19th & Monday 20th December,
Masudul Alam Choudhury, School of Business,
College of Cape Breton,
Sydney, Nova Scotia B1P 6L2,
Fax: 902-562-0119, Tel: (office) (968) 515-845: (home) (968) 513-445
Abubakr Rafique Ahmad, Pro-Vice Chancellor, International Islamic University, Chittagong, Bangladesh.
Harmonizing Development and Financial Instruments by Shari’ah
Rules for Ummatic Integration
Islamic Endogenous Loans
(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: firstname.lastname@example.org
The present options for an economy
all have serious weaknesses and, in any case, the way forward
for Islam must be completely distinctive.
Islamic opposition to riba enables a distinctive
new way which addresses the real economy, furthers justice
and ends foreign financial colonialism.
The new way uses Islamic endogenous loans. These are state-issued, repayable, interest-free
loans which are generally administered by the banking system
on market and private property principles.
The loans are counter-inflationary and are always
directed at productive capacity.
Because they bear no interest, the loans create productive
capacity at one half, or less, of the present cost for:-
capital investment - hospitals, roads, bridges, etc.
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
and start-up businesses
1. The present
options for an economy have serious weaknesses:
present, the broad options for an economy are:-
Unfree, unfair and inefficient market
finance capitalism (i.e., ‘free market’ capitalism).
many weaknesses are:-
the inflationary creation of money
which is largely not directed towards productive
huge amounts of personal, corporation,
city, local government and national government debt
b) Social democracy.
This is a
form of unfree, unfair and inefficient market finance capitalism. Although it has a greater sense of social justice
it also has a greater inefficiency.
c) Socialism and communism.
and communism have inefficient command economies, dictatorial
political structures and are atheistic.
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. The way forward
for Islam must be distinctive
is to give a moral, intellectual and material lead to the
world its economy must be completely distinctive (Choudhury,
1997 & 2003). Without that distinctiveness, the ummah
will never free itself from control by others.
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.
(interest) is not necessary
is wrong. Which
is why Islam opposes it.
there is another, separate, argument against riba,
namely, that interest is not necessary.
The cost of administration can be an element of interest
but such cost can often be low, even minimal.
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). Furthermore, part of interest payments can be
in effect a guard against loss.
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.
as is well known, the effects of interest are hugely negative. For example, in Aachen, Germany, interest
on capital is 12% of the cost of rubbish collection; 38%
of the cost of drinking water; 47%
the cost of sewage; and up to 77% of the cost of public
housing. Indeed, it has been estimated that an amazing
50% of the price of all goods and services relates
to borrowing costs (principal and interest).
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). 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.
the question arises -
Why should there be interest at
all? 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.
Why should something created out of nothing give
any right – any right at all -
to receive interest?
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.
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. The conventional
definition of endogenous and exogenous money is a lie
economics and neoclassical finance capitalism, however,
are intent on maintaining the existence of interest.
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.
a visit to any dictionary reveals that 'endogenous' has
the meaning of ‘coming or growing from within’ (and 'exogenous'
has the meaning of ‘coming from without’). 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.
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.
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?
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
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).
leaves one other aspect to the conventional claim that it
issues endogenous money for the purposes of productive investment. That aspect is interest. Conventional endogenous money bears interest
and, very generally, interest doubles, or more than
doubles, the cost of a capital project.
So how can something which doubles the cost
of a project really be something which causes a “growing
from within”? Something
that hampers growing cannot be claimed to be promoting
the conventional claim that only the banking system can
issue, and does issue, truly endogenous money for new productive
capacity is a lie.
5. Islamic definitions
of endogenous and exogenous money
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.
A supply of Islamic endogenous loans is of immense
importance because it is capable of ensuring, among other
economic and social justice (Shakespeare
& Challen, 2002)
an end to the imposition of interest
a direct linking of new money to
a widespread ownership of productive
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
an ability of a society to control
its own destiny as opposed to being ruled by outsiders and
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. 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. Islamic endogenous
loans combine efficiency with social and economic justice.
Islamic endogenous loans combine
efficiency with social and economic justice.
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. Islamic endogenous money has four main uses:-
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.
Over time, the National Debt would reduce. 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.
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. 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).
capital investment, particularly for clean, renewable
energy. At present,
using interest-bearing loans, a lot of green technology
is not financially viable.
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.
and start-up businesses thereby freeing them from the crushing
pressure of interest-bearing debt.
(In the case of small and start-up businesses, there
would be no requirement for wide ownership.)
7. Islamic endogenous
loans implement Say’s Theorem (Law)
economics upholds Say's Theorem (Law).
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. The Theorem also requires that producers and
consumers must be the same people.
But, at present, there is undoubtedly a huge potential
supply which does not create its own demand. Moreover, producers
and consumers are not the same people. That
is to say, at present, Say's Theorem (Law) most certainly
does not work in practice.
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.
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. A genuine
Islamic banking system
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.
Robert & Shakespeare, Rodney (1999), Binary
the new paradigm, (University Press of America).
Masudul A. (1997), Money in Islam (Routledge, London and New York) and (2003),
The Islamic World-System:
A Study in Polity-Market Interaction (RoutledgeCurzon). Choudhury spearheads the call for Islam to have
a distinctive way forward and use endogenous money. See also (1989), Islamic Economic Co-operation;
(1990), Journal of Economic Cooperation Among
Islamic Countries; and (1998), Reforming the Muslim
Margrit I. (1995), Interest and Inflation-free Money, New Society
Rodney & Challen, Peter (2002), Seven Steps to Justice,
New European Publications, London.