...the deadline is June 30th 1992. The government must come up with an alternative economic framework before this date. For on July 1st, in compliance with the recently delivered verdict of the Federal Shariat Court, all institutions operating on interest would cease to exist. Barring any foul play on the government’s part, if a viable framework is not presented, the consequences could be very serious, in fact, disasterous, for the economic structure of a country whose life vein is interest...

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Since the past many years, Muslim scholars have been endeavouring to establish the economy of Pakistan on interest-free lines. A lot of solutions have also been presented in this regard. However, all these attempts have proceeded by first accepting and acknowledging certain premesis of a capitalistic economy. Since these premesis are in direct contradiction with those laid down by Islam, the result of this cross-breeding is a sui generis malformed beyond perception. Regrettably, our scholars insist on branding it as the golden economic model of Islam.

One of the main limbs of this bizarre species is ‘Interest-free Banking’, which actually amounts to a contradiction in terms. It must be appreciated that Banking owes its existence to the creation of a large amount of capital with a fair amount of ease, and to an almost total elimination of the element of risk in the mode of its operation. These two factors, in fact, define the very nature of Banking. It must be borne in mind, that Banks primarily operate1 on the interest they receive upon the loans they advance against collateral securities. Interest and Security ensure a guaranteed return well over the money lent. Without the two, a Bank can neither readily draw in a huge amount of money nor continue to be an institution with a ‘certain-future’---the two causes of its creation. ‘Interest-free Banking’ is a concept which disregards both these causes and, therefore, is in contradiction with the very nature of Banking.

A cursory look at the formation of Banks reveals that an individual or a group of individuals who establish and run a bank have very little of their own in the accumulated money. In fact, the little their own investment in the total sum, the more a Bank is considered successful. Without entering into any sort of a business venture and by simply manipulating the accumulated money in a certain manner, they are able to earn unimaginable amounts of ‘easy’ money. As ‘Interest-free Bankers’ why at all should they set up enterprises and business ventures, risking their future by entering in a profit and loss agreement with investors, troubling themselves with all the affairs of such concerns, facing the next to impossible task of dealing simultaneously with thousands of investors when, as ‘Interest-based Bankers’, they can earn much much more without taking all these pains and risks, simply by lending the secured money at a higher interest rate and returning the depositers a relatively low one? From the point of view of the depositers also, if they are not given surety of a fixed return, why at all should they deposit money with an institution having a ‘vague-future’ and face the chances of totally loosing their money? Should they not opt for a more safer investment like land or gold or perhaps even directly entering in a business and taking the risk themselves? ‘Interest-free Banking’, in short, is a fantastic production of man’s romance with economic concepts. This romanticism might be enthralling, but, we are afraid, it can find no place in the world of reality.

Perhaps, the solution lies in rethinking the whole set-up which emanates from the laws and principles Islam sets forth in this matter. We take this opportunity to introduce our readers to a humble effort undertaken in this regard by our mentor, Mr Javed Ahmad Ghamidi. His innovative approach to the whole problem has placed it in an entirely new perspective. He has proposed an alternative which can best be described as a new economic order, considering its staggering implications.

Mr Ghamidi asserts that by prohibiting both Interest and Security2 Islam has once and for all put an end to all institutions which are established and run on these bases. It has prohibited the two because both of them promote economic injustice and inequity---the very antithesis of an economy envisaged by Islam. Also, at the very outset, it condemns those who live beyond their means and rely on loans for their livelihood. Banking, on the contrary, institutionalizes what Islam condemns and in fact goes even further: it induces a country to live beyond its means. The net result is that it has become the centre of many economic evils. Mr Ghamidi, therefore, stresses that an Islamic economic framework is not just ‘Interest-free’, it is ‘Banking-free’ as well. This may be a startling premise, but can be better appreciated if some moments are spared to view the havoc caused by banks in the economy a country.

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An objective analysis reveals some glaring evils in Banking, an institution, which, actually, developed from the guiles of the goldsmith a few hundred years ago.

