Alternate Interest Free Economic System

ALTERNATIVE INTEREST-FREE ECONOMIC SYSTEM:

GOALS, CHALLENGES AND ROAD MAP

This paper is based on the assumption that Interest-Free Economic System is the desired alternative. This assumption is the natural corollary of the assumption that states that the conventional economic system based on interest is very harmful and there is a need for an alternative system. Any detailed discussion on this assumption-within-assumption is beyond the scope of this write-up. But rich literature is available on the desirability of an interest-free economic system as well as the undesirability of the conventional system. However, some reflections on these issues will by default crop up in this article.

Our task at hand is one step ahead. It requires unfolding the goals of such an alternative system and delineating the steps required for realising those goals. A goal cannot be realised without facing the challenges and obviating the consequences that may crop up in the process. Further, a clear idea about the road map and a blueprint will also be required. So the intent is to develop a model that can do both - describe the disease and prescribe the medicine. A description of Islamic economics, as such, is also not intended in these lines. However, its contours can be felt between the lines!

Our methodology of discussion will be to first visit the writing of renowned Islamic economists and find what goals they have proposed and then proceed further. I shall, for this purpose, be referring to the writings of Dr M. Umer Chapra and Dr Mohammad Nejatullah Siddiqi.

1. Goals of an Islamic Economic System

Dr M. Umer Chapra, in his book “Islam and Economic Challenges,” has discussed the goals of an Islamic Economic System from different aspects. First, he talks about what an economic system should ensure. What it should do and what not? Then he proceeds to describe the conventional interest-based system and the Islamic interest-free system, concluding with the failure of the former and the success of the latter.

Dr Chapra says that an economic system should ensure:[1]

1. Need Fulfilment;

2. Respectable Source of Earning;

3. Equitable Distribution of Income and Wealth; and

4. Growth and Stability. [Chapra, 1992, p. 210]

While describing money and the banking system he says:

A. The system should not:

- Promote Inequalities

- Lead to Conspicuous Consumption

- Bring Unemployment

- Result in Unhealthy Monetary Expansion to the detriment of all [Chapra, 1992, p. 201] 

 B. Instead the system should:

- Support Need Satisfaction

- Lead to a High Rate of Employment

- Result in broad-based Ownership of Means of Production [Chapra, 1992]

[Ibid, p. 201]

 Dr Chapra after describing Maqasid Al-Shari’ah (Higher Objects of Islamic Law) links the goals of the economy to the fulfilment of the objects and opines that only that market may be considered optimum which is in harmony with, or not at least in conflict with, the maqasid. Chapra says, “The Islamic worldview and strategy are blended into a consistent whole and there is complete harmony between them.” [Ibid, p. 201-202] In his opinion an economy attains total efficiency when it achieves three goals: 1. Efficient employment of total potential of scarce human and material resources; 2. Stability; and 3. The sustainable rate of future growth.

He further warns that equitable distribution of income and wealth should not affect the following four factors:

- Motivation to Work

- Saving

- Investment

- Undertaking Enterprise [Chapra, 1992, p. 3]

[Ibid, p. 3]

One may refer to the thoughts and works of Dr Mohammad Nejatullah Siddiqi in his book as well as his website[2]. He talks about two positive traits of the economy [justice (adl) and equity (ihsan)], stressing the need of obviating two negative traits [oppression (zulm) and corruption (fasad)].

“The desired state of the world is free of oppression (zulm) and corruption (fasad) and full of justice (‘adl)…. Its hallmark is justice and equity and elimination of oppression and corruption while ensuring need fulfilment and sustainability.” [3]

Dr Siddiqi has also defined and distinguished between justice and equity.

“Justice is largely perceived in terms of equivalence (in exchange transactions) and reciprocity (in a social relationship). But equity (ihsan) is urged on top of justice and is defined as giving more than is due according to the standards of equivalence and reciprocity to ensure dignity for all…. There are persons in society who are weak, invalid, poor, etc. so they have little to give. But they must receive to survive. Hence exchange and reciprocity are no good for them…. That is what equity envisages.”[4]

In other words, justice is treating equally and with fairness while equity is bringing some benefit or preventing some disutility (mafasid). It means rendering to others even more than their due. It is benevolence along with justice.

Dr Siddiqi has prescribed remedies and suggested goals for achieving the same. He has especially talked about, inter alia, discouraging interest and gambling and promoting a production-based economy. 

