyone's guess. The U.S Embassy says Davis was "assigned to the U.S. Embassy in Islamabad, has a U.S. diplomatic passport and Pakistani visa valid until June 2012." They have called for his release, saying that as a diplomat, Davis has immunity under the Vienna Convention. But on Sunday night, Dawn News, a local Urdu channel, broadcast what it says are images of Davis' passport -- which did not have a diplomatic visa.

Though the United States on Saturday formally requested diplomatic immunity for an American who killed two people before a large number of people, the US itself has not granted similar immunity to even senior diplomats of other countries involved in such cases in the US. In the 1997 case, Gueorgui Makharadze, the Georgian ambassador in Washington, had killed an American teenager in a road accident. The then US president Bill Clinton had flatly refused to grant diplomatic immunity to the Georgian diplomat and consequently Makharadze was sentenced to 21 years by a US court. Pakistan’s New York-based permanent representative to the UN, Munir Akram, got involved in a case involving his live-in girlfriend, he was not given diplomatic immunity. In a minor case of very little significance in 1982, a North Korean diplomat grabbed a woman’s breasts in a park in Eastchester, outside New York City and then took shelter in his country’s UN mission for 10 months before he finally pleaded guilty of a minor charge and then left the country. Minister Kamal Nath, a Congress Leader and a Indian Union Minister in the Government led by Prime Minister Dr. Manmohan Singh, had sought diplomatic immunity who is an accused in the infamous Sikh Genocide of 1984. After being summoned by the US Court in 2010, he has been denied diplomatic immunity by US Department of State.

United States is equally hypocrite when its diplomats are involved in abuse of diplomatic immunity. An American Marine serving his embassy in Bucharest, Romania, collided with a taxi and killed the popular Romanian musician Teo Peter on December 3, 2004. Christopher Van Goethem, allegedly drunk, did not obey a traffic signal to stop, which resulted in the collision of his Ford Expedition with the taxi the rock star was travelling in. Van Goethem's blood alcohol content was estimated at 0.09% from a breathalyser test, but he refused to give a blood sample for further testing and left for Germany before charges could be filed in Romania. The Romanian government requested the American government lift his immunity, which it has refused to do. An American diplomat, Consul General Douglas Kent, stationed in Vladivostok, Russia, was involved in a car accident on October 27, 1998, that left a young man, Alexander Kashin, crippled. Kent was not prosecuted in a U.S. court. Under the Vienna Convention on Consular Relations of 1963, diplomatic immunity does not apply to civil actions relating to vehicular accidents. However, on 10 August 2006, a U.S. Court of Appeals ruled that since he was using his own vehicle for consular purposes, Kent may not be sued civilly.

The hypocrisy of United States does not end with diplomats only, it extends to other diplomatic immunity areas as well. The biggest headache for the British authorities remains the collection of fines from diplomatic missions resulting from their refusal to pay the congestion charge for driving into the center of London. Embassies have clocked up fines totaling 36 million pounds (US$54 million), with the U.S. embassy alone owing 3.8 million pounds, the figures showed. UNITED NATIONS – Diplomatic immunity might allow foreign embassies to avoid paying parking fines. It’s nearly $18 million dollars, with the Top Ten worst offenders accounting for approximately $8 million of this staggering figure. Congressman Weiner said ““It’s insulting to all New Yorkers that countries like Yemen, Zimbabwe and Iran owe the City millions in unpaid parking tickets”.

The United States has had a history of being reluctant to pay its U.N. dues, with critics of the world body charging it has a bloated and sometimes corrupt bureaucracy. U.N. supporters say the dues are cheap at the price. The announcement about the reduction in U.S. arrears at the United Nations comes as U.S. Republicans threatened on Tuesday to use their new power as the majority in the House of Representatives to withhold funding for the world body, which they accused of waste and bias. The United States has paid off more than a third of the nearly $1.2 billion in payments it owed the United Nations at the end of last year.

Raymond Davis Incident - Same Happened Once in 1964

I am pasting below an excerpt from the Imam Khomeini's Speech that he delivered after a similar incident (referring to Raymond Davis Incident) took place in Iran - 1964. After the speech, which incited a lot of people, he was sent in exile in November the same year. I am sure you will be able to relate it with what has happened in Lahore.....

