As debate on deficit heats up, a look into Shariah guidelines for solutions may help. CREATIVE COMMONS
With the strengthening of democracy in Pakistan, calls for building an interest-free economic system are increasingly gaining traction. As the debate on public sector borrowing intensifies in the wake of the recent budget and the government’s successful conclusion of a US$5.3 billion facility from the International Monetary Fund (IMF), it would be helpful to look into Shariah guidelines for both spending and borrowing.
First let us look at the Shariah guidelines for expenditure. Monzer Kahf, an Islamic economist, lists three areas that early Islamic governments traditionally spent on: defence, judiciary and what was known as society’s management, under which internal social/tribal affairs and foreign relations were included. Social goods, such as health, education, drinking water were provided through Auqaf, or charitable trusts.
Therefore, according to Shariah, if Pakistan limits itself to the provision of defence and internal security, judicial sustenance, and the running of national politics and international relations, a lot of expenditure that the government incurs could either be shifted to the private sector or the not-for-profit sector.
This means two things: first, the government must stop subsidising certain goods and services. Subsidising electricity and power generation has resulted in the on-going energy crisis in the country, in addition to worsening the budget deficit and consequently increasing the public sector borrowing requirement.
Secondly, health, education and other social services like clean water, sanitation and similar activities must be organised through the third sector organisations, like Auqaf, cooperatives and trusts. This would mean the government must also not pay cash to support lower-income families and business unit. Pakistan Income Support Programme (PISP) does not result in any increase in the productive capacity in the economy. On the contrary, it puts added pressure on the budget.
Now let us look at what Shariah has to say about borrowing. Dr Umer Chapra, another Islamic economist, lists four reasons for excessive borrowing by previous and present-day Muslim states: corruption, price subsidies, a large and inefficient public sector, and defence expenditure. It seems all of these factors exist in Pakistan’s present economy, contributing to excessive public sector borrowing. Here are some steps Pakistan can take:
(a) The government must not borrow in order to provide goods and services that the private sector or the third sector has otherwise ability to produce and supply. Therefore, there is no point of keeping on borrowing to run such corporations like Pakistan Railway, Pakistan International Airlines, and similar corporations if the private sector has the ability to acquire and run them profitably and sustainably.
(b) Borrowing for meeting the non-developmental expenses of the government cannot be justified. If a government fails to collect enough taxes to meet its current expenses, it is certainly an incompetent authority that must not be allowed to borrow. If it is absolutely required to borrow, the ruling party or parties must borrow on their account, and must be made responsible to pay the debt back during their tenure.
(c) Borrowing from the central bank for meeting current expenses should not be allowed. It is an act of injustice on the present and future generations who must pay the price of subsequent increase in inflation.
(d) If it is absolutely necessary to borrow, it should not be on the basis of interest; instead the government must use Shariah compliant ways of raising money. One contemporary tool for public sector debt rising is through government/sovereign Sukuk. The most commonly used Sukuk allows the government to sell an asset to investors for a specific period and then buy it back at the end. Between the sale and buy-back, the government leases the asset and pays rentals to the investors. This is an asset-backed arrangement and therefore limits the ability of the government to borrow to the extent of the availability of a Shariah compliant asset.
(e) While it is perhaps too late for the government to use a Shariah compliant structure for borrowing from the IMF, it must consider in future using only those instruments and tools to borrow, which fulfil strict Shariah requirements in this respect.
The writer is an economist and a PhD from Cambridge University
Published in The Express Tribune, July 15th, 2013.
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COMMENTS (45)
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My comments: First thing is that there is no such thing as an Islamic economist just like there is no Islamic physicist; economics being a science.
Second, providing healthcare or education or social security in the form of food, clothing, shelter etc is not unislamic. on the contrary it is according to the spirit of Islam and very Islamic. If you don't provide people these basics the society will become divided and result in a strife.
