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 Justice
Private 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
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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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