Khomeini's Speech Excerpts “The Granting of Capitaluatory Rights to the USA“ 27 October, 1964

.I cannot express the sorrow I feel in my heart Iran no longer has any festival to celebrate; they have turned our festival into mourning…They have sold us, they have sold our independence; but still they light up the city and dance The dignity of the Iranian Army has been trampled underfoot! A law has been put before the Majlis according to which we are to accede to the Vienna Convention, and a provision has been added to it that all American military advisers, together with their families, technical, and administrative officials, and servants   “ in short, anyone in any way connected to them " are to enjoy legal immunity with respect to any crime they may commit in Iran. If some American's servant, some American cook, assassinates your marja in the middle of the bazaar, or runs over him, the Iranian police do not have the right to apprehend him! Iranian courts do not have the right to judge him! The dossier must be sent to America, so that our master there can decide what is to be done They have reduced the Iranian people to a level lower than that of the American dog. If someone runs over a dog belonging to an American, he will be persecuted. But if an American cook runs over the Shah, the head of the state, no one will have the right to interfere with him. Why? Because they wanted a loan and Americans demanded this in return.

Source: Islam and Revolution: Writings and Declarations of Imam Khomeini, p 181-188. 

A visiting delegation of the powerful US House Armed Services Committee conveyed a veiled threat on Friday that Pakistan-US defense cooperation could be under cloud if the standoff persisted on the issue of immunity for Raymond Davis, an American national accused of killing two men in Lahore.

Shumaila, the widow of Muhammad Faheem, one of the two civilians shot dead in Lahore by a US citizen Raymond Davis committed suicide after taking poisonous pills on Sunday. The United States on Monday called the suicide of the wife of a Pakistani shot by a US official "a tragedy" but renewed calls on the country to free the American. The United States has put all bilateral contacts with Pakistan on hold until Islamabad releases an employee of the its consulate in Lahore, arrested for shooting down two men, diplomatic sources told Dawn.

The government on Saturday appeared to be all set to grant `immunity` to Raymond Davis, accused of double murder in Lahore, after Washington limited its bilateral interaction with Islamabad till the resolution of the matter. Apart from the pressure from Washington, what may have led the government to this decision was a message from Pakistan`s Ambassador to the US, Hussain Haqqani. He urged the government to grant immunity to Davis at the earliest. His message was sent after the State Department virtually snapped all communication with the embassy in Washington. According to a top diplomatic source, a cable from the Washington embassy clearly warned that the diplomatic stand-off with the US was likely to grow more intense with each passing day. The cable is said to have also conveyed the strong sentiments in Washington on the issue and said that the US could go all out to get Davis released.

Below is a last paragraph of a column from Mr. Irfan Siddiqi on the subject of this blog:

Difference in Cash and Credit Price and Islamic Finance

Difference of cash and credit price charged by suppliers looks like Time value of Money and in Islam charging for time in relation to money is prohibited as Riba. Is it so? The answer can be found by analyzing what is Riba, nature of money in Islamic Economics, Time Value of Money and rulings on credit transactions.

Usury from Medieval Latin usuria, "interest", or from Latin usura, "interest") originally was the charging of interest on loans; this included charging a fee for the use of money, such as at a bureau de change. In places where interest became acceptable, usury was interest above the rate allowed by law. Today, usury commonly is the charging of unreasonable or relatively high rates of interest. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrew word. "When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not." (Blackstone's Commentaries on the Laws of England, p. 1336).

The Holy Qur'an did not give any definition for the term for the simple reason that it was well known to its immediate audience. It is like the prohibition of pork, liquor, gambling, adultery etc, which were imposed without giving any hard and fast definition because all these terms were well known and there was no ambiguity in their meaning. Similar was the case of riba. It was not a term foreign to Arabs. They all used the term in their mutual transactions. Not only Arabs but all the previous societies used to practice it in their financial dealings and nobody had any confusion about its exact sense.

Hadith while explaining the word riba has mentioned in detail the transactions of riba which were used to be effected by the Arabs of Jahiliyya on the basis of which the earliest commentators of the Holy Qur'an have defined riba in clear terms. Imam Abubakr Al-Jassas (D.380 AH) in his famous work Ahkamul Qur'an has explained riba in the following words: "And the riba which was known to and practiced by the Arabs was that they used to advance loan in the form of Dirham (silver coin) or Dinar (gold coin) for a certain term with an agreed increase on the amount of the principal advanced." On the basis of this practice the same author has defined the term in the following words: "The riba of Jahiliyya is a loan given for stipulated period with a stipulated increase on the principal payable by the loanee." The well-known Imam Fakhruddin Al-Raazi has mentioned the practice of riba in the days of Jahiliyya as follows: "As for the riba An-Nasiah, it was a transaction well-known and recognized in the days of Jahiliyya i.e. they used to give money with a condition that they will charge a particular amount monthly and the principal will remain due as it is. Then on the maturity date they demanded the debtor to pay the principal. If he could not pay, they would increase the term and the payable amount. So it was the riba practiced by the people of Jahiliyya."

