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Riba Elimination & Foreign Loans

If all the forms of interest or mark-up are held to be repugnant to the Islamic injunctions, what modes of financing do you suggest for: (a) financing trade and industry; (b) financing the budget deficit; (c) acquiring the foreign loans; and (d) similar other needs and purposes?

I am submitting two short studies which shed light on modes of financing in an Islamic framework: Islamic Banking by Abdur Rahim Hamdi and Islami Bankari: Nazariyati Bunyadain awr Amli Tajurbat by Prof Ausaf Ahmad. These two documents1 cover problems of financing raised in (a) and (d).


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As far as (b) is concerned, budgetary deficit is not a healthy policy and good economic management must ensure mobilisation of resources enough to meet the genuine needs of the society and state. Proper control on expenditure and mobilisation of resources with equity and accountability would ensure balanced budget. In certain circumstances and for certain time horizons budgetary deficit can be met through what is known as ‘deficit financing’. This must be under the limit of the rate of growth in the economy to ensure that it does not have inflationary consequences. All efforts to finance budgetary deficit by interest-based borrowings have been a failure. Even the richest countries of the West are now groaning under mountains of debts and are not finding easy solutions. The US is the most indebted country today. Its domestic debt has crossed the limit of $3 trillion with annual interest payments coming to $290 billion. This debt mountain has grown in the 20th century only, as in the year 1901, America’s total domestic debt was only $1 billion. As such, a sane economic policy for an Islamic country, rich or poor, would be one based on “living within means.”

As to item (c), even international financial dealings should not be on the basis of interest-based loans. Resources can be contracted on the basis of venture capital and risk sharing deals. There is a vast scope for these and even non- Muslim western bankers and economists are hopeful about the potential of this new mode of relationship. Turkey, a secular country, has promoted the entire Bosphorus Bridge Project (around $1 billion) on the basis of participatory capital as against interest-based loan. In fact, the equity-based modes of financing have been under consideration of the World Bank, IFC and other financial institutions. A study by the Development Centre of the Organisation for Economic Cooperation and Development of the European countries (Paris) has discussed this issue. A few paragraphs:

“Interest-free banking is a novel form of finance. Even sceptics have accepted that Islamic banks are not merely trying to give interest another name and that legal instruments within the framework of Shari‘ah exist which permit profitability on a different, albeit Koranically acceptable basis.

“About 20 percent of the world’s population is Muslim, many of whom are devout. They would prefer to be sure that their financial affairs are in line with the precepts of Islam, but as is only natural, wish to earn legitimate profits. Here lie opportunities for Islamic banks, both in mobilising and utilising funds.

“The establishment of many new Islamic financial institutions in all parts of the Muslim world has shown that banking according to the principles of Shari'ah is not only feasible, but also profitable.” [Arab and Islamic Banks, Trantc Wohlus Scharf, OECD, Paris, 1983, p. 90]

“If the South proposes now, with Islamic banking principles, a new concept of socioeconomic interaction (profit-sharing systems, focus on small- and medium-sized innovative entrepreneurs, with the major objective of economic asset creation, etc.) it could be a contribution to cooperation concepts so far mainly propounded by the countries of the industrialised world.

“Islamic banking is trying to change the relationship between finance on one hand and industry and commerce on the other. This new relationship is the basis of the Islamic economic system being set up. Though Islamic principles have yet to be put to the test in the competitive environment of international finance, the two systems are similar in that they both strive for closer ties between financial intermediation and economic asset creation.

“Islamic banks could make a useful contribution to economic growth and development, particularly in a situation of recession, stagflation and low-growth levels, because the core of their operations is oriented towards productive investments. All countries, both in the North and in the South, need more venture capital. Loan capital is available, particularly in industrialised economics, but at high interest rates. However, even medium-scale entrepreneurs there find it difficult to raise sufficient risk capital for expansion and innova tion. This has acted as a brake on productivity and economic growth in the North. Thus, practical and immediate cooperation possibilities exist between Islamic banks and enterprises all over the world. The intermediation process remains to be fully developed.” [ibid, p. 94-95]

Professor Khurshid Ahmad

 

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