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Can 'Negative Interest Rate' Overcome The Present Economic Crisis?

06 Aug 2020 01:08 PM, IST

Can 'Negative Interest Rate' Overcome The Present Economic Crisis?
Can 'negative interest rate' overcome the present economic crisis?

By Prof. Syed Farhat Husain


The whole world has been facing a severe economic crisis for the last two decades. The present coronavirus pandemic has further brought the global economy to a standstill and plunged the world into recession. To mitigate this extraordinary financial crisis, some Western countries decided to implement an unconventional monetary policy called ‘Negative Interest Rate Policy (NIRP)’. European Union (EU) member countries Sweden and Switzerland, and Japan initiated to embrace this policy. Negative interest simply means that instead of paying interest, a fee is charged on deposits. This Policy occurs when Central Bank sets its interest rate called Bank Rate at less than zero percent. If surplus funds are piled up and they intend to keep these funds with Central Bank as deposits, they have to pay an amount as service charge. This is termed as Negative Interest Rate Policy (NIRP). Before embarking on its details, it would be pertinent to look into Zero Interest Rate Policy.


Zero Interest Rate Policy

During the global economic crisis of 2008, USA, EU countries and several other countries had decided to bring down interest rate to zero as a non-traditional measure. Japan started this policy in 1990, when its real estate bubble burst and the prices crashed beyond the imaginations. Japan’s Central Bank brought down the interest rate to zero which was a clear indication that other banks should also cut their lending rates so that investment could increase and supply of money remained at desired level. The sole purpose was to combat the critical situation of economic recession. After the crisis of 2008, USA also pursued this policy.


From Zero To Minus

The basic logic of lowering rates and keeping it at near zero is that the cost of loans and advances be lowest, therefore, it will encourage lending and spending in the market by individuals and entrepreneurs and eventually boost the economic activities. The same logic is applied in case of Negative Interest Rate as well. Economic crisis persisted due to recession and now the decision of lockdown to contain corona pandemic has further aggravated the crisis. Spending of individuals and business houses diminished drastically resulting into the accumulation of surplus funds at their end. Banks also have huge money at their disposal against a miniscule demand for borrowings. Now, to tackle this, the policy of Negative Interest Rate was advocated so that banks could provide cheaper loans to ensure increased money supply in the market. For this, country’s Central Bank sets its interest rate (i.e. Bank Rate) in minus. The Danish Central Bank declared negative rate in the year 2012, European Central Bank in 2014, Sweden and Switzerland in 2015 and Japan in 2016. Britain, Russia and some other countries are implementing this policy during current pandemic crisis. So far, India has no such plans. However, RBI has repeatedly decreased its short-term interest rate called Repo Rate, persuading the commercial banks to lower down their lending rates.


Negative Interest Rate Policy can help best utilizing the idle funds as banks will try to enhance their lending, undoubtedly, along with a risk of lending to unproductive ventures.


Is This A Right Solution?

In the present traumatic economic scenario, we need to ponder very sincerely whether this policy is a right path to overcome the crisis? Zero or negative rates will certainly help enhance the supply of capital to traders and industrialists enabling them to boost production. But this is mere one side through which supply may get strengthened. The other immense important side i.e. demand remains unperceived and thus, unresolved also. As a matter of fact, absorption of produce always depends on demand, which further depends on the purchasing power of consumers. If our people have purchasing power, there will be increased demand resulting into more production and employment generation. So, only added money supply alone cannot yield the   desired outcomes.  Therefore, in our opinion, cutting interest rate to zero or below is not at all a thorough and everlasting solution to the prevailing and also forthcoming crisis. Moreover, this leaves with us an unresolved issue pertaining to fixation of up to what extent can interest rate be reduced?


Another Important Aspect

The voyage of interest which started from high, moderate and low, now reached to zero and negative. (However, zero and negative should not be taken as interest. To be more precise, zero implies interest free and negative would mean service charges of keeping deposits). But, more importantly, the present crisis has forced the world community to find salvation in the state of “interestlessness”.


