International Conference:
Sunday
19th & Monday 20th December,
2004
at International Islamic
University,
Chittagong, Bangladesh
on
Harmonizing Development and Financial Instruments by Shari¯ah
Rules for Ummatic Integration
Contact:
Professor
Masudul Alam Choudhury, School of Business,
College of Cape Breton,
Sydney, Nova Scotia B1P 6L2
Canada
Email: mchoudhu@uccb.ns.ca
Fax: 902-562-0119 Tel: (office) (968) 515-845: (home) (968) 513-445
Or Professor
Abubakr Rafique Ahmad, Pro-Vice Chancellor, International Islamic University, Chittagong, Bangladesh.
----------------------------
Islamic Endogenous Loans
by
Rodney
Shakespeare, Christian Council for Monetary Justice, United Kingdom,, London Global Table: www.globaljusticemovement.net)
Private address: 11, Charman House, Hemans Estate, London, SW8 4SP, United Kingdom. Tel: (UK) 020 7771 1107. email: rodney.shakespeare1@btopenworld.com
Abstract
The present options
for an economy all have serious weaknesses and, in any
case, the way forward for Islam must be completely distinctive.
Fortunately,
Islamic opposition to riba enables a distinctive
new way which addresses the real economy, furthers justice
and ends foreign financial colonialism.ã
The new way uses Islamic endogenous loans.ã These are state-issued, repayable, interest-free
loans which are generally administered by the banking
system on market and private property principles.ã
The loans are counter-inflationary and are always
directed at productive capacity.ã
Because they bear no interest, the loans create
productive capacity at one half, or less, of the present
cost for:-
- Public
capital investment - hospitals, roads, bridges, etc.
- Private
capital investment as long as such investment creates
new owners of capital and is part of policy to
enable all individuals to become owners of productive
capital.
- Environmental
capital investment
- Small
and start-up businesses
------------------------
1.ã
The present options for an economy have serious
weaknesses
At
present, the broad options for an economy are:-
a)
Unfree, unfair and inefficient market
finance capitalism (i.e., åfree market¯ capitalism).ã
Among its
many weaknesses are:-
¦
the inflationary creation of money
which is largely not directed towards productive
capacity
¦
widespread riba
¦
huge amounts of personal, corporation,
city, local government and national government debt
¦
rich-poor division
¦
economic colonialism
¦
plutocracy
b)ãããããã Social democracy.ã
This is a
form of unfree, unfair and inefficient market finance
capitalism.ã Although it has a greater sense of social justice
it also has a greater inefficiency.
c)ãããããã Socialism and communism.
Socialism
and communism have inefficient command economies, dictatorial
political structures and are atheistic.
The
weaknesses of a), b and c) above are obvious and so if
Islam were to embrace any of a), b), or c), it would also
be embracing the known weaknesses.
2.ã The way forward
for Islam must be distinctive
If Islam
is to give a moral, intellectual and material lead to
the world its economy must be completely distinctive (Choudhury,
1997 & 2003).ã Without that distinctiveness, the ummah
will never free itself from control by others.
Fortunately,
Islamic opposition to riba enables a distinctive
new way forward which addresses the real economy, increases
productive capacity, furthers justice, enables environmental
capital projects and ends foreign financial colonialism.ã
3.ã Riba/interest
is not necessary
Riba
is wrong.ã Which
is why Islam opposes it.
