REPLACEMENT OF INTEREST TIME MULTIPLE COUNTER LOAN THE ONLY PRACTICABLE WAY TO ELIMINATION OF INTEREST ELIMINATION OF UNEMPLOYMENT RECOVERY OF THE ECONOMY DEBT RETIREMENT CAPABILITY ABDUL WADOOD KHAN FTIME MULTIPLE COUNTER LOAN ISLAMIC ALTERNATIVE OF INTEREST 1. Quranic definition and prohibition of Riba / Interest: The last verses revealed on Riba are 2:278-280 reading: NEM Ge Co be 19, aM Na 1 ad aU ty LA V5 Called Y ASUS Gag’ ASE OS GY Se EAE os ae "O you who believe fear ALLAH and forgo whatever remains from Riba (payable to you) if you are believers (indeed). And if you do it not then be warned of war from ALLAH and His Rasool saws (against you). And if you repent and resolve not to revert then your entitlement is to your principal amounts. You will be avoiding doing wrong and wrong being done to you. And if he (borrower) is in difficulty, allow time until he is at ease (to repay the principal amount of loan) " It is quite clear from the above verses that: i. Limiting claim of lenders to their principal amounts means that any excess over principal amount of loan charged by lender from borrower is Riba and that is exactly what interest is. Thus interest is same as Riba prohibited in Quraan. ii: Fear of ALLAH must lead believers to give up interest and so doing is condition of Jman. Syed Qutab Shaheed held that interest and Islam cannot co-exist. iii. Interest is so severely prohibited that its continuance incites war from ALLAH and His Rasool saws. iv. There is no exemption and no limitation and as such every increment big or small on principal amount of loan charged by lender from borrower is Riba irrespective of whether the loan is for production or consumption, whether the borrower is rich ar poor and whether there is oppression or not. The condition "if he is in difficulty" indicates that it is not necessarily the poor from whom charging of interest is prohibited because as a rule they are always in financial difficulty. Only rich people are sometimes in financial difficulty when theyz require extension in time for repaying loan. It is a gross misconception that it is permissible to charge interest from those who earn profit by investing borrowed money and willingly pay interest. No doubt in such cases there is no ‘zulm’ in the sense of oppression. This contenion is made by those who do not know that ‘zu/m’ in Arabic means putting something in other than its place or use. In shirk there is no oppressinn and Quraan holds it ta he zu/m azeem hecause it involves falling down in adoration at wrong place. Earning of interest by lending money is wrong use of money as it was invented to be used as medium of exchange and not as means of eaming. In Ahya-al-Uloom Imam Ghazali described zulm aspect of interest as wrong use of money. Aristotle also held "the most hated sort and with the greatest reason is interest which makes a gain out of money itself, and not from the natural object of it, for money was intended to be used in exchange but not to increase at interest. Of all modes of getting wealth this is the most unnatural." 2. That bank interest is Riba prohibited in Quraan is the unanimous view held throughout by Muslim scholars having profound knowledge of Quraan and Sunnah:The greatest Muslim thinker of the last century Allama Iqbal had attained deep knowledge and clear perception of Islamic precepts and also of modem socio-ecoriomic compulsions and evils. He held bank interest to be a tool of brute exploitation of mankind, source of financial miseries and cause of moral degradation in society. His following verses show he had an inkling that counsel hired by vested interests will try to equate interest with trading profit. y 5 Bet oh ne by euetusut Lox ute url el ABB le Ot lb eee Gb £ I i Bor Foun 6 2 AT WV al wr BP od sh 2 tse ue bo ub a Gis Ue 2 amy BT Sie Fo te ut wm At ow I PF x Bouts Fe wos zt re abe ys s cde a Pb3 3. Socio-economic ill effects of interest: According to 2 hadeeth of our Holy Prophet saws prevalence of interest in any community brings dearness of necessities of life. Recent research studies confirm that interest breeds inflation and unemployment. Keynes, the most eminent economist of the last century, in his famous ‘General Theory’ spells out fifteen reasons for abolishing interest, most important of which are that unemployment must persist as long as interest stays and that the remedy for inflation is also to lower the rate of interest. In “Treatise on Money’ he stated "Direct relationship between interest and prices is one of the most complete established empirical facts within the whole field of quantitative economics.” In ‘Selective Papers on Economics’ Wicksell stated, "A high rate of interest is associated