The claim of an increased amount over the principal had different forms in the days of Jahiliyya. Firstly, while advancing a loan the creditor used to claim an increased amount over the principal and would advance loan on this clearly stipulated condition as is mentioned by Imam Al-Jassas in his Ahkamul Qur'an already quoted above. Secondly, the creditor used to charge a monthly return from the debtor while the principal amount would remain intact up to the day of maturity as mentioned by Imam Ar-Raazi and Ibn Aadil already quoted. The third form is mentioned by Mujahid, but the full explanation of this transaction is given by Ibn Jarir himself on the authority of Qatadah in the following words: "The Riba of Jahiliyya was a transaction whereby a person used to sell a commodity for a price payable at a future specific date, thereafter when the date of payment came and the buyer was not able to pay, the seller used to increase the amount due and give him more time." The same explanation has been given by al-Suyuti on the authority of Faryabi in the following words: "They used to purchase a commodity on the basis of deferred payment, then on the date of maturity the sellers used to increase the due amount and increase the time of payment." This form of Riba has been frequently mentioned by the commentators of the Holy Qur'an because they wanted to explain a particular sentence of the verses of Riba which is as follows: "The non-believers say that sale is very similar to Riba." (Aya 275 of Sura Al-Baqarah). This saying of the non-believers clearly refers to the particular transaction of sale mentioned above. Their objection was that when we increase the price of commodity in the original transaction of sale because of its being based on deferred payment, it is treated as a valid sale. But when we want to increase the due amount after the maturity date, when the debtor is not able to pay, it is termed as Riba while the increase in both cases seems to be similar. This objection of the non-believers of Makkah has been specifically mentioned by the famous commentator Ibn Abi Hatim on the authority of Said ibn Jubair: "They used to say that it is all equal whether we increase the price in the beginning of the sale, or we increase it at the time of maturity. Both are equal. It is this objection which has been referred to in the verse by saying 'They say that the sale is very similar to Riba.'” The same explanation is given in al-Bahr al-Muheet by Abu Hayyan and several other original commentators of the Holy Qur'an. It clearly shows that the practice of increase at the time of maturity relates to two situations: firstly, a situation where the original transaction was that of sale of a commodity as mentioned by Qatadah, Faryabi, Saeed Ibn Jubair etc, and the second situation was where the original transaction was that of a loan whereby monthly interest used to be charged by the creditor and the principal amount used to remain intact until the date of maturity, and if the debtor would not pay the principal at that point of time, the creditor used to increase the due amount on the principal in exchange of further time given to debtor. It is thus established that the Riba prohibited by the Holy Qur'an was not confined to one transaction only. It had different forms which all were practiced by the Arabs of Jahiliyya. The common feature of all these transactions is that an increased amount was charged on the principal amount of a debt. At times, this debt was created through a transaction of sale and it was created through a loan. Similarly, the increased amount was at times charged on monthly basis, while the principal was to be paid at a stipulated date, and some time it was charged along with the principal. All these forms used to be called Riba because the lexical meaning of the term is increase. That is why, the commentators of the Holy Qur'an like Imam Abu bakr al-Jassas have defined the term in the following words: "The Riba of Jahiliyya is a loan given for a stipulated period against increase on the principal payable by the Loanee."

One of the wrong presumptions on which all theories of interest are based is that money has been treated as a commodity. It is, therefore, argued that just as a merchant can sell his commodity for a higher price than his cost, he can also sell his money for a higher price than its face value, or just as he can lease his property and can charge a rent against it, he can also lend his money and can claim interest thereupon.

