Understanding Islamic Finance - Doha Academy of Tertiary Studies

56 Understanding Islamic Financeconventional view that borrowing enhances productivity and capacity to repay is not true.Many economists have been pointing out for a long time the harmful impact of the institutionof interest on national and global economies. 28The interest-based financial system is creating unrepayable debt – making a class ofpeople richer and leaving others poorer and oppressed. Today, all developing countries arecaught up in a sophisticated debt trap owing to the most striking feature of the interest-basedmechanism: yesterday’s debt can be repaid by taking out more debt today. The unproductiveand wasteful spending both by individuals and governments, which the interest-based andeasily available credit system has the tendency to promote, has led to a decline in savings,real investment and employment opportunities in almost all countries around the world. Thesystem, combined with inflation, becomes a recipe for total economic instability. This affectsthe poor and the middle class, which comprise the major part of the population, and therebythe level of national savings.It has been proved by empirical evidence that credit, compared with equity, does notplay any critical role in modern investment and business spending. Contrary to the popularmisconception, a major part of funds which finance business needs in the US, for example,are raised as equity (and not loans) on the open market, i.e. common stocks. Kester (1986)lists debt-to-equity ratios for major categories of business in the US and Japan, and showsthat most of these ratios are substantially below unity, so that equity financing is much moreprevalent than debt financing. This amount of debt would be reduced even further were itnot for the artificial tax advantage of debt-based financing in these countries (since interestpayments can be written off). Mohsin S. Khan (1986) has shown that interest-based creditincreases the risk of banking crises. If collateral is sufficient, modern banks will financeprojects even with poor feasibility. This results in business failures.It is a proven fact and also a ground reality that, at the global level, debt has been used bycapitalist countries and the multilateral institutions as a tool of control. The Ottoman Empirewas subjected to European influence through the institution of interest-based debt. 29 The roleof the IMF and the World Bank is also to subjugate the indebted countries to the will of therich countries. The Economist, against the backdrop of America’s war against terrorism afterSeptember 11, 2001, puts the caption: “The IMF and the World Bank: Bribing Allies” andcontends that the two institutions that are driven by political considerations have become apart of America’s arsenal.James Robertson has succinctly explained how the interest-based system works to favourthe rich and what role the present money system plays in the following words:“The pervasive role of interest in the economic system results in the systematic transfer of moneyfrom those who have less to those who have more. Again, this transfer of resources from poor torich has been made shockingly clear by the Third World debt crisis; but is applied universally. It ispartly because those who have more money to lend get more in interest than those who have less;those who have less often have to borrow more; and partly because the cost of interest repaymentsnow forms a substantial element in the cost of all goods and services When we look at themoney system that way and when we begin to think about how it should be redesigned to carry outits functions fairly and efficiently as part of an enabling and conserving economy, the arguments foran interest-free inflation-free money system for the twenty-first century seem to be very strong.” 3028 For details see Siddiqi, 1981, pp. 47–51, Ahmed, 1967, pp. 171–196.29 Zaman and Zaman, 2001, p. 71 (quoting from Blaisdell, 1929).30 Robertson, 1990, pp. 130, 131. For further details, see Shariat Appellate Bench, 2000, Taqi Usmani’s part of judgement, paras132–179.