Yet
there is another, separate, argument against riba,
namely, that interest is not necessary.ã
The cost of administration can be an element of
interest but such cost can often be low, even minimal.ã
In the case of public capital investment, moreover,
the administrative cost is often substantially borne by
the borrower and not by the lender (e.g., as
when a government collects fees and taxes with which to
repay its debts).ã Furthermore, part of interest payments can be
in effect a guard against loss.ã
But if collateral is adequate or largely not involved
(e.g. when a government undertakes the obligation to repay,
or when specific provision is made for collateral), interest
is not necessary.ã
Moreover,
as is well known, the effects of interest are hugely negative.ã For example, in Aachen, Germany, interest
on capital is 12% of the cost of rubbish collection; 38%
of the cost of drinking water; 47%
of
the cost of sewage; and up to 77% of the cost of public
housing.ã Indeed, it has been estimated that an amazing
50% of the price of all goods and services relates
to borrowing costs (principal and interest).ã
Overall, the cost of interest causes 80% of the
population to pay out much more than they receive; 10%
are in balance; and the last 10% receive very much more
than they pay out (Kennedy, 1995).ã Internationally, of course, the effects of compound
interest are such that whole societies are trapped into
an ever-increasing debt which they can never repay, and
the attempt to repay in practice results in their economic
resources being ripped off to outsiders.ã
So
the question arises -
Why should there be interest
at all?ã For a start, the original principal of the loan
is created out of nothing by the pressing of computer
buttons (as all bank loans are) and then interest is added.ã
Why should something created out of nothing give
any right ¡ any right at all -
to receive interest?ã
It
is time for Muslims to recognise that interest can be
viewed as a tax -
a very large tax -
which is not only wrong but also unnecessary.ã
Moreover, in making that recognition, Muslims will
easily come to a further recognition -
that, if interest is eliminated, the cost of productive
investment can be halved or more.
4.ã The conventional
definition of endogenous and exogenous money is a lie
Conventional
economics and neoclassical finance capitalism, however,
are intent on maintaining the existence of interest.ã
For them, interest is at the heart of everything
and this can be understood by considering the conventional
definition of endogenous money as that which issues from
the banking system.ã
But
a visit to any dictionary reveals that 'endogenous' has
the meaning of åcoming or growing from within¯ (and 'exogenous'
has the meaning of åcoming from without¯).ã Thus the conventional claim that money coming from
the banking system is endogenous (and money coming from
the state is exogenous) is a disgraceful twisting of words
for it is essentially being claimed that government and
other institutions at the heart of society are in reality
outside and only the banking system is inside.ã
The
conventional justification for this twisting of the meaning
of words, however, is that it is referring to the economy
(and not society) and that the banking system efficiently
allocates resources to the productive economy while the
government cannot be trusted to do so.
But supposing
it is true that - as happens today - the banking system does not allocate
money to new productive capacity and, instead, allocates
it to derivatives, to the bidding up of existing asset
prices, to putting individuals, companies and whole societies
into debt, to anything but the real economy?ã
Then it is only too clearly seen that the conventional
claim that it puts endogenous money towards productive
capacity is a lie.
And the lie
is seen to be worse when it is realised that a government,
using the banking system and insisting on market and private
property principle, can ensure that all of the
supply of new
money to an economy can go to new productive capacity (in a way which
can never be done by the banking system today, indeed,
which is incapable of even being understood by the banking
system).
Which
leaves one other aspect to the conventional claim that
it issues endogenous money for the purposes of productive
investment.ã That aspect is interest.ã Conventional endogenous money bears interest
and, very generally, interest doubles, or more
than doubles, the cost of a capital project.ã
So how can something which doubles the cost
of a project really be something which causes a úgrowing
from withinî?ã Something
that hampers growing cannot be claimed to be promoting
growing.
Therefore
the conventional claim that only the banking system can
issue, and does issue, truly endogenous money for new
productive capacity is a lie.
5.ã Islamic definitions
of endogenous and exogenous money
Islam, however,
is able to define endogenous money quite differently - as state-issued
(ultimately from the central bank) interest-free (repayable
and cancellable) loans, capable of being administered
by the banking system on market and private property principle,
which are always directed at new productive capacity.ã
A supply of Islamic endogenous loans is of immense
importance because it is capable of ensuring, among other
things:-
¦
economic and social justice (Shakespeare
& Challen, 2002)
¦
an end to the imposition of interest
¦
a direct linking of new money to
productive capacity
¦
a widespread ownership of productive
capital
¦
an increase in political freedoms
¦
an efficient wealth creation
¦
a basic income for all inhabitants
¦
policy to unite inhabitants who have
different linguistic, religious, geographical and ethnic
backgrounds
¦
an ability of a society to control
its own destiny as opposed to being ruled by outsiders
and others
¦
a
new economic system which, by a proper use of interest-free
loans, spreads productive capacity to all individuals
in the population so that they produce (and thus earn)
independently of whether or not they also have a conventional
job.