Imam Al-Ghazzali (d.505 A.H.) the renowned jurist and philosopher of the Islamic history has discussed the nature of money in an early period when the Western theories of money were non-existent. He says:

"The creation of dirhams and dinars (money) is one of the blessings of Allah…. They are stones having no intrinsic usufruct or utility, but all human beings need them, because every body needs a large number of commodities for his eating, wearing etc, and often he does not have what he needs and does have what he needs not.. Therefore, the transactions of exchange are inevitable. But there must be a measure on the basis of which price can be determined, because the exchanged commodities are neither of the same type, nor of the same measure which can determine how much quantity of one commodity is a just price for another. Therefore, all these commodities need a mediator to judge their exact value…. Allah Almighty has, therefore, created dirhams and dinars (money) as judges and mediators between all commodities so that all objects of wealth are measured through them… and their being the measure of the value of all commodities is based on the fact that they are not an objective in themselves. Had they been an objective in themselves, one could have a specific purpose for keeping them which might have given them more importance according to his intention while the one who had no such purpose would have not given them such importance and thus the whole system would have been disturbed. That is why Allah has created them, so that they may be circulated between hands and act as a fair judge between different commodities and work as a medium to acquire other things…. So, the one who owns them is as he owns every thing, unlike the one who owns a cloth, because he owns only a cloth, therefore, if he needs food, the owner of the food may not be interested in exchanging his food for cloth, because he may need an animal for example. Therefore, there was needed a thing which in its appearance is nothing, but in its essence is everything. The thing which has no particular form may have different forms in relation to other things like a mirror which has no color, but it reflects every color. The same is the case of money. It is not an objective in itself, but it is an instrument to lead to all objectives…

So, the one who is using money in a manner contrary to its basic purpose is, in fact, disregarding the blessings of Allah. Consequently, whoever hoards money is doing injustice to it and is defeating their actual purpose. He is like the one who detains a ruler in a prison…

And whoever effects the transactions of interest on money is, in fact, discarding the blessing of Allah and is committing injustice, because money is created for some other things, not for itself. So, the one who has started trading in money itself has made it an objective contrary to the original wisdom behind its creation, because it is injustice to use money for a purpose other than what it was created for…. If it is allowed for him to trade in money itself, money will become his ultimate goal and will remain detained with him like hoarded money. And imprisoning a ruler or restricting a postman from conveying messages is nothing but injustice."

Time value of Money has been defined as The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Money that you hold today is worth more because you can invest it and earn interest. After all, you should receive some compensation for foregoing spending. A key concept of TVM is that a single sum of money or a series of equal, evenly-spaced payments or receipts promised in the future can be converted to an equivalent value today.  Conversely, you can determine the value to which a single sum or a series of future payments will grow to at some future date. The basic idea of time value of money is that a Rupee today is worth more than a Rupee tomorrow. This can be shown in many ways, many people find it easiest to understand if they think in terms of something they already know: food. For example having the money today allows you to buy some food immediately. Alternatively you may be willing to forgo current consumption and wait until later to purchase your food. Thus you could lend your "food money" to another with the promise of being paid back at some future time. Since you are passing up food today you would demand a return sufficient to allow you to buy at least as much food in the future that you are giving up now. As we do not know the future this type of deal involves risks. For example the borrower may decided to not pay you back. This is called default risk. Or the borrower may pay you back but due to rising prices you can no longer purchase the same amount of food as you had expected to be able to buy. As a result of these risks (you as a lender) would require a higher interest rate to compensate for accepting the risks. However if you ask for too high of interest rates you will not find any takers for your loan.

Islam acknowledges an increment in a commodity’s price in any sale contract to be paid at a future date, as long as money’s time value is not claimed as a predetermined value. In other words, any conditional increase in the loan’s principal in return for a deferred repayment due to an expected depreciation in the value of the money, asset, or other factors (e.g., inflation and commercial losses) is prohibited. The following few quotations from traditional jurists exemplify that increasing the price of a commodity for delay is acceptable:

1. Al-Kasani (Hanafi) in Bada’i`i al-Sana’i`i: “The price may be increased based on deferment.”
2. Ibn Rushd (Maliki) in Bidayat al-Mujtahid: “He has given time a share in the price.”
3. Al-Nawawi (Shafi`i) in Al-Majmu`: “Deferment earns a portion of the price.”
4. ‘Ibn Taymiyah (Hanbali) in his Fatawa: “Deferment takes a share of the price.”

This is tantamount to the acceptance of time value in the pricing of goods. What is prohibited is any addition to the commodity’s price once it has been mutually agreed upon, because of any delay in its payment. Such a prohibition also suggests that Islam does not permit a fixed predetermined time value for money. The reasons behind the permissibility of increasing the price of a commodity in credit sales  is that once the commodity is sold, even on credit, the purchaser retains its ownership on a permanent basis, and thus the seller has no right to reprice the sold commodity, since it no longer belongs to him/her. Jalal al-Din al-Suyuti (d. 911/1507) and Ibn Jarir al-Tabari (d. 310/922) reported the similar situation of involvement with riba in which a person sold a commodity on credit; when the payment was due and the purchaser could not repay it, the price was increased and the time for payment was extended. Imam Tirmidhi (d. 279/857) reported that the Prophet (pbuh) forbade “two sales in a single contract.”