“Reducing the role of debt and eliminating gambling from financial markets should, therefore, be on top of the agenda for Islamic economics.”[5]

“Islamic Economics looks at production as a life-sustaining activity. It aspires to promote a type of economy that sustains life for all, the weak and the poor included. It does not equate life-sustaining productive activity with profit-making activity. It is also aware of the limits to growth that ecological and environmental considerations impose on us.”[6]

“The key to Islamic economics lies in positioning the Islamic vision in place of the Anglo-Saxon economic vision. But the Islamic economic vision has to be universal and contemporary not chauvinistic and medieval. As we move in that direction we may be pleased to discover we have good company from amongst modern economists in the West and East. The search for a more humane political economy is now universal. The challenge is, who leads the way.”[7]      

It is true that ‘the search for a more humane political economy is now universal.’ It is also true that a majority of the goals described above are also universally accepted. However, the Islamic approach has certain characteristics which we are repeating hereunder to highlight so that our discussions ahead may become more meaningful.                                                                   

1. Reducing the role of debt and eliminating gambling

2. Production-based economy

3. Savings-based economy resulting in investment wherefrom

Another very important goal of an interest-free economic system is that wealth created should permeate all ranks and files of the economy and it should remain in circulation. One may refer to the verse of the Qur’ān that tells us the basic reason for this goal.

“And what Allah restored to His Messenger from the people of the towns - it is for Allah and the Messenger and for [his] near relatives and orphans and the [stranded] traveller - so that it will not be a perpetual distribution among the rich from among you. And whatever the Messenger has given you - take; and what he has forbidden you - refrain from. And fear Allah; indeed, Allah is severe in penalty.” [Al-Qur’ān 59:7]

This verse has a particular historical reference to an event in Madinah. But the message of keeping wealth in circulation so that it may not remain in the hands of the rich alone is universal. 

One can imagine a production-based economy with the least dependence on debt and high reliance on savings-based investments wherein wealth created is not allowed to circulate only between the upper strata of society. The fruits of such an economic development will seep into all the fibres of the economy in an all-pervading fashion.

2. Challenges

A changeover to, even a move towards, interest-free economy from a conventional interest-based economy will throw three types of challenges: (i) Natural challenges; (ii) Resistance from Stakeholders of the existing system; and (iii) Self Inflicted Problems.

Any system in vogue, whatever level of ills it may contain, cannot be thoroughly contaminated. It must be serving some purpose otherwise it would have been thrown into the dustbin. A completely bad thing cannot see the day of light even for some hours of the day. The whole idea of revolutionary changes makes no sense. Changes have to be evolutionary. This step-by-step approach demands that questions arising at every stage are addressed logically and seriously.

An interest-free economic system demands that all premiums on debts without any counterpart be prohibited. The conventional economy has been running on interest for the last more than two centuries and almost all economic transactions are contaminated by it. An answer to the following issues will be required for replacing the existing system with the desired system. These are genuine, rather natural, challenges.

● Developments in conventional economics which are agreeable to Islamic economics

● Developments in conventional economics which are not agreeable to Islamic economics

● The ills of a debt-based economy including deficit financing.

● The possibilities of deploying capital in joint ventures on an equity financing basis.

● The need and products of Islamic finance based on equity financing in production-based economies as against those in rentier economies.

● The limits and conditions of current expenditure based on future income for individuals, families, corporate houses and nations.

● The pros and cons of the existing monetary system and the method and impact of creating money and bringing it to circulation, suggesting remedies based on the principles of equity and justice.

In addition to the above issues that require some research work based on empirical studies, there is another issue that an interest-free economic system, for all practical purposes, is another name for an Islamic economic system. Some people are averse to this idea. An interesting development is that most of such persons, groups and nations have agreed to the idea of Islamic finance because they get easy and low-cost money in this name but when it comes to anything more Islamic than that, they get scared. It is a challenge for the proponents of Islamic economics to convince the world at large that this alternative is universal and it serves all.

2.1 Resistance from Stakeholders of the Existing System

The conventional interest-based economic system is serving the powerful persons, families and nations who are in minority but they sway the world of economics and finance. It serves them and serves well. The vast and badly hit majority that is at the receiving end of the ill impacts of the system is either voiceless or unable to rise to the occasion. Such stakeholders may include rich people, big bankers, resourceful corporations and powerful governments. Their resistance is inevitable but this does not mean that the task ahead is insurmountable. Theirs is not a homogeneous entity as such and they are also members of the same society and are serving it from their specific sides. With conscious efforts, serious research and unambiguous practices of the alternative system, the tide can be changed and made favourable. 