In stating that these " non-developmental expenses" are unjustified; the author is too short-sighted as he sees only the direct effects government actions and ignores the indirect, long term consequences.
third, the author is only using the name of Shariah in order to prove his point without even knowing what is Shariah.
The author has only one valid point which he proves in a very cumbersome way by discussing Sukuk financing etc and that is that the state should borrow moderately One should expect some well thought out and logical article from a Cambridge economist
Shariah law is derived from divine sources but if you want to make it at par with capitalism and socialism, so be it...lets see which one proves to be the best. In the end what matters is what benefits mankind and not what you or I think. Further if endorsement from the West is a benchmark for success and all that is good, what can you say about the gay marriage laws being endorsed by them. I was under the impression that seeing the dismal state of the economy of the West and its turbulent society people would grow up and take heed but seems newspapers and other news media have not made their way everywhere.
Whatever system is in place, islamist, christian, jewish or hindu it should ensure reduced inflation, fair business practices no black marketing
If sharia law was that good then why west didn't implement and endorsed it in first place ,it is still man made law and there is no real source of it being real.
So much of hue and cry over an article and simply because it talks the Shariah. If people have a personal problem against any religion whatsoever this is not the place for it…there are ample opportunities through hate groups on social media where one can give vent to their emotions. One wonders how people sitting on a collapsed economy where thousands remain without the basic necessities of life can sit and pass judgements on a system that is trying to bridge the gap between the haves and have nots. But who cares really for the elimination of poverty or equality of subsistence when we have all the time in the world to sit and rant and that too in words which simply spell out ignorance of the subject matter.
@Ali Tanoli: Actually west or anyone is not opposed. The problem actually starts when these kind of failed policies lead to economic refugees flooding west and creating problems there.
Why West opposed Islamic Laws or Banking in any where in the world ?/ can Mr Hamyoun Dar write on this subject......
Most of us including me giving comments here are not aware of either system whether capitalism, Sharia based economic, or any other and in the world biggest opponent of Sharia banking are peoples in united states why they ??? I don't know.
Get rid of IMF and Crruption from the govt and coutry every thing will be fine and straight.
Many of the recommendations made here are also made by other governance systems as well and are not peculiar to Shariat. In fact finance is far more sophisticated (and corrupt) today than it was centuries ago, and what is considerd Shariat-compliant is a matter of opinion. What one rejects outright is that Public Goods be turned over to the private sector. Why? Instead of ending corruption and bringing in efficiency, it is made justification to sell out. This is trying to give legitimacy to unlimited privatisation, something that our new PM is blindly fond of -- the way IMF and WTO want -- so that our sovereignty can be swallowed piece by piece. For-profit corporations do just that -- earn purely for profit by serving only those who can pay, and not to fulfil basic public needs and rights. As long as things remain unregulated and free-for-all, whether one calls it Shariat or secular, is not going to make the slightest difference. There has to be strict limits to interest and monopolies which are the most unIslamic factors.
Then perhaps the author can explain why he chooses to live under the infidel-capitalist system in Canada, paying non-halal interest on his mortgage and earning non-halal interest on his investments? Why not move back to Pakistan and help set-up this 'model Islamic financial' system? Also, if the system he proposes is so 'wonderful' why haven't the members of the OIC (especially the oil rich ones with clout) implemented it? Leave religion where it should be - within the 4 walls of a home and the 4 walls of a place of worship (mosque, synagogue, church, temple...). It has no place in governance or economics or science!
And the Islamic hallucination continues. Waiting for a day when a Secular Pakistan can lay waste to these dumb debates over imposing Saudi Doctrine in every aspect of paksitani life.
P.S. May Allah Rot Saudi Arabia, UAE, Qatar and Kuwait. The filth of ideology they transferred here in my Paksitan has ruined our country formed on 5000 years of diverse history.
So basically: pull the plug on all major government expenditures including education, health and social safety, and hence eliminate the need to take un-Islamic interest-based loans.
While we're at it: the solution to the electricity crisis is to not use so much electricity.