Following is a Hadith from Al-Muwata 31.74, which throws some light on the term “Two Sales in One Sale”.

Yahya related to me from Malik that he had heard that al-Qasim ibn Muhammad was asked about a man who bought goods for 10 dinars cash or fifteen dinars on credit. He disapproved of that and forbade it.

Malik said that if a man bought goods from a man for either 10 dinars or 15 dinars on credit, that one of the two prices was obliged on the buyer. It was not to be done because if he postponed paying the ten, it would be 15 on credit, and if he paid the ten, he would buy with it what was worth fifteen dinars on credit.

Malik said that it was disapproved of for a man to buy goods from someone for either a dinar cash or for a described sheep on credit and that one of the two prices was obliged on him. It was not to be done because the Messenger of Allah, may Allah bless him and grant him peace, forbade two sales in one sale. This was part of two sales in the one sale.

Malik spoke about a man saying to another, "'I will either buy these fifteen sa of ajwa dates from you, or these ten sa of sayhani dates or I will buy these fifteen sa of inferior wheat or these ten sa of Syrian wheat for a dinar, and one of them is obliged to me.' Malik said that it was disapproved of and was not halal. That was because he obliged him ten sa of sayhani, and left them and took fifteen sa of ajwa, or he was obliged fifteen sa of inferior wheat and left them and took ten sa of Syrian wheat. This was also disapproved of, and was not halal. It resembled what was prohibited in the way of two sales in one sale. It was also included under the prohibition against buying two for one of the same sort of food."

Islamic jurists have explained this to mean that, for instance, if a person tells someone: “I will sell this cloth for ten (dirhams) in cash and on credit for twenty (dirhams)” and, at separation, one price is not settled. If one of the two prices is settled, he sale is valid. Al-Tirmidhi also added that if a seller says: “I sell the cloth for 10 (dirhams) cash and 20 (dirhams) on credit” and the buyer accepts one of these prices or says: “I will purchase it for 20 (dirhams) on credit,” or the parties differ on the price, the sale is still valid.

While it is best to buy an article by paying cash, it is also permissible to buy on credit by mutual consent. A group of jurists are of the opinion that, should the seller increase his price if the buyer asks for deferred payments, as is common in installment buying, the price differential due to the time delay resembles interest, which is likewise a price for time; accordingly, they declare such sales to be haram. However, the majority of scholars permit it because the basic principle is the permissibility of things, and no clear text exists prohibiting such a transaction. Furthermore, there is, on the whole, no resemblance to interest in such a transaction, since the seller is free to increase the price as he deems proper, as long as it is not to the extent of blatant exploitation or clear injustice, in which case it is haram. Al-Shawkani says, "On the basic of legal reasons, the followers of Shafi'i and Hanafi schools, Zaid bin 'Ali, al-Muayyid Billah, and the majority of scholars consider it lawful." (Nayl al-awtar,vol. 5, p. 153. Al-Shawkani said, "We have compiled a treatise on this subject and have called it 'Shifa al'ilal fi hukum ziyadat al-thamam li mujarrad al-ajal' (The Reason for Increasing the Price Due to Lapse of Time), and have researched it thoroughly.")

The condition for the credit price to be different from cash price of a commodity is that the parties to transaction must settle one price before parting otherwise the difference of cash and credit price is not permitted.When one of the price is settled, seller cannot change the price based on any change in payment period as this would constitute Riba.

Money’s time value is acceptable in the case of pricing assets and their usufruct, it is not acceptable in the case of any addition to the loan’s or debt’s principal. Time valuation is possible only in business and the trade of goods, not in the exchange of monetary values and loans or debts, as the Shari`ah considers a loan to be a virtuous act from which one cannot take any benefit. Therefore, no time value can be added to a loan’s or a debt’s principal after it has been created or the purchaser’s liability has been stipulated.

Yusuf Al-Qaradawi has followed the footsteps of Hazrat Umar (RAA) who said that “We have given up 90% of all legitimate transactions for the fear that an element of Riba might be present in them.” When you are in doubt about a transaction whether it involves an element of Riba or not just give up.