By D.G. Bokare
Interest-free banking of Islamic economy is a powerful tool to abolish age old poverty problems from the economy and thereby meet the requirement of the Holy Qur’an in respect of equality among all the citizens of the Islamic States.
Inspite of practising interest-free banking for many years, the Islamic economy could not eliminate poverty from the economy. We still find alms-seekers at the Mosques and job-seekers and people living in slums in large numbers throughout the Islamic countries. There is some debate among Islamic economists on this subject but no one could come out with a bold statement suggesting offer of loans to all irrespective of whether one has security to offer or not for becoming entitled to such loans. One main reason is that the banking system is mostly in the hands of private people who would not take the risk of allowing loans to become bad debts if the recovery is not made. Therefore the idea of creating the state’s own Islamic Fund for this purpose.
Let us look at the concept of Islamic State Fund and its position in the context of abolition of poverty.
Islamic State Fund
The State is an undisputed authority to create and manage the monetary systems. Rather it is one of the major functions of any State government and it has historical acceptance for thousands of years. An Islamic State giving interest-free loans to all its citizens or enterprises is a unique engineering in economics. However, there is a criticism that in the context of competitive market economy we would be establishing a monopoly of disbursing loans in the hands of the State. As such, loans should be disbursed by the competitive forces of the market and not by the State.
The Islamic State Fund has no objective to earn interest or income or an intention to maximise its profits at the cost of its citizens. On the contrary the State is interested in providing welfare activities for its citizens. This is a distinguishing feature. As such the state’s credit system of giving loans for the welfare of the citizens cannot be called a monopoly.
On the other hand, this fund helps to develop healthy competition in the economy and allows the citizens to enjoy the fruits of the competition. Also it would be instrumental in abolishing man-made legislated monopolies, such as joint stock companies, patents, copy rights, etc. By creating State fund in Islamic economy we will be promoting a unique and useful architecture which would be different from that of communist economy and capitalist economy.
If the State has to give loans without interest to its citizens, it is essential that there should be a standing fund at the disposal of the State for effective monitoring. The administrative machinery will be engaged in studying the needs of all fund-seeking proposals before actually granting interest-free loans. Accounting of disbursements and recoveries will be made regularly by the management of the fund. Auditing systems will take care of malpractice, cheating, frauds, etc., for which law and order machinery is available for appropriate punishment. Initial contribution to the fund will be made by the State from the budget provision and the same can be increased as per the needs. Additionally, voluntary contributions in the form of deposits from the citizens can also be accepted for meeting the increasing demand from the borrowers. In the initial period, small amount of tax can be collected through budget provisions to build up the corpus. Entrepreneurs can also be called upon to deposit their depreciation funds and other earmarked funds into the State fund for the use of national economy. These could be planned by paying some interest and allowing tax concessions for some time as part of motivation to the business community. Deficit finance mechanism could be used only when it is found absolutely necessary. As long as deficit finance is used for productive purposes there is no fear of inflation. Western economists object to such mechanism even though the relation of deficit finance and inflation is never established. Islamic economy will not have that fear as the entire State fund will be used for productive purposes only and such an exercise will be of a one-time nature.
Once the quantum of the fund is raised, its loans and repayment make it a revolving fund. The administrative expenditure of the fund can be charged to revenue budget each year. Once the State fund is established, the other side of the fund’s disbursements can be planned as desired by the State. The demand side of capital is engendered in the business operations of the enterprises. All branches of round about methods of production get promoted in the economy as the capital is freely available without interest. As all new talents will have access to the fund, additional investments for new innovations, technologies etc. are available in the Islamic economy. This will keep the economy more dynamic.
As the security or credit worthiness will not be a bar for obtaining such loans from the State fund, many aspirants who have skills and ambitions will make use of the fund to start their own enterprises. It is firmly believed that all human beings have an innate skill. The poor would not have survived if such skills were not available with them while fighting the survival battle everyday. I remember that during the BJP government in Madhya Pradesh some years ago, small loans upto Rs.500 were given to vendors selling vegetables in the market. These vendors augmented their income through this additional loan funds without interest.