Try providing clean water first!
This "Islamic sharia compliant" economy sounds very similar to neo-liberalism.
Part C , is Spot on . Centroal or federal bank are a way of accumulation of wealth which is unlike the teaching of Islam.
A failing state looking for solutions. Firstly, Pakistan completely failed to implement proper and decent modern capitalistic principles. Secondly any socio-economic system will fail in Pakistan as long as you raise your children with attitudes that promote talking half truths and outright lies. Where the state does not provide equal rights and obligations to all its citizens. A state that does not punish all culprits and does not implement all of its own laws and regulations, where any serious public debate is nearly impossible because everything is sensitive. Just try it for while, that is the best recipe to figure out that the state is not failing because of economic policies but because of quite a few other basic characteristics of the nation. If Sharia does not work you can always fall back on the Indus Valley Civilization for answers.
this idea wouldnt work in a billion years. especially in a country where there is rampant corruption, a thinning middle class, a tumultuous law and order situation leading to tumultuous investment, the absence of anti exploitative laws to protect the common man from corporate wolves and a largely uneducated population. it looks good on paper but the practicality of this system seems highly unrealistic.
It would be a dream come true for those who want to take us in seventh century, if the disntinguished writer also excludes Defence expenses from necessary State obligations. In the begining of Islam, there was no concept of regular armies, nor there was specific budget set for them. Whenever need arose, a call was given for Jihad, funds were collected from public and volunteers did the rest. Regular army concept is a western idea, which has no place in Shariah. Taliban have already proved it in present times, that old concept works. Once Defence obligations and Debt servicing is declared un-Islamic, the expenses on other two, i.e. Judiciary and Administration would also be not needed in true Islamic society.
If you take a vote of Pakistanis who have money, how many will go for an interest-free lending? I bet not a single one. And why should they? Why wouldn't they invest it outside Pakistan if Pakistan provides no return on their hard-earned money.
Yes, I completely agree with the author. Also, in the earlier days, we didn't have electricity or computers, so we should ban them now.
@ Islamic Libertarian - As a Civil/Fiscal Libertarian myself I have to accept the fact that Shariah Law is incompatible with Libertarian principles of self-ownership and non-aggression. As soon as you get into the area of imposing your principles on others regardless of getting 51% of the vote, you're no longer a much of a Libertarian.
Full On Sharia is the ONLY thing we Indians want to see in Pakistan.
Please do it as quickly as possible.
It will really make the whole world happy solve everyone's problem.
Also Sharia in Pakistan will give India a chance to develop peacefully.
@Anonymous: "BTW where is this system being practiced? If not why? "why you considers HOLY MUSLIMS people so DUMB, that they will practice it for their own money?
@Mj: "Will it have provisions for captured booty from conquests" that is JAZZIAA imposed on KAFFIRS like me. will fill BELLY of KHALIFA e TIME :-))* before KHARJIS do the job :-)))
@Ahmed... Totally agree with you..
You want shariah? Let's hope you get it, along with everything else that comes bundled with it. After that Pakistan will be an economic success story rivaling the industrialized west.
wow.....capitalists advises in the guise of shariah......come on man!
a remarkable le concept for economic revival anywhere in the world.but be ready to see moronic comments from anti Islamic or anti religious trolls.
My cousin just finish his MBA in Karachi in finanace and when I asked him about Sheria banking he laughed at me and said Highly educated Allama like Taqi Usmani sahib can only give a speech or sermon on it very well but in realty its doesnot exist or least its in early childhood.
The thing with Sharia is, there are differences of opinions on it. But if there was some sort of sharia system in Pakistan, id want it to be as libertarian as possible. You simply cant trust politicians in this country, with any kind of socialized welfare. You just cant.
@bharatvarsh: Look closely, What the author is proposing is essentially Capitalism - Leaving the entire social expenditure field to the charities and merely spending on State's self serving tasks (such as Defence, judiciary, police, Foreign Relations etc.)
