Are We Ready to Do Away With Interest?

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The Opportunity I was Talking About
by Nidal Sakr

(MAF - 10/5/08) If the obvious answer is “Not”, I contend that such an answer may be short-lived. After all, our current crisis is squarely blamed on interest.
From policy makers’ perspective, interest has been the magic stick to keep things afloat. By lowering interest rate, banks would offer more credit, and people would borrow more money. Banks would make money charging interest on these loans, and people have their dreams come true with the dream home or car they buy. As banks charged lower interest, more people borrowed and banks lent more to make more money, so people borrowed more to buy more. Things looked so good that banks started borrowing at lower interest rates and charging higher rates making profit on the difference between the rates they charge and the rates they pay. The economy heated up, home prices rose so banks were giving bigger loans. We entered a phase of a sucker economy where banks would lend to those who had nothing but the dream of owning a house without having the income to make its payments, and the banks would sell those loans off to get more money to lend.

Then came the reality check, when the economy returned to normalcy given a series of irresponsible fiscal, foreign, and economic debacles. Confidence in the soundness of our system was shaken. Money available to banks, lenders, borrowers, and employers began to recede. Unemployment rose, people could no longer make good on their payments, foreclosure skyrocketed, home prices plummeted, and the economy started to crumble. Banks are holding deeds to properties that are worth only a fraction of the loan they gave to finance purchases. Banks can no longer get money to stay in the business of lending, and the meltdown ensued.
From lenders and borrowers perspective, the government’s magic stick was not but a magic whip that brought their lives to streaking hold, and turned their dreams into a terrible nightmare.

That is the new American story in a nutshell. At the center of it all is that interest rate. With regulations or not, that is what interest rate does. You can keep it in check for a while but you never know when it will blow up in your face.

One may say, but that is what our economy is based on, the answer is that it does not have to be.
Initially, interest rate was charged as a premium on lending money by someone who had money to give. It was a price someone in need had to pay to get that money. In some ways that premium was an exploitation to that some one’s need.

There is a better way where we all share the responsibility for the decisions we make. It would encourage all of us to make the best decisions so we may all share the rewards. It is an old-new way of doing business for the common good and it is proving both most profitable and most secured. Interest-free banking is the largest growing financial sector in the world today, and has been for the last couple of years. Virtually all major banks, including US banks, have been moving towards the untapped lucrative new sector.

Instead of charging a set rate of interest on the money they lend, banks would assess the feasibility of the projects they are lending to and share the profits of these projects with the borrower. The bank would be forced to scrutinize the projects before they give out money that essentially is not theirs, and would make higher returns on such investments.

As a newly emerging sector, interest-free banking would create massive employment opportunities, and would allow investment and financial firms to develop an array of countless financial products. Interest-free banking may just be the shot in the arm our economy desperately needs to get back on track and remain afloat as world leading economy. But just like all other windows of opportunities, this one may not stay open for long.

Instead of rushing to gamble away $700 billion that is not likely to make significant dent, we must look into new directions and take bold and creative steps towards solvency.
In the process, instead of the exploitation of interest, we shift towards the benefits of sharing a win-win situation.

How Do We Do It?
Simple. Every bank should start a division for interest-free banking and investment. Research centers and universities should start focusing on research, development and training on interest-free banking and investment. Government should encourage the newly-emerging sector through tax breaks, incentives, and direct investment.

Slowly but surely, the economy would start moving towards a new responsible and highly rewarding mode. It may not do away with interest banking altogether, but for sure it will give us more choices. Something we cannot say we have at this point in time. The US does have the golden opportunity to capitalize on its failure and turn it into a gold mine. As the global financial sector is increasingly showing interest in and inching towards expanding interest-free banking, US must take a more aggressive approach while restructuring and rehabilitating its banking and financial system.

It has already been proven. Ask none other than Citigroup and Chase.

It is the one opportunity we cannot miss, if we want to remain world leaders, that is.