USURY AND DIGITAL ECONOMY: DOES USURY

ENCOURAGE ECONOMIC GROWTH?

1
Sebastiana Viphindrartin,2Zainuri,3Suryaning Bawono, 4Silvi Asna
1,2
Lecturer of Economics and Business Faculty, University of Jember,Indonesia
3,4
Student of Economics and Business Faculty, University of Jember, Indonesia

Corresponding Email : ninobalmy@gmail.com

Abstract. This paper was aimed at reviewing the contribution of usury to the economic growth
of Indonesia and Malaysia. By using the Threshold Autoregressive as a proxy to forecast the
future economic conditions and by taking into account each exchange rate regime and the crisis
period experienced by the two countries, authors found that the higher the usury rate (by looking
at the interest rates as the proxy), the more the efforts done by the countries to recover from the
economic crisis. Authors also found that Sharia concept (by looking at direct investment as its
proxy) was able to drive the economy and to increase the economic resilience to the financial
crisis, as seen in Indonesia and Malaysia during the Asian crisis period (1997) until the digital
economic era (2018).

Keywords: usury, economic growth, TAR

Extended Abstract

1. Introduction
The Asian financial crisis period that occurred since July 1997 raised fears of an economic crisis
throughout the world (Desai, 2014). In the era of digital economy (2018), debt-related transactions
continued to occur across national borders through Electronic Funds Transfer (EFT). Consequently,
usury was increasingly spreading throughout the world, including in Asian countries. Year 2009
was the year of the birth of Bitcoin that became a competitor of EFT, which basically was a
derivation of fiat money (Eisenstein, 2011). Digital currency was considered impossible to replace
fiat currency in a short-term manner. However, in this digital era, the use of digital money, especially
Bitcoin, was increasingly evenly distributed throughout the world through the World Wide Web
techonology (Semmler & Tahri, 2017). The development of the digital world in usury inclusion in
society also continued to grow through uncontrolled peer-to-peer lending. The existence of nude
loan in China proved that in the digital era, the impact of usury on human lives, especially in personal
financial and economic level, was increasingly alarming. Therefore, it is not impossible that the
scandal also occurred, or even is occuring in a country where the majority of the population is
Muslim, such as Indonesia and Malaysia.

2. Literature Review
Since the fourth and fifth centuries AD, the Holy Fathers, to go towards spiritual salvation,
strongly opposed the practice of usury. In Christianity, usury is considered a big sin. It actually
allows the practice of lending, provided there is no usury in it (Hall, 2011; Milner, 2011). The
practice of usury has been going on since 88 BC when the Roman law legalized usury. Contrarily,
more than a thousand years, Islam, Christianity and Jew have been standing to oppose that (Schoon,
2016; Rist, 2016).
Thomas Aquinas explained that money is not obsolete like clothes or houses. If someone wears
clothes for one year, the clothes cannot come back new; the clothes that are used will be used clothes,
so charging rental fee for clothes is a natural thing. Based on this concept, charging rental fee for
the lent money is an improper act (Decock, et al., 2014). Aristotle described usury as "the birth of
 money from money" and claimed that it is unnatural because money does not multiply (Jones, 2014).
Jew, Christianity, and Islam are very strong in opposing usury (Geisst, 2013; Rahman, 2014). In
Christianity, lending money is a good that should not expect anything in return (Luther, 2015;
Klingenberg, 2012). Loan transactions with interest system cause financial and economic
imbalances between individuals, social groups, and between countries. Imbalances emerge as
economic bubbles and crises in financial markets that are fragile (Ozsoy, 2016; Bentham, 2014).
From 2007 to 2009, usury was proven to be the trigger for the global financial crisis (Wegener, et,
al, 2017).
In 1997, the Asian financial crisis was triggered by the policy of fiat exchange rate that began
in Thailand that spread to Indonesia, Malaysia, China, South Korea, and other countries in Asia
(Eslamloueyan & Jafari, 2018; Lee & Luk, 2018). After the crisis, all crisis-hit countries (except
Malaysia) announced changes from the exchange rates-based monetary policy framework to the
inflation targeting using interest rates as instruments of monetary policy operations (Joe & Oh,
2018).

3. Research Method
The Threshold Autoregressive (TAR) method, adopted from a concept proposed by Irving
Fisher, was employed in this research. This model was applied to time-series data based on the
autoregressive model in the model parameters through the parameter switching behavior. This
model can describe and predict future values, assuming that data movement behavior changes after
entering different parameters. The transition from one parameter to another depends on the past
values of x price movements (Mtumbuka et al., 2014)

4. Findings and Discussion

4.1 Findings
By looking at the inflation as a proxy, it appears that usury has an impact on the price
level, in general (Anari & Kolari, 2016). The following is the calculation of the TAR model
to see the impact of the interest rates and the inflation on the purchasing power, with GDP
percapita as the proxy:
Yt =(yt(-3)<c1t1) x β0 + β1 it1 + y(-3)>= c,(y(-3) < c2t2) x β2 + β3 it3 + (y(-3) >= c3t3)x β4 + β5it5
+ β6Rt6 + et

Y = F(i,r,y)
Where t is time period, c is threshold parameter, Y is per capita income as the proxy of
purchasing power, i is inflation, r is interest rate, β is a constant, and e is an error factor.
From the results of the forecast, GDP per capita and interest rate had sharp shocks in
1997 - 2000 and 2008 – 2011 (for example) when China’s interest rate was inversely
proportional to its GDP per capita. This proves that the interest rate is a burden on welfare,
as reflected by GDP percapita in China.
The TAR Estimation Results in Indonesia :