In contrast
is the Islamic definition of exogenous money as either
money coming from abroad or money created by the
international banking system operating within a country.ã The usual form
of this money is that of interest-bearing loans which
are not necessarily directed at productive capacity
and furthering the needs of society; and which hand control
of society either to a narrow elite or to outsiders.
6.ã Islamic endogenous
loans combine efficiency with social and economic justice.
Islamic endogenous loans combine
efficiency with social and economic justice.ã
Taking the form of state-issued, interest-free
loans (administered by the private banking system) they
are directly related to the real economy, made repayable
and, when repaid, are cancelled or cancellable thus ensuring
that productive assets always back a society¯s currency.ã Islamic endogenous money has four main uses:-
Public
capital investment thereby allowing hospitals, roads,
bridges, sewage works, fire stations, schools etc. to
be constructed for one half, or one third of the present
cost.ã Over time,
the National Debt would reduce.ã However, the capital projects can still, if
wished, be built by the private sector, managed by the
private sector, even owned by the private sector.ã
The key point is that the cost, at the very least,
is being halved.
Private capital investment if
such investment creates new owners of capital and is part
of policy to enable all individuals, over time, on market
principles, to become owners of substantial amounts of
productive capital.ã By using state-issued interest-free loans, administered
by the banking system on market principles, a large company/corporation
would get cheap money as long as new shareholders are
created (Ashford & Shakespeare, 1999).
Green
capital investment, particularly for clean, renewable
energy.ã At present,
using interest-bearing loans, a lot of green technology
is not financially viable.ã
With interest-free loans, however, it would become
viable. Thus we could have, for example, clean electricity
through tidal barrages, dams, windmills, wave machines,
solar electricity, and geothermal power stations.
Small
and start-up businesses thereby freeing them from the crushing
pressure of interest-bearing debt.ã
(In the case of small and start-up businesses,
there would be no requirement for wide ownership.)
7.ã Islamic endogenous
loans implement Say¯s Theorem (Law)
Neo-classical
economics upholds Say's Theorem (Law).ã
The Theorem says that, in a market economy, the
total market value of the wealth produced is equal to
the total purchasing power created by the process of production
and therefore that supply creates its own demand.ã The Theorem also requires that producers and
consumers must be the same people.ã
But, at present, there is undoubtedly a huge potential
supply which does not create its own demand.ã Moreover, producers
and consumers are not the same people.ã That
is to say, at present, Say's Theorem (Law) most certainly
does not work in practice.ã
However, Islamic endogenous loans distribute future productive
capacity, over time and on market principles, to everybody
in the population thus ensuring that producers and consumers
really are the same people.ã
For the first time in history, the use of Islamic
loans can ensure that Say¯s Theorem really does, in practice,
become a true Law.
8.ã A genuine
Islamic banking system
Since
Islamic loans address all the main aspects of the real
economy, the banking system can become genuinely Islamic
and have no need to be involved with either the creation
of money or the imposition of riba.
------------------------
References
Ashford,
Robert & Shakespeare, Rodney (1999), Binary
Economics -
the new paradigm, (University Press of America).
Choudhury,
Masudul A. (1997), Money in Islam (Routledge, London and New York) and (2003),
The Islamic World-System:
A Study in Polity-Market Interaction (RoutledgeCurzon).ã Choudhury spearheads the call for Islam to have
a distinctive way forward and use endogenous money.ã See also (1989), Islamic Economic Co-operation;
(1990), Journal of Economic Cooperation Among
Islamic Countries; and (1998), Reforming the Muslim
World.ã
Kennedy,
Margrit I. (1995), Interest and Inflation-free Money, New Society
Publishers.
Shakespeare,
Rodney & Challen, Peter (2002), Seven Steps to
Justice, New European Publications, London.
-------------------