Evaluation of riba and collateral concepts in economic activities

It can be stated that to investigate and analyze Islam's economic dimension within the context and methodology of the science of economics also proves valuable in assessing the essence of Quran, the basis of the religion of Islam. Therefore, the thorough examination of the two Islamic concepts within economics, riba (Islamic interest) and collateral is of crucial importance. Moreover, indebtedness can be included into the list of unavoidable practices in economic transactions. Essentially being a type of indebtedness, riba is a vital concept in Islam, bearing significant repercussions. This notion might vary vis-a-vis its practice and is closely related to collateral, another licit type of indebtedness in the aforementioned faith. All in all, it is beneficial to assess the level of similarity between religious concepts and economic notions, therefore, this thesis focuses on riba (islamic interest) and collateral practices, each a set of indebtedness. This study aims to draw attention to the comparability of interest, a concept in indebtedness and riba, a religious notion and seeks to uncover to what extent these two aforementioned factors bear similarities, as well as their respective relationships with collateral. Accordingly, when the notions of debt, loan and riba are examined through a clustering analysis, one can state that all these factors are interrelated whereas the former constitute the universal set, since loan arises from a debt-relationship, and hence, a loan agreement is inexistent when no underlying debt exists. In summary, debt is the constituent element, and correspondingly, a debt-loan relationship must be established to formulate riba, especially as a substitute for interest, a prerequisite of the loan agreement. Despite various arguments proposing otherwise, it is believed that riba and interest are of similar essence. Riba (interest) is explicitly forbidden in Islam, as well as other Abrahamic religions. Nevertheless, when the decreasing purchasing power in inflationary environments is taken into account; the debtor is protected through the aforementioned ban, whereas the debtee is negatively affected due to the inability to maintain the purchasing power. Within this context, the payment of inflation differential to compensate for the purchasing power should be excluded from the scope of riba. It can be put forward that this particular case should not be classified under "interest" but rather as a different value that should be paid regardless. On the other hand, while riba and collateral are distinct practices in terms of Islamic law and are only similar in their characteristics of a forward-carrying derivative, when the debtor defaults, there should be no extra value added to the outstanding debt in collateral, since the debtee can receive the due by selling the asset pledged. In conclusion, it can be postulated that whereas no drastic disagreements exist in the literature regarding riba to be haram and collateral to be permissible, collateral can lead to riba in some cases.