Islam prohibits interest completely and discards the general belief that “money in itself has productivity”. According to Islamic ideology, money when employed with other factors of production such as land, labour, machines along with entrepreneurship etc results in productivity, otherwise money in its own individual capacity can never grow. For this very reason, according to Islamic law, no extra amount is allowed to be paid on loans, only principle amount is secured and guaranteed by way of personal guarantees or mortgages. Those who desire returns on their capital, they must participate in the business on the basis of profit and loss sharing implying that capital owner agrees to bear the risk of losses, if any. This only will create a conducive atmosphere and mutual trust particularly in these days of crisis. This seems to be a viable principle ensuring all norms of justice and is apt for all types of economic environments-Boom or Recession.



Islamic revolutionary step of absolute ban on all forms of interest has saved the entire humanity from high level of oppression and sheer injustice. Genuinely, the world now is passing through a very tough time and facing a severe economic crisis. There is a dire need to convince the public in general, and influential persons and intelligentsia in particular, to discard the futile exercise of lowering interest rate time and again, rather, firmly take a bold decision to get rid of interest-based financial system once and for all. After this decision, analyse objectively the entire economic landscape. Muslim scholars have very logically and in the modern terminology showcased the dangers of interest-based system, and also put forth alternative system as well, which was highly appreciated by some renowned non-Muslim economists. Lowering interest rate to zero and below clearly indicates that interest mechanism has failed miserably to solve the problems. Therefore, it is now high time that we ponder over the alternatives before it is too late. As earlier said, economic crisis is persisting on for the last two decades. Present Covid-19 pandemic has worsened the situation, even the developed economies are in great trouble. Situation is deteriorating by leap and bounds and none can predict as to how long would this last?


In such circumstances, a code of conduct revealed by our Creator and Sustainer Almighty Allah and its practical shape carved out by the Last Messenger (PBUH) must be adopted, executed and followed in letter and in spirit to re-orient the economics along with other faculties of human life such as social, spiritual, political etc. It is high time that Islamic scholars should come forward with greater zeal and enthusiasm to save the mankind from ensuing disaster. It is possible that due to their noble efforts human beings get an intransient remedy of their pains and may encounter a path of genuine happiness, everlasting success and ultimate salvation through the Islamic tenants which are, of course, a common heritage of entire humanity. And let’s pray to Almighty Allah to always shower blessings to mankind and be hopeful that there’s light at the end of tunnel.

(The author of the article is a retired principal from a government college in Uttarakhand.)


Keywords : Negative Interest Rate ,   Covid 19 ,   India ,   EU ,   USA ,   Japan  

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Nasir Ali

07 August 2020 04:39 PM
7 August 2020 With all due respect to the author of this article, I do not seem to see a single concrete point supported by an empirical work in favor of abolishen of interest beyond a usual rhetoric. Young generation of Muslim economists may need more than copying material from the internet. The author, started with a story that since the world is resorting to low, zero or even negative interest rates, therefore, the institution of interest around which the entire capital system is built should be abolished. He gave examples from developed countries such as Switzerland, Sweden and Japan. Those who surf the internet and google these terms like Zero Interest Rate Policy (ZIRP), will quickly find that the author has not made any effort beyond copying the material from the internet. There is not a single reference to any technical study either in developed or developing countries substantiating eclecticism employed in his thoughts. If he is a real scholar and a true proponent of abolishing interest from the world economy, he must answer the following questions and bolster his views with concrete econometric studies. 1) Why ZIRP has not achieved its intended results? Rampant trends in deflation both in Europe and Japan remain. Many countries (including US, Europe and Japan) have resorted to Quantitative Easing (QE) as a non-conventional measure to ease state of recession. 2) When a country falls into recession it could be led by a pressure on demand, supply or both. If a system is interest free, it means you lose at least one control mechanism to stabilize the economy. In an interest free system what control mechanism will replace it? We need to ponder into practical world, no theoretical or imaginary views will be helpful. 3) In an integrated world today (imagine how recessions in one country are linked with recessions in others, COVID-19 led recession is a case in point), abolishen of interest (let

K A Najmi

06 August 2020 07:27 PM
In your article, you have stated that under Islamic finance\"principal amount is secured by guarantee / mortgage\". Does it mean that the sharing of profit and loss is restricted to the performance of the business and principal always remains secured. In other words the provider of fund is assured of getting its principal back even if there is loss in business. That such loss would be borne by the promoter/ guarantor? And not by the fund provider?

Zaheer Lalitpuri

06 August 2020 04:22 PM
Very nice Article.

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