The greatest evil in it, which can rightly be termed as the source of all the other evils, is the concentration of wealth in a few hands, necessarily the rich. The result is economic disparity and a perpetual widening of gap between the rich and the poor. Through the courtesy of Interest and Security, the two pillars of Banking, an extremely large amount of money is rendered at the disposal of a few individuals, who, as a consequence, decisively influence the economy of a country. They become the sole beneficiaries of the whole country’s wealth, and with this ‘deadly weapon’ literally control the destiny of their nation. They are at liberty to direct the flow of wealth at any project they like, as long as they can obtain an interest rate well over the one they have to pay back to the depositers. The fact that a lucrative project might be harmful for the country’s well-being finds little consideration in their ‘feasabilities’. Similarly, other projects which may not promise a high rate of return, yet are essential for a country’s welfare may be of no significance to them.

Secondly, the rate of interest a Bank sets has a direct bearing on the cost of living as well as the price levels of various commodities of general use. House rents are fixed keeping in view the interest the money invested would fetch if it had been placed in a Bank. Similarly, a typical factory owner, who, inevitably, sets up his concern from a Bank loan adds the interest margin in the price of the goods he is manufacturing. Frequently, there are two, three or even more such interest margins because the loans acquired are multiple as well. This high debt margin also accounts for the pathetic state of the factory labour which is employed on meagre wages. The ultimate result is that the whole country is caught in a perpetually increasing price-gradient. What adds to this misery is that economists admit that in an interest-based system all measures which can cure this price hike are the ones which cause unemployment and vice versa.

Thirdly, since most of the wealth of the general masses nourishes a few Bankers, the sale of goods in local markets experience a pronounced decrease. Quite often, this leads to a severe slump in the country’s economy. Factories are forced to close down creating mass-scale unemployment. Also the manufacturers are inflicted with severe losses. The government, if possible, tries to compensate such influenced tradesmen by buying their goods. As a preventive measure, it also tries to keep the production below a certain level. In the process, a lot of money is spent3 . Moreover, to lessen the burden so caused on the national exchequer, the government is induced to plan a budget whose deficit runs in billions. To reduce this deficit, it frequently resorts to a number of activities which further cripple the national economy. Every year millions of currency notes are published. This false money is one of the immediate if not the main cause of inflation. Further taxes are imposed and foreign aid and loans are procured to increase the national income and reduce the budget deficit. Again, foreign agencies provide loan and aid on their own conditions and virtually dictate the future development (ie. the lack of it) of a country4. Needless to say that with economic slavery comes mental servitude, which totally destroys the moral fibre of a country. Furthermore, once a country starts relying on foreign loans, the need to repay them on interest starts an unending sequence of their procurement. Every year a considerable amount of the annual budget is spent in servicing these debts5.

Fourthly, a large quantity of money is retained in banks as reserve to meet sudden increases in the withdrawal of money. These ‘fits’ continue to occur every now and then as part of trade-cycles of an interest-based economy. Also, the quantity of money floated for loan advancement is not allowed to exceed a certain level so that the interest rate should not fall. As a result, a very large amount of money is left untouched, whilst the government may be busy procuring foreign loans!

Fifthly, foreign agencies which directly invest in a developing country are preferred as borrowers by the  Banks of such a country because of their ‘sound’ credibility. This results in a restriction in the availability of credit for the domestic borrowers. Also, among these domestic borrowers loans are advanced to only the few who are in a position to pledge the usually high-valued Securities against them6. Many capable and competent yet not-so-rich young men, from whose skills the country could benefit, are, inspite of all their own wishes, unable to play a role in the country’s development. As a consequence, a lot of this indigenous talent is bought by foreign agencies, who reap all the benefit.