Loans from the State fund should be given to all those who want to live with honesty and dignity as guided by the Holy Qur’an. They need means of production from the State which include money, knowledge and infrastructure to be a player in the competition. Monopoly as designed by the capitalist economy will not have any place in the Islamic economy as said earlier. Any knowledge, innovations, developments, etc., should be the property of the society and be freely available to all without any restrictions. Access to such knowledge and finance will give a new dimension to social systems. Every one will struggle to be on one’s own and will not look for favours from ‘haves’. He or she will be joined by parents, old relations, handicapped persons in using the loan funds more judiciously and economically to make a decent living for all of them. This will solve one major issue of unemployment of able, disabled and old people of the State. Islamic economy can be unique in successfully solving this important problem of unemployment through interest-free financing from the State fund. These loans will be available to all without any security. State’s machinery is to be used to educate the people on economical utilisation of such funds, use of appropriate technology as available with the State and other social agencies, follow-up for repayment of loans on a regular basis, develop necessary infrastructure and support systems for people to enjoy life, etc.
Professor Md. Yunus of Bangladesh was disillusioned by the abstract world of economic theory as it could not solve any of the problems of the poor people of that country.
Western model of development has no place in his programme since it takes care of only 15-20 per cent of the population. He firmly believed in Islamic interest-free banking system and he wanted to use this to abolish poverty once for all. This is a time-consuming process, though. He has however succeeded in firmly guiding the State’s people to avoid depending on the private banking based on normal development model of the government which is, in turn, based on western economic systems. People’s participation to his appeal and programmes was spontaneous and as such achieved substantial results in a period of about twenty years in helping lakhs of people to be proud to stand on their own feet instead of looking for alms from alms-givers. If the said programme had been started by the State as recommended above, the abolition of poverty in Bangladesh could have been achieved by this time.
“I was shocked to see how poor people in a small village, Jobra, suffered because they could not come up with small amounts of working capital says Prof. Md. Yunus.” “The amount they needed was less than a dollar per person. They could get that money only against extremely unfair terms. They were required to sell the goods to the lender at the price set arbitrarily by him. I made a list of people who needed this kind of money . I came up with a list of 42 people. The total amount they needed was $ 27. I was so shocked I could not get over it. How easy it was for us to talk about millions and billions of dollars but pay no attention to the need of $ 27 for 42 able-bodied, hard-working, skilled people.’ (source: Mainstream, August 23, 1997)
This was the event in the year 1976. Prof. Yunus approached the banks for loans to be paid to the people, but none of the banks was willing to take risk to give loans who could not have any security or credit worthiness to satisfy the banks. He therefore had no choice but to take the loans in his personal name and disbursed the same to all those 42 persons. After trying similar exercise at other villages he came to the conclusion that the normal banking systems, though they talked about helping the poor, were not sincere in the efforts to do so. They can give loans against some securities only. These loans are used for creating assets and, in turn, further securities. And based on increased securities further larger sums can be obtained from the same bank for which there is no limit. This way a rich person is helped by these banks to become richer, and thereby widening the gap between rich and poor. This defeats the whole purpose and goes against the guidance of equality given in the Holy Qur’an.
Professor Yunus, being a practical economist, started his own bank with the help of his friend and small villagers to meet the needs of the poor whose requirements were very small. This he found necessary as he could not change the banks. He had to change his thinking and false confidence about the normal banking systems. He therefore started the Grameen Bank in 1983 for this purpose owned by borrowers. He received tremendous support from the downtrodden people and many of them joined him in his mission to abolish poverty.
Today the Bank serves 27,000 villages out of a total 68,000 villages. There are about 21 lakhs of borrowers out of which 94 per cent are poor women. As on June 1997 the Bank has cumulatively given loans to the tune of US $ 2 billion. Average loan amount is $ 160 only. These loans are normally given for the purpose of income-generation, housing, hiring equipments and cattle. Recovery rate is unbelievably at 97 per cent which cannot be matched by the normal banking sector.
Professor Yunus is attempting to create a parallel sector of poor people which has been deprived of basic needs of life for centuries at the hands of privileged classes belonging to industrial and other related sectors. Any programmes of reforms of organised sector will never take care of the un-privileged sector of almost 50-60 per cent of population of any developing and un-developed countries. Changing the quality of life of this 50-60% population is the real sense of development.
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