Y = (Y(-3)<7792.629)*(7573.79301853 - 57.660149142*I) + (Y(-

3)>=7792.629)*(11802.2863794 - 267.255666084*I) - 58.4566881596*R

R-squared 0.840390 Mean dependent var 7822.679

Adjusted R-squared 0.800487 S.D. dependent var 1806.559
S.E. of regression 806.9326 Akaike info criterion 16.42861
Sum squared resid 10418244 Schwarz criterion 16.67731
Log likelihood -167.5004 Hannan-Quinn criter. 16.48259
F-statistic 21.06108 Durbin-Watson stat 1.078402
 Graph 1: The results of the forecast of Indonesia's GDP per capita using the TAR model
14,000
Forecast: YF
Actual: Y
12,000
Forecast sample: 1994 2017
Adjusted sample: 1997 2017
10,000 Included observations: 21
Root Mean Squared Error 1155.706
8,000 Mean Absolute Error 832.8327
Mean Abs. Percent Error 9.947872
Theil Inequality Coefficient 0.073989
6,000 Bias Proportion 0.057936
Variance Proportion 0.524719
4,000 Covariance Proportion 0.417345

2,000
98 00 02 04 06 08 10 12 14 16

YF ± 2 S.E.

Graph 2: The results of the forecast of Indonesia’s real interest rate using the TAR model
40
Forecast: RF
30 Actual: R
Forecast sample: 1994 2017
20
Adjusted sample: 1997 2017
10
Included observations: 21
Root Mean Squared Error 5.113370
0 Mean Absolute Error 4.049701
Mean Abs. Percent Error 152.0571
-10 Theil Inequality Coefficient 0.322393
Bias Proportion 0.081545
-20
Variance Proportion 0.025771
-30 Covariance Proportion 0.892684

-40
98 00 02 04 06 08 10 12 14 16

RF ± 2 S.E.

There was a bias in Indonesia. In 1997, the inflation far exceeded the nominal interest rate, so
it caused the real interest rate to be negative, followed by a decline in purchasing power as a recovery
from the crisis. This is indicated by W-shaped chart in the forecast chart for 1997 – 2003.

The TAR Estimation Results in Malaysia :

Y = (Y(-3)<16554.9)*(17457.679033 - 564.340312643*I) + (Y(-3)>=16554.9 AND Y(-

3)<20009.19)*(19168.7957699 + 170.211842314*I) + (Y(-3)>=20009.19 AND Y(-
3)<22590.79)*(21001.9064333 + 651.510777699*I) + (Y(-
3)>=22590.79)*(23435.4780861 + 850.053413161*I) + 31.4477232883*R

R-squared 0.960003 Mean dependent var 19980.74

Adjusted R-squared 0.933339 S.D. dependent var 3612.447
S.E. of regression 932.6912 Akaike info criterion 16.81155
Sum squared resid 10438953 Schwarz criterion 17.25920
Log likelihood -167.5213 Hannan-Quinn criter. 16.90870
F-statistic 36.00310 Durbin-Watson stat 1.822285
 Graph 3 : The results of the forecast of Malaysia's GDP per capita using the TAR model
36,000
Forecast: YF
32,000 Actual: Y
Forecast sample: 1994 2017
28,000 Adjusted sample: 1997 2017
Included observations: 21
24,000 Root Mean Squared Error 1519.793
Mean Absolute Error 1203.066
20,000 Mean Abs. Percent Error 5.668875
Theil Inequality Coefficient 0.038001
16,000
Bias Proportion 0.077379
Variance Proportion 0.555640
12,000
Covariance Proportion 0.366981

8,000
98 00 02 04 06 08 10 12 14 16

YF ± 2 S.E.

Graph 4 : The results of the forecast of Malaysia’s real interest rate using the TAR model
15
Forecast: RF
Actual: R
10 Forecast sample: 1994 2017
Included observations: 24
Root Mean Squared Error 3.443857
5
Mean Absolute Error 2.930014
Mean Abs. Percent Error 617.5120
Theil Inequality Coefficient 0.431571
0
Bias Proportion 0.010026
Variance Proportion 0.421627
-5 Covariance Proportion 0.568346

-10
94 96 98 00 02 04 06 08 10 12 14 16

RF ± 2 S.E.

Malaysia's economic growth which tended to be anti-usury tended to grow steadily with real
interest rates that were close to zero and less than 5% with inflationary shocks in 1998 and 2008.

4.2 Discussion
In the period of the 1997 Asian financial crisis, Indonesia and Malaysia had different responses
when the IMF offered a certain interest rate debt. Indonesia accepted the IMF’s usury-based loan to
increase its cash-in-flow which was expected to boost the economy. Meanwhile, Malaysia refused
and preferred to control the inflation by reducing interest rates and focusing on the real sectors. This
difference in response had a major impact on post-crisis economic conditions. Indonesia, which
experienced a deep impact, as illustrated in the forecast of the TAR model, was able to recover its
economic conditions quickly due to additional funds from debt offered by the IMF. However, the
debt containing usury as an economic burden actually burdened economic growth so that the
recovery process, as illustrated by the TAR model, was in the shape of ‘W’ letter and tended to
decrease as if bearing the burden. There was an attraction between the productivity and the interest
that must be paid by Indonesia. In addition, local investors were defeated by the dominance of
foreign investors. This made Indonesian economic growth fluctuate and has a negative correlation
with the interest rates. In contrast, Malaysia, which relied on its real sectors, found that its economy
was growing even though the interest rates were fluctuating as inflation controls. From the forecast
results using the TAR model, it was illustrated that interest rates and economic growth were
negatively related, meaning that both in Indonesia and in Malaysia, interest became an economic
burden. The lower the interest rate the stronger the economic growth.

5. Conclusion
The real interest rates, namely the nominal interest rates after subtraction by the inflation value,
in ASIA 2, were negatively correlated with GDP per capita. This proves that interest or usury is a
burden to the economy.

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