Sixthly, the outflow of secured loans only towards ‘rich’ domestic borrowers brings into existence a particular class in a country, the industrialists, who, like their progenitors, the Bankers, are provided with the opportunity to play with the whole country’s wealth. The economic welfare of a country rests at their mercy. They can disrupt its economic stability and equilibrium by creating a shortage of goods at one place and producing. them in abundance at another. They can cause unemployment by replacing the hand-labour with mechanized techniques wherever and whenever they like because providing the relieved labour with alternative opportunities is not their headache. By establishing business ventures and commercial projects only in certain industrial centres, they are responsible for the creation of large cities which receive development and service at the expense of the rest of the population. This naturally promotes an atmosphere of rivalry between the beneficiaries and the deprived. Since they are the main buyers also, they dictate the demand pattern in a country, frequently, not taking into account the actual demands in a country. A country may be needing investments in the agricultural sector whilst, quite inevitably, they may be insisting on high-tech goods. Moreover, their money brings the whole leadership of their country at their doors as well. It is they who reign supreme in the institutions of science and technology, art and literature, learning and education. The mass media is their obedient servant as indeed is a country’s bureaucracy. At the international level their influence is even more potent. They can start a war and initiate a peace. At their orders, governments are brought to power, and at their bidding, they are deposed. Above all these money-barons and their masters the ‘old’ wall-street capitalists have once and for all determined MONEY as the ultimate value in a society. Honour, integrity, piety, competence and hard work are forced to solute and serve its cause. Greed and selfishness, fraud and deception reign supreme. Evil ruls the world. Only strangers now tread the path of truth...

Satan and his disciples, it looks, have yet again led the believers away from Divine Guidance. Fourteen hundred years ago a small Qur’ānic verse had warned them of the dire consequences of wealth being confined in a few hands. It still has the same message for us, if we could only care to pay heed!

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It is evident from the foregoing analysis that the institution of Banking cannot be purged from its evils, simply because its own existence depends on them. The only remedy is to extract it from its roots and reshape the whole economy ab initio.

This brings us to the ‘Banking-free’ economic framework proposed by Mr Ghamidi. It is essentially based on a three-faceted scheme:

(1) All institutions which provide capital on loan should be completely abolished, and all Banks should be converted into various branches of the Public Treasury (the Bait-ul-Maal), where people can deposit their savings. These branches shall provide protection, exchange and other similar facilities. In return for this service, the deposited money will be invested only in the public sector on industrial, commercial, agricultural and welfare projects with the precondition that without being given any profit on the original amount, the depositers would be returned their money whenever they demand it. This broad-based public sector shall be planned by the government keeping in view the collective requirement and welfare of all the people. It shall finance all projects which need huge investments as part of its basic obligation towards the public.

(2) The public sector so created shall not be run by the government. Leaving it in state ownership, its running and management shall be entrusted to the private sector by adopting either or both of the following two modes, depending upon the circumstances: (i) by selling a certain quantity of shares to the private sector, (ii) by imposing khiraaj (tribute) on the party of the private sector which is entrusted with the job of management7. However, the government can keep certain ventures of public interest, like the ordinance factories or the mass media under its own management.

(3) Individuals in the private sector who intend to set up their own business shall be freely allowed to do so. They can pool their money to form a joint venture and employ other means to procure funds. Joint stock companies can also play their role in the set up. However, no financial institution shall be allowed to mediate and advance loans to them. Also the only form of absentee partnership permitted would be one in which people can directly become shareholders in various projects of the private and public sector.

The resulting economy, a blend of a broad-based public sector and a naturally developed private sector, would, perhaps, rightly depict the moderate set-up of an Islamic Economic System in contrast with the two extremes of Capitalist and Socialist Economies.

It must be realized that the economic system of a country cannot be isolated from its political, social, educational and legal systems. Therefore, a complete overhauling of the above systems must also take place8. However, the government must take the following measures in particular to reciprocate and facilitate the implementation of this set-up:

(1) Efforts should be made to merge the whole Muslim Ummah from Morocco in the West to Indonesia in the East in a single geographical unit---The United Islamic States---so that all Muslims can benefit from the resources they have been blessed with.

(2) Those in authority including the head of the state must necessarily (i) have the same standard of living as that of the common man, (ii) always keep their doors open to hear the grievances of the poor, who can freely call them to account whenever they like and (iii) lead the Friday prayers.

(3) It should be the responsibility of the state to provide the basic necessities of life which include food, shelter, clothing, health and education to every needy citizen.

(4) To run the machinery of the state, the government should be allowed to rely only on the income obtained from its lands, industries, mineral reserves, trade, zakat and ushr9,and no tax10 should be imposed on the people.

(5) Ushr should also be levied on industrial produce11, just as it is done on agricultural produce.

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It is quite likely that what has been presented above shall be rejected on grounds of ‘high treason’ against the thoughts and ideas people are so used to. It is extremely difficult to rise above traditional views, conventional ideas, and existing frameworks, yet, gentle reader, the truth, sometimes, may not be very orthodox. It must be clarified that no claim is being made. Only an earnest request to weigh every new idea in the balance of Reason and Revelation.

