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International Transactions at Government Level

Government transactions at the international level differ from the private in several respects. Many imports (exports) from (to) different parties take place in the context of a single project, while financing is usually at the project level. Complex and time-consuming legal formalities are involved because the government may change hands. Above all, government transactions represent needs of one quarter — defence or political establishment — but responsibility of another — the treasury, not to mention future generations. The decisionmakers usually operate in a short run while the obligations have a long-term character. Thus, there is a symmetry in perceptions about the relative importance of needs and financial constraints. These factors imply that any solutions for the problem of riba are bound to have complex operational requirements and are likely to face resistance for all sorts of reasons. Notwithstanding these apprehensions, the problem of riba has to be faced head-on in order to obey the express orders of Allah.

Let us remind ourselves that by and large the rules for contracts and transactions applicable to the state are the same as those binding on individuals. There is no exception for government in the ease of riba. The Prophet (pbuh) has already set the precedence for dealings with non-Muslims. In the present times, two things call for our attention. First, the problem of riba and probable solutions in government level transactions with foreign governments, international commercial banks and other world bodies. Second, the Shari'ah status of the membership of international financial organisations, such as the IMF and the World Bank. We concentrate on the first and just touch on the second.

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It is clear from the discussion in previous sections that the purpose for which funds are acquired is immaterial from the point of view of riba. What is critical is the nature of transactions, especially in the light of contracts governing them. As long as the legal position of a transaction is loan against the government, it is a ribawi transaction if a discrepancy arises in settling the transaction. In this sense, exports and imports at the government level are not ribawi transactions. The real problem lies in the financial domain — mostly in financing imports and balance-of-payments deficits. Riba is at the hub of all existing borrowing from foreign commercial banks, aid (excepting grants) from foreign governments and other donor agencies and funds raised through FEBCs or sale of treasury bills to foreign investors.

What are riba-free options for the government in international transactions? The answer depends on the purpose being served by funds from foreign sources. These funds are mainly aimed at financing (i) defence needs, (ii) development projects and (iii) balance-of-payments deficits. Defence purchases can be handled through bai’ mu'ajjal contracts directly with foreign governments rather than buying the same from the manufacturers against loans from their respective governments. We, therefore, focus on the other two cases.

Consider the 1292-megawatt Hub power project — with an estimated cost of over $1.5 billion — in Balochistan. This is a gigantic development project by any standard. It represents a huge long-term investment. But once completed, it is expected to be a productive asset for years to come. Notwithstanding these factors, the project still has the following components:

  • Feasibility report
  • Acquisition of umpteen number of things such as land, bricks, steel, cement, machinery, furniture, papers, pencils, and so on
  • Construction effort (services of hired labour and machinery)
  • Overhead expenses for both men and material.

Practically, the project may go through many distinct phases before it becomes operational and each stage may involve expenses of the above type. Once the project is commissioned, running expenses for both labour and other inputs will be involved. What are the options available to the Government of Pakistan from the Islamic point of view in order to materialise this project?

Option A

The government can seek a musharakah arrangement with Pakistani as well as foreign investors or some funding agencies for the entire project. Depending on how one views the project’s strategic importance, it may be a shirakah almu- tanaqisah (decreasing participation) contract.

Option B

The government can arrange interest-free funding from an international source as follows:

  1. A separate bai’ muajjal (not mark-up financing) contract for every well-defined marketable component of the project with the total cost of the items being equal to the amortised value of an otherwise interest-based loan — from the point of view of the funding agency — for the same purpose. This agency can pay to the suppliers directly (or through a subsidiary) and transfer the ownership of merchandise to the government, which may repay ihc sum involved in instalments.
  2. The cost component which cannot be handled through bai’ (trading) may be covered under other Shari'ah- permitted modes. For example, shirakah almu- tanaqisah with suitably defined profit-sharing ratios in the perspective of the entire project.