2.2 Self-Inflicted Problems

Self-inflicted wounds are more painful than others. It is an irony that interest-free economics has been hit hard, rather below the belt, by its sister Islamic Banking and Finance Industry. The latter was supposed to be an offshoot of the former but with time it has assumed the role of game-changer, if not game-spoiler. 

A very basic object of interest-free economics is to reduce the role of debt in finance. Initially, this object was kept in mind but with time, things have taken a turn differently, if not a u-turn. I shall be quoting Dr. Siddiqi in support of this charge sheet on this assault from the most unexpected corner.  

“The thing to worry about is not the phenomenon of Islamic Banking and Finance emerging as the chief embodiment of the idea of Islamic economics but the particular form Islamic finance has assumed: Debt-financing.”[8] 

The reason behind this strange phenomenon is that the Islamic Finance industry started making copies of existing financial products, with its brand, of course. The following long quote is self-speaking: 

“The few Islamic banks that had come up by the end of the seventies of the last century did not depend on brand name ‘Shariah Advisories’ for getting business. All that came during the eighties when, feeling the wind had started blowing the familiar way, giants of the conventional financial industry like City, HSBC, and ANB AMRO…entered the field of Islamic finance…. Every contract currently used by Islamic financial institutions is certified by a Shariah scholar, often a team of scholars. Barring a few exotic speculative products like Debt Default Swaps, every product currently available in the conventional financial markets is also available or can be readily made available in the Islamic financial market.” 

“The contributions to the subject before the induction of murabaha in the late seventies of the last century all revolved around the principle of sharing. Even after admitting several other debt-creating modes such as ijarah and salam/istisna into the Islamic financial arrangements, it was emphasized they had to have only a limited scope. The addition of ‘trade based modes of finance’ had the backing mostly of Shariah scholars, not of trained economists.”[9]

The solution could have come from trained economists or in association with the Shariah scholars. But alas!

“…whatever economic talent was forthcoming during the last thirty years was absorbed, largely, into the Islamic finance industry which had little time for theoretical niceties.”[10]

Dr. Siddiqi has placed himself in the category of those “who complain that Islamic economics proper has been submerged under the stormy waters of Islamic finance endangering its distinct identity….”

This is a painful story and, instead of prolonging it, I would close it with a description of the need for course correction in the Islamic bond industry, i.e. sukuk.

“What makes some of the sukuk debt instruments is the inclusion of murabaha receivables into the package of assets against which sukuk are issued and the commitment to redeem them at their face value at some future date, regular periodical returns being paid in between. There is no difference, in effect, between this and a sum of money lent for an interval being serviced by periodical payment covering the interval.”[11]

3. Road Map

A description of challenges, particularly the last part above appears to be dampening. But no, the situation is not that bad. Conventional economics has inflicted far-reaching injuries and there appears to be no way out as if economics today has reached a dead end. A search for alternative economics is on. There is no reason why this interest-free alternative will not be considered if it is found to be the panacea. The task in hand is to present it with a clear road map and put it into practice wherever possible. A debate done properly is surely bound to be noticed.

Dr Nejatullah Siddiqi has prescribed a road map of five strategic changes required for the purpose as under: 

1. Family, rather than the market as the starting point in economic analysis

2. Cooperation plays a greater role in the economy, complementing competition

3. Debt playing a subsidiary rather than the dominant role in financial markets

4. Interest and interest-bearing instruments playing no role in money creation and monetary management

5. Maqasid based thinking supplanting analogical reasoning in Islamic economic jurisprudence[12]

In the current economic thinking, an individual as an economic agent faces the market where he has to face competition on an impersonal basis. The idea of making family the primary economic agent has an altogether different connotation. A family is a place where love, care and compassion take place. It is not impersonal as the market. Thus, this could be the beginning of cooperation instead of competition in the economy.

The role of debt can be reduced but it cannot be ended altogether. With the abolition of interest, the trading of debt documents will vanish in thin air. It is possible only when equity financing is encouraged in a big way. Equity financing would mean an atmosphere of risk sharing. 

Risk management is an important aspect of the road map of an interest-free economic system. This would begin with abolishing the system whereby the financier can play a win-win game, immunizing himself from any monetary risk by shifting it to the producer. Further, all scope of buying and selling risk is required to be blocked. The culture of risk sharing and equity financing cannot be ushered in without treading this path.

Gambling, which is a zero-sum game, needs to be disallowed. There is no scope of any type of gaming in the interest-free economic system. Buying risk too is a form of gambling which cannot find a place in this alternative to the conventional system. 