with high commodity prices". Quaid-e-Azam visioned Pakistan as Islamic welfare state and wanted it’s economic system to be based on Islamic principles. But our rulers and economy managers subdued with western culture and capitalist system promoted interest-based system and ruined our economy as is evident from ever rising inflation and unemployment and consequent financial miseries leading to suicides and rising tide of crimes. In spite of a large part of our annual budget being consumed in debt servicing, due to interest-based borrowings the country is drowning ever deep into debt morass with no prospect of any recovery in the present system. The goverment in its petition of February 13" 1999 to Federal Shariat Court admitted, "Higher costs of bank borrowings are likely to lead Pakistani manufacturers being priced out of foreign markets. Internally it will lead to price increases and a higher rate of inflation and externally it will lead to a fall in exports and a greater dependence on foreign loans at higher rates of interest and a consequential transfer of economic sovereignty in favour of foreign countries." Due to sustenance of the curse of interest we have almost lost our economic independence and for regaining that we must get rid of interest. Baseless contentions of the advocates of interest have all been repelled time and again. Now the only relevant question which requires an answer is how to eliminate interest quickly and effectively. 4. The need of an Islamic lending device: Widespread supply of loans by the present banking system has played a big role in bringing enormous economic development in the world. From Islamic point of view what is wrong in the present banking system is the element of interest aud that is the cause of war frorn ALLAH and His Rasool saws. Therefore, what must be done is to replace interest in the banking sysiem. This will promote widespread interest-free lending which is highly commendabie as according to a hadeeth e qudsi reward for qard is eighteen times. It isutterly wrong notion that gard hasan (interest-free loan) is meant for the poor and not for business. In Islamic economic system zakat and sadaqaat are for the poor and needy and gard for businessmen and the affluent who can repay. Sayyed Abu-al-Aalaa Maudoodi in his book, ‘sood’ wrote “Loan’ is an indispensable requirement of mankind. Individuals require it for personal needs and businessmen also need it in day to day dealings. Governments also cannot do without loans. How can the need of loans on such a large scale be fulfilled through mere welfare ?" This need is also highlighted in the following publications issued by Islamic Rescarch and Training Institute (IRTI) of Islamic Development Bank (IDB), Jeddah:- i, Research Paper No. 29: "...in order to effectively replace Interest, the Islamic Economy needs a comprehensive financing mechanism. In the absence of such a mechanism, even if the capital structure of an enterprise is cleansed from Interest, overtime, the maintenance of such an Interest-free capital structure may not be possible. On the other hand, if a comprehensive Islamic financing mechanism can be devised, not only Interest can be prevented from entering in the capital of enterprises but also existing enterprises may be able to replace their Interest-based debts at a larger scale. ....a comprehensive financing mechanism may be defined as a mechanism which provides monetary financial accommodation to enterprises but remains neutral with respect to their longer-run ownership structure. Although, hiring, installment purchase and spot sale of owned assets and Mudharabah etc, serve the purpose of financing but, neither of these can function as a comprehensive financing mechanism. ....For some reasons, if the company needs cash, installment purchase or hiring does not directly meet such requirements. Mudharabah and Musharakah arrangements directly meet the company’s cash requirements. But both of these essentially lead to a change in the ownership structure of the enterprise. Thus enterprises which need cash, but, for the time being, not wanting or being able to change their ownership structure would find hard to compromise. An interest-free comprehensive financing mechanism is thus needed by an Islamic Economy.....if funds are needed for expansion and business sections cannot be identified for new Mudharabas and Musharakahs the enterprise has to admit new Mudharibs/Mushariks (Partners) by issuing profit sharing financial instruments. Besides the cost of such arrangements, this option is suitable only for those enterprises which are willing to change their ownership structure. Capital structure of sole Proprietorships: - these