Option C

The government can enter into simple bai’ contracts with the suppliers of goods and services and parallel interest-free loan contracts with the funding country or agency. The amount of loans may equal the amortised values of funds locked from the financier’s point of view. The market price charged to the government may also reflect the export incentives given by the funding country or agency to the exporters. The lending country may route the payment through the government or release it directly to the exporters. In the latter case, it may also claim charges for payment services. This arrangement can be supplemented by Option B (ii) for those project components which cannot be covered otherwise.

Option D

The project may be viewed as a composite whole of well-defined sub-parts. Options A, B and C can then be explored for every part separately.

The Government of Pakistan may even consider entering into one of the above arrangements with foreigners for those parts of the project which require foreign exchange. The remainder can be covered through similar contracts with Pakistanis or through special levies for the purpose of the project.

What about the following possibility? The government might make simple bai’ arrangements for material components of the project and cover the working capital needs through a zero-interest loan from the same party. The cost of the loan from the lender’s point of view may be absorbed in the prices of goods to be paid by the government. One may support this idea as follows: in this way the interest of the financier will be served with the form of transaction Islamically okay for the government. If prices reflect interest costs from the seller’s point of view, it should not disturb us. After all, this sort of costs are routinely added to prices one pays every day. This argument can be challenged on the sabbt (sabbath) analogy: is riba (on loan) not being concealed behind technicalities? If one studies the borrower’s case in such a deal, indeed the problem is being pushed under the carpet. To conclude, only bai’ mu'ajjal contract with one party or bai’ and loan contracts with separate parties can be regarded as riba-safe arrangements. Bai’ plus loan contract with the same party is questionable on riba grounds.

Zero-interest credits under trading arrangements, as mentioned above, are real possibilities. Owners of funds are interested in some return on their funds. Technicalities are not important for them, but forms of transactions are critical for us. In order to materialise these possibilities, the Government of Pakistan may petition — if necessary, through the Organisation of Islamic Countries — to the World Bank to take the lead in adding the Islamic techniques to its existing transaction modes. The case will have a merit, too, because practically no preferential treatment would be sought for the Muslim users of funds as compared with other member countries. On the other hand, the Muslim countries will lose the flexibility for reducing borrowing costs through early settlement of accounts at revised terms, often the case in existing interest-based loans from the World Bank.

Let us now consider short-term borrowings from the IMF to redress balance-of-payments problems. These loans are denominated and repaid in terms of special drawing rights (SDRs) — an expression for the value of a basket of major currencies. These are riba-based arrangements. By their nature, the transactions involved are always money-to-moncy transactions, and in no case transfer of property rights on another good is involved. So there is no direct or indirect way of salvaging the existing arrangements with the IMF. The problem has to be addressed at its source. Ordinary exporters and importers should be allowed to create their own rights and responsibilities in a fully flexible exchange-rate environment. The government should not act as guarantor or intermediary in the deals by its citizens in their own interests. It should restrict its foreign exchange requirements to revenues generated through direct exports and levies on imports. If necessary, it may also acquire foreign exchange at existing exchange rates.

Notwithstanding the above action plan, our affiliation with the IMF and World Bank needs review from the Islamic point of view. As per their existing rules of business, both institutions do ribawi dealings with their members. For a Muslim country, there is the question bf being a party to ribawi business. At the practical level, the role of the IMF can be compared with that of a central bank at the international financial level. It creates international liquidity in the form of SDRs, helps member countries in their international payments problems and acts as guardian of the foreign exchange markets all over the world. Though the SDRs are a zero-cost concept at the IMF level, interest rate plays a pivotal role in facilitating the dealings of member countries with the IMF and with one another. At best, the relation of a Muslim country with the IMF body can be similar to that of an Islamic bank with the central monetary authority in the country — still a grey area in Islamic banking. The indispensability or otherwise of association with the IMF and the World Bank and Shari‘ah-consistent modalities need special attention, outside the scope of this paper.

Dr Sayyid Tahir


Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Republished with permission.