The case of derailment of Islamic banking can be resolved and brought back to the desired main track. For example, Dr Siddiqi has suggested ways and means of ending the malaise of excessive debt creation in the present-day trade-based finance practised by Islamic banks. He says “The deposit money received by Islamic banks based on mudaraba should be advanced on the same basis (of profit-sharing) to investors who would then finance productive enterprises directly or based on murabaha, ijara, salam/istisna, etc.”[13] This suggestion implies the separation of commercial banking and investment banking in a special way. Investment-making institutions would not be allowed to accept deposits from the public. They either seek funding on mudaraba basis through banks or sell shares collecting funds based on shirkah. Deposit-taking banks, on the other hand, will manage the payments mechanism only.” This is an attempt of course correction by separating purely financial transactions from business transactions.

The tendency of Islamic banks to provide alternative financing products akin to the existing conventional products needs to be checked. This leads to the demand on the Shariah experts to adjust the features of the existing products by permutation and combination so that some analogy with a past Shariah decree of any school of jurisprudence may be found. There is a need to supplement this qias (analogy) based method of jurisprudence with Maqasid approach. Objects of Islamic law are defined. Hence any law-making exercise should pass through this litmus test. 

The idea of a parallel window for Islamic financing products under the conventional banking umbrella is obnoxious. This is a defeatist tendency whereby an alternative system is made subordinate to the system it was supposed to replace. It is a case of losing the battle at the beginning itself.

Some aspects of the road map may be country specific. In respect of India, the following submissions are made because of its characteristic features of being a democratic country with fast developing production-based economy and a large number of Muslims in minority:

A major portion of the features of an interest-free economy can be practised. Enterprising persons have a good scope of business opportunities. Arrangements for equity-based finances on the mode of venture capital or angel finance can be made within the existing laws of the land. The only problem faced will be in the collection of public deposits because the Reserve Bank of India will not permit that, in the existing rules and laws. India is a democratic country where efforts for opening avenues for public deposits under interest-free mode can be done and we understand that it is being done in a manner that is suitable for democracies.

● There is the scope of the risk-sharing mode of finance under the umbrella of state-level and multi-state-level cooperative laws. Efforts are being made to keep the scope open and widen its base. 

● Many regional communities are running activities for providing interest-free capital on a charitable basis, i.e., qarz hasan mode. Their efforts may be praised but the need of the hour is activities within the scope of the existing laws so that they can be replicated in other places. One cannot build any movement based on such private exercises.

● There is a serious effort spearheaded by well-meaning persons for liaison work in favour of Islamic banking in India. A separate effort in favour of an interest-free economy is required primarily because the scope of the economy is much wider than that of banking or finance. Further, the practices in the name of Islamic banking need course correction that can only be done with a more serious academic effort. So Islamic banking requires the check and balance of interest-free economics so that it may not become a misnomer. 

A movement in favour of the alternative interest-free economic system is required. We will not be alone in this. Dr Siddiqi says 

“The current endeavours of other faith-based communities, also of non-religious but well-intentioned people, to escape from the tyranny of ideologies by making economics serve humane objectives, deserve our involvement at the local as well as the global level.” [Ibid]

“As we move in that direction we may be pleased to discover we have good company from amongst modern economists in the West and East. The search for a more humane political economy is now universal. The challenge is who leads the way.”[14]

One can locate some serious groups and individuals, both activists and academicians who are working in the fields of alternative and development economics for the eradication of poverty and economic development. Some of them may have to be convinced about the vices of an interest-based economy and satisfied with its worth including the feasibility of an interest-free economy. However, their work, particularly in collecting empirical data and developing a theoretical base for providing a respectable life to the common man is very much common with the maqasid-based interest-free economics. Name a few, for example, we may collect information about the Alternative Economic Survey Group of Delhi or noble prize winners like Amartya Sen and Angus Deaton, and their associate Jean Dreze. Amartya Sen did work on human rights, inequality and poverty and studied the causes of famine, providing a solution to these problems. Angus Deaton’s analysis and consequent measurement of consumption, poverty and welfare and his focus on household surveys and individual data enabled him to get the coveted award and international recognition. Jean Dreze has the distinction of being co-authors of several books by the two economists. This Belgium-born Indian economist has done remarkable work in the fields of hunger, child health and education. Their importance lies in empirical analysis, an area where academics related to interest-free economics have much to learn. We may not only sympathise with these developmental economists but also associate with them and become wiser in the process.                                                                              

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