| NON-INTEREST RESOURCE MOBILIZATION
FOR PUBLIC CAPITAL PROJECTS - The Use of Islamic Endogenous
Loans
Rodney Shakespeare
London Global Table
www.globaljusticemovement.net
Christian Council for Monetary JusticePrivate address:
11, Charman House,
Hemans Estate,
London, SW8 4SP,
United Kingdom.
Tel: (UK) 020 7771 1107
email: rodney.shakespeare1@btopenworld.com
NON-INTEREST RESOURCE MOBILIZATION FOR PUBLIC CAPITAL PROJECTS
_ THE USE OF ISLAMIC ENDOGENOUS LOANS
Rodney Shakespeare
ABSTRACT
Islamic opposition to Riba opens the path to an immensely
creative possibility _ a non-interest way of mobilizing resources
for public capital projects. The way uses Islamic endogenous
loans (repayable, interest-free loans issued by the central
bank) which are counter-inflationary and always directed at
productive capacity. Because they bear no interest, the loans
allow the building of bridges, hospitals, schools, sewage
works, tsunami warning systems etc. at one half or less of
the present cost.
The loans can also be used for other aspects of the real
economy:_
• Private capital investment in large corporations if
new owners of capital are created
• Environmental capital investment (e.g. clean energy)
• Small and start-up businesses thereby freeing them
from the crushing pressure of interest-bearing debt.
Above all, the use of the loans will enable Islamic societies
to give an intellectual, material and moral lead to the rest
of the world.
NON-INTEREST RESOURCE MOBILIZATION FOR
PUBLIC CAPITAL PROJECTS _ THE USE OF ISLAMIC ENDOGENOUS LOANS
Rodney Shakespeare
1. INTRODUCTION
There is always a need for more public capital projects _
anything from a road or hospital to housing or sewage works
_ but there is never enough money. Consequently, faced with
a demand to build a capital project, a government will always
start by saying that its income is insufficient and then add
that, in any case, there are other, more pressing, claims
on its resources.
Which is not unreasonable because there is a limit to the
amount that can be raised by taxation and there are always
many urgent things needing to be done. Besides, the government
will say, even if we do agree to build the project, we will
have to borrow the money which, because of the associated
Riba/interest, will increase our already huge, and debilitating,
National Debt.1 Then, as a last afterthought, it will say
that if a government prints money for its spending, the inevitable
result is inflation.
Yet, whatever a government says, there is an undoubted need
for public capital projects and much pain and misery results
when they are missing or inadequate. A terrible recent example
is the December 2004 death and destruction caused by tsunami
(tidal waves) because countries surrounding the Indian Ocean
did not have proper warning systems in place.2
So, is there a solution? Is there any new way of funding
necessary public capital projects without raising taxation,
increasing the National Debt _ or causing inflation?
Yes, there is. It can be summarised in the phrase Islamic
endogenous loans. While not being a magic wand capable of
solving all problems, the loans do have the practical consequence
of either:_
doubling the amount of public capital projects obtainable
for the present cost
or
allowing the existing amount of projects to be obtained at
half the present cost.
2. RIBA/INTEREST IS NOT ONLY WRONG BUT UNNECESSARY
In order to understand the new way it is first only necessary
to remind that Riba (interest) is wrong. The Quran forbids
Riba and that, for Muslims, is the end of the discussion.
Yet Muslims should also recognise that, leaving Quranic injunction
aside, there could be another, separate, argument against
interest _ namely, that interest is not necessary. If correct,
the argument is peculiarly powerful because Western neoclassical
economics (and the worldwide finance capitalism it generates)
generally assumes interest to be something that exists, has
always existed, and always will exist because it is, as it
were, an integral part of nature.
Moreover _ and this is being blunt _ the argument that interest
is wrong is not likely to carry much weight with the non-Muslims
who may view Islamic religious belief as of little relevance
to themselves. However, if interest is stated to be unnecessary
then the ears of non-Muslims begin to prick up. After all,
everybody knows interest imposes a considerable financial
cost and the possibility of avoiding it is something which
has appeal to all sane people, be they Muslim or non-Muslim.