Points raised in the article are valid. I aint no big supporter of Shariah compliant finance but for gentlemen who say that they dont want to pay a penny more then they borrowed are in the wrong. Islamic Banking seeks share of profit generated by the underlying acquired asset. Islamic Banking isnt a welfare or free for all meal. For that, you can probably go to Qarz-e-hasna trust/charity organizations.
P.S: Islamic finance cant exactly be practiced by the governments for the reasons mentioned in the article. Because it demands very strict financial discipline and identifiable underlying assets. Governments and inefficient governments at that want vanilla facilities like standby lines of credit/running finance.
Communism and Sharia economy have one thing in common they work only on paper. An idea must be applicable in time and space and in the past 1400 years we don't have a model of sharia based economy applied to a civilization or nation state. Now folks will argue that it was applied in some remote parts of the desert, well it can only be applied to closed, isolated, sparsely populated live stock based economy of the desert. In today's globalized world where economies are inter-related and inter-dependent sharia economy will not work even for a day, there will be massive shorting of the host country's currency, stock and bond that it will be brought to its knees in one trading day. Modern day zimbabve will be created in span of hours. Economist propagating such ideas are called "vodoo economist". Sharia economy doesn't work in the saudi desert(inspite of oil) nor will it work in the land of indus.
@Syed A. Mateen: Do you believe that amount of (e.g) Rs. one million has the same value after one year? Please tell me where such lender is found.
Instead of attacking each other why not comment about the given topic?
Anyway, Shariah approved financing is gaining traction even in non-Muslim countries. It is worth a try as capitalism has it's own faults.
BTW where is this system being practiced? If not why?
@ Ahmed - Sorry to disappoint you but as a secularist let me say that alot of what is mentioned in this article makes alot of sense. However, to say that Shariah law holds exclusivity to the idea of limiting of government expenditure and the abolishing of interest is absolute nonsense. While I appreciate the Islamic scholars for their ideas regarding economics, they do not even remotely convince me that Shariah Law has any validity.
If our learned Islamic Economist want's to learn as what are Sharia Laws and Sharia Economy, they should go to Saudi Arabia to learn.
I don't think that the advice is going to work in Pakistan.
Only in one case, if Sharia is enforced in the entire country from Karachi to Khyber in every sphere of life and not only in economy.
I don't consider Islamic Banking in Pakistan as Sharia Banking where the Bank it self become a partner while extending a loan.
For me, Sharia loan is that when I take a loan of Rs.10,00000 from an Islamic Bank, I should pay back only Rs.10.00000 and not a penny more.
I don't think that such a system would be acceptable to an Islamic Bank in Pakistan, what to talk about Commercial Banking?
Yes full Sharia for Pakistan.
@Ahmed:
What you call 'Islamic Finance' was developed centuries after the formation of religion.
Will it have provisions for captured booty from conquests?
I'll just look at last 200 years of economies of the countries and decide which way to go. So far, anything but capitalism-based economy has failed. No one will work hard if there is no return, and that is the human nature deep down. Ideology - Sharia or Socialism - doesn't work very well in this area.
@Ahmed:
What are u doing by posting on a secular newspaper as well?? Mr Economist, and since you are the only economist in this whole world, why is it that despite all the trolling? your khayali sharia only exist on the internet, and nothing beyond. And btw, you can have sharai banking within Pakistan which I doubt, you still have to pay interest on the loans you borrow from outside. And why do Islamo-nazis insist on imposing their system on everyone?? Who is stopping you in Pakistan to start giving interest free loans to people?? Pakistan and many countries already has islamic banking existing along with traditional banks, so people have a choice. But what would a dumb non-economist like me know?
Get ready people. People with no knowledge of economics or anything substantial, the seculars, are about to fill the comments against Islam.
It's all wrong since it's Islamic.
BTW, it's about time the world recognises that God didn't just make this world and leave it to run on it's own without providing it with A way to run it i.e. The Shariah.