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1. In the words of Sir Geoffrey Crowther: ‘Every bank has a very great deal of the money-lender in its composition. It collects money from those who have to spare or who are  saving it out of their income, and it lends this money out to those who require it. (“An Outline Of Money”, 2nd ed, Pg 23)

2. If one reflects on verses 282-3 of Surah Baqarah, it becomes evident that pledging a security against advanced loans is only permitted in a journey, because, while travelling, it is not possible to write down a legal document for a transaction. For further details see “Tadabbur-i-Qur’ān”, Amin Ahsan Islahi, Vol 1, Pgs 642-4.

3. Perhaps, the most glaring example in this regard is the American Agricultural Policy. Every year the government borrows five billion dollars to reduce the agricultural production. For details see “Man and Money”, Sheikh Mahmood Ahmad, Chapter 6.

4. To quote Sheikh Mahmood Ahmad: ‘The strategy adopted by foreign financial interests is no different from the one adopted by drug pushers. The first few doses of any drug can be had free. Foreign aid begins as a grant. The need for drugs and foreign finance, after one is hooked, proceeds at an identical pace. As we need more doses of both, the price starts escalating. The grant becomes a concessional loan, and then the concessional portion starts dwindlig and the commercial one starts rising, and finally the level of interest of both categories keeps creeping upward, while maturities keep contracting. Again exactly like drugs, the greater the frequency of the need for a drug, the higher the price that can be extracted for providing satisfaction...’ (“Man and Money” Pgs 885-6)

5. It would be worthwhile to note that 31.3% of the entire annual budget and 43% of the revenue budget for the fiscal year 1991-92 has been allocated for debt servicing. Out of the 80.7 billion rupees debt servicing payments, interest payments are 62.4 billion while 15.5 billion rupees have been repaid as principle of foreign loans. (Figures taken from “The Pakistan and Gulf Economist”, September 28th-October 4th 1991, Pg 9)

6. Everett E. Hagen, professor of economics at The Massachusetts Institute of Technology, while commenting on the role of Multinational Corporations (MNCs) in developing countries admits: ‘The charge that the MNC subsidiary in the country, by borrowing capital within the country reduces the amount available to the domestic entrepreneurs has more substance. On the average, foreign subsidiaries of American corporations raise more than twice as much capital within the country in which they operate as the amount contributed by the parents. Some of the capital raised domestically is offered only because the securities of the foreign corporations are regarded as entirely safe; the capital would not have been offered to domestic borrowers. The total amount of capital raised for industrial projects or other use in economic development may therefore be greater because of the MNC loans, but on balance the MNC borrowing must considerably reduce the amount available to the domestic borrowers.’ (“The Economics Of Development” 4th ed, Pg 25)

7. This would be analogous with how Hadhrat Umar had dealt with the conquered lands of Syria and Iraq. He had kept them in state ownership, but had left them with their original owners, imposing a fixed tribute on them according to their produce.

8. For details see “Renaissance”, Feb 1991, “The Islamic Manifesto”.

9. Verse sixty of Surah Taubah clearly says that zakat and ushr can be used for running the state as well as for the individual and collective welfare of the citizens. The general belief that zakat and ushr should only be spent on the welfare of the poor, we are afraid, has no basis at all in the Qur’ān and Sunnah.

10. While codemning to the death the idolators of Mecca after they had intentionally rejected the truth, the Qur’ān says:’If they repent, establish regular prayers and pay zakat, then leave them alone.’ (9:5) and verse eleven of the same surah grants them the citizenship of an Islamic State if they do so. The Qur’ān has made no other demand from them in this regard, deciding once and for all that after the believers have paid zakat, an Islamic Government can, though, make an appeal to the public if it needs monetary  assisstance, but it cannot forcibly claim a single penny of tax from its Muslim citizens. The Prophet (pbuh) is also reported to have said: “No tax-collector shall enter paradise.” (Abu Daud, Kitaab-ul-Khiraaj)

11. Islam has imposed Ushr on every produce. Fourteen hundred years ago this produce was only agricultural. Today this produce has many forms, industrial produce being a major one.