3. SINCE NOWADAYS THE BANKING SYSTEM CREATES MONEY OUT
OF NOTHING THERE IS NO JUSTIFICATION FOR THE IMPOSITION OF
INTEREST
Of course, those of a cynical turn of mind will say that it
does not matter if interest is necessary or unnecessary because
interest is simply an imposition by those who own money and
have the power to dictate the terms on which others can borrow.
Which cynicism is not unreasonable if people really are lending
their own money. But suppose they are not lending their own
money and, instead, are creating the lent money out of nothing
simply by pressing computer buttons (which is what the banking
system does today)? Where, then, is the justification for
the imposition of interest?
There are, of course, the traditional justifications for
the imposition of interest. Thus Nassau Senior3 invented the
term ‘abstinence’ seeing interest as the reward
for abstaining from immediate consumption. Rather similarly,
Alfred Marshall spoke of ‘waiting’.4 And the principle
of time-preference was stated by Eugen von Bohm-Bawerk5 who
viewed a loan and the associated interest as a real exchange
of present goods against future goods. Again, the underlying
idea is of paying a price for getting something now rather
than having to wait.
But if somebody creates the money to be lent out of nothing
by pressing computer buttons why should that person be allowed
the additional privilege of adding interest? That person has
done no ‘waiting’ or ‘abstaining’. And
who said that person has the right to create the money in
the first place? Indeed, those who create money out of nothing
are normally deemed to be guilty of forgery and counterfeiting
(for which there is always serious punishment).
Yet, today, money is created out of nothing by the banking
system which has, in practice, been allowed not only to usurp
society’s prerogative to create money6 but also to usurp
society’s right to impose tax _ for a tax, in effect,
is what interest is except that the benefit of the ‘tax’
does not go to the government. Thus we have reached the crux
of the matter which can be expressed in the question _ Who
(society or the banking system) has the ultimate right to
create money (and, if wished, to impose interest)?
Of course, on hearing the question, there is an immediate
flurry of objection, for example, pointing to the everyday
cost of financial administration as being a reason for imposing
interest. Which is not denied because the cost of administration
can be a part of interest7 as can provision for default.8
And every investment _ at least in the private sector _ must
in principle pay for itself. However, when the administration
cost is minimal and when the collateral (security for a loan)
is adequate or largely not involved,9 and when there has been
a scrutiny to establish whether the investment can pay for
itself, it can then be clearly seen that interest itself is
not necessary. Rather it is like a tax _ and an unnecessary
one at that _ imposed, simply, by those who have the power
to impose it. And, like taxes, it can go on being gathered
for evermore, bleeding a country to death (as heavily indebted
countries know only too well).
The conventional economist will then try to make another
defence of the imposition of interest. In another version
of the ‘abstinence’ argument he will articulate
conventional savings doctrine. This says that, before there
can be investment, there must be financial savings and physical
savings. Indeed, at first it sounds reasonable to say that,
before there can be investment, money must be obtained, and
physical things (e.g., bricks and cement) must be available.
But suppose the money is created out of nothing by the pressing
of computer buttons10 and suppose the bricks and cement are
easily available (even though, when in short supply, their
prices can rise or, if necessary, alternatives are available)?
Where, then, is the justification for conventional savings
doctrine?
So the question stays with us _ Why should there be interest
at all? Indeed, Muslims should recognise that, apart from
being wrong, interest can be viewed simply as an unnecessary
‘tax’, and a very large one, whose receipts go only
to a small percentage of the population and to foreigners.11
In fact, it is hard to see any justification for the imposition
of interest since the original principal is created out of
nothing and interest generally has hugely deleterious effects
on the economy and society as a whole.12
Muslims, therefore, should beware of outdated concepts such
as the time value of money and conventional savings doctrine
which are generally presented to the populace as unchallengeable
slogans and everlasting truths. In reality, of course, they
are cynical deceptions designed to maintain the malignant
grip of money-lenders and other undesirable features of finance
capitalism such as rich-poor division and economic colonialism.
4. THE COST OF CAPITAL PROJECTS CAN BE HALVED OR MORE
Furthermore, in making the recognition that interest is not
necessary, Muslims will easily come to a further recognition
_ that, if interest is eliminated, the cost of capital projects
can be halved or more. This is because interest, particularly
when compounded, adds hugely to the cost of a project. Indeed,
in many cases, due to the accrual of interest, the money owed
becomes incapable of ever being repaid. This is the basic
mechanism which has caused the National Debt of most countries
to rise to astronomical levels.13
5. THE CONVENTIONAL DEFINTION OF ENDOGENOUS AND EXOGENOUS
MONEY IS A PERVERSION AND A LIE
Conventional Western economics and neoclassical finance capitalism,
however, intent on maintaining the existence of interest,
will still come up with one more attempted defence of interest
(and of the banking practice of creating money out of nothing
by pressing computer buttons). For them, interest is at the
heart of everything that is materially successful and this
can be understood by considering the conventional definition
of endogenous money (which is alleged to be the key to all
material growth and success) as that which issues from the
banking system. Conventional economists then get very excited
_ indeed, give yelps of triumph _ as they add that loaned
money issuing from the banking system is especially virtuous
because it serves the needs of the economy _ particularly
the need for productive capacity _ and efficiently allocates
resources.
But that is untrue. Firstly, 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 society, and only the banking system is inside. That
is a perversion of vocabulary.
Secondly, the claim of efficiently allocating resources,
particularly for productive capacity, is a complete lie. Nowadays,
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 consumer credit, to
putting individuals, companies and whole societies into debt,
indeed, to anything but the real, productive economy.14
The perversion and lie are further compounded when interest
is considered. Conventional endogenous money issuing from
the banking system) bears interest and, very generally, interest
doubles, or more than doubles, the cost of a capital project.
Something which doubles the cost of a project cannot honestly
be called something causing a ‘growing from within’
and something that hampers growing cannot honestly be claimed
to be promoting growth.
6. ALL OF THE NEW MONEY SUPPLY CAN BE DIRECTED AT PRODUCTIVE
CAPACITY
The perversion and lie, moreover, are seen to be outrageous
when it is understood that a government, using the banking
system and generally insisting on market and private property
principles, can ensure that all of the supply of new money
to an economy can go towards new productive capacity. In other
words, by using what is summarised as Islamic endogenous loans,
government can do what the banking sector claims to do, but
does not.
The mechanism for the loans is simple. In the case of public
capital projects (e.g., roads, bridges, hospitals, schools,
waterworks, sewage works etc.), the national central bank
(in Islam, Bete el Mar) lends interest-free money to the government
for the purposes of the government’s own capital expenditure.
In due course, the lent money is repaid by the government
to the central bank which can cancel the repaid money. No
interest is involved, thereby halving at least the cost.15
In the case of the private sector, the central bank (Bete
el Mar) lends interest-free money to the banking system which
then lends it on to businesses on market principles including
the ability to repay the money, and the existence of collateral.
NB. In the case of large corporations, a key condition for
the use of interest-free loans is that the investment is associated
with the creation of new shareholders.16
The linkage of the money supply with the real economy (and
at half the present cost) is something which can never be
done by the banking system as it exists today, indeed, is
incapable of even being understood by the present banking
system. The linkage not only halves the cost of public capital
projects but it is also important to note that the public
projects can still be:_
• built by the private sector
• managed by the private sector
• and even, for that matter, owned by the private sector.
And since the loans are repaid and cancelled, there can be
no inflation.
7. ISLAMIC DEFINITIONS OF ENDOGENOUS AND EXOGENOUS MONEY
Thus it can be seen that Islam is able to give true definitions
to endogenous money and exogenous money _ definitions which
are completely different from the present perverse conventional
definitions. Completely unlike conventional economics, Islamic
economics is able to define Islamic endogenous money as state-issued
interest-free (repayable and cancellable) loans which are
always directed at new productive capacity. The loans are
capable of being administered by the banking system on market
and private property principles.
And Islam is also able to define exogenous money as interest-bearing
money either coming from abroad or created by the international
banking system operating within a country.17 Such money, of
course, if at all possible, is to be avoided.
8. ISLAMIC ENDOGENOUS LOANS ARE DIRECTED AT THE REAL ECONOMY
AND CANNOT BE INFLATIONARY
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.
The cancellation of the money on its repayment ensures that
there can be no inflation because a productive asset has been
created and the money used to bring it into existence is eliminated.
Indeed, Islamic endogenous loans create a counter-inflation
i.e., more wealth and economic activity are created but with
lowered prices.
9. NON-INTEREST RESOURCE MOBILIZATION FOR PUBLIC CAPITAL
PROJECTS _ THE USE OF ISLAMIC ENDOGENOUS LOANS
The first main use for Islamic endogenous loans is now easily
seen _ for public capital projects. Hospitals, roads, bridges,
sewage works, waterworks, fire stations, schools and tsunami
warning systems can be constructed for one half, or even one
third of the present cost. Over time, the National Debt would
reduce.
Moreover, the public 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 halved.
10. OTHER USES OF ISLAMIC ENDOGENOUS LOANS
There are, moreover, three other main uses for Islamic endogenous
loans:_
Private capital investment in large corporations 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 the market principles of binary economics,18 a large
company/corporation would get cheap money as long as new shareholders
are created. 19
Environmental 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 generation through
tidal barrages, dams, windmills, wave machines, solar electricity,
and geothermal power stations. It is a shocking thing that
clean, green electricity generation is not at present substantially
in existence and thus the world could destroy itself through
global warming all because of the insidious grip of usury.
Small and start-up businesses thereby freeing them from the
crushing pressure of interest-bearing debt. There would be
no requirement for wide ownership. However, there would still
be a requirement for collateral as security against the possible
loss of the loan and it might be desirable for eligibility
for the loans to be confined to socially beneficial businesses.
That said, the key point is that interest-free loans could
be used for small businesses in exactly the same circumstances
as today except that the small businesses would not be suffocated
by interest payments.
Together with the use for public capital projects, these
three uses _ for private capital projects if wide ownership
is involved; green capital investment; and small business
_ would back the currency with assets, break the grip of usury
and, because they are directly related to productive capacity,
would be counter-inflationary. They would, moreover, would
implement a genuine free, fair and efficient market; throw
off foreign and financial elite control, address social and
economic justice through the spreading of wide capital ownership
and its associated capital income; and give hope for the environment.
11. ISLAMIC ENDOGENOUS LOANS IMPLEMENT JEAN-BAPTISTE SAYS’S
THEOREM (OFTEN CALLED “SAY’S LAW”)
Neo-classical economics upholds Say's Theorem (often called
“Say’s 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 are capable of distributing
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 endogenous loans can ensure
that Say’s Theorem really does, in practice, become a
true Law.
12. BENEFITS OF ISLAMIC ENDOGENOUS LOANS
A supply of Islamic endogenous loans for both public and private
sector (binary) projects is of immense importance because
it is capable of ensuring, among other things:_
• economic and social justice20
• a great lessening of Riba/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.
13. GIVING A LEAD TO THE WORLD
Islamic endogenous loans have huge beneficial potential. They
will be central to ensuring that the Ummah becomes a new comity
of proud, self-reliant societies giving a moral, intellectual
and material lead to a world sorely in need of such a lead.21
----------------------------------
Books:
Margrit Kennedy, Interest and Inflation-Free Money,
(New Society Publishers, 1995)
Tarek el-Diwany, The Problem With Interest (Kreatoc
Ltd., 2003)
Robert Ashford & Rodney Shakespeare, Binary Economics
_ the new paradigm (University Press of America, 1999)
Rodney Shakespeare & Peter Challen, Seven Steps to
Justice (New European Publications, 2002)
Masudul Alam Choudhury, Money in Islam (Routledge, 1997)
Masudul Alam Choudhury, The Islamic World-system (RoutledgeCurzon,
2004)
Websites:
www.globaljusticemovement.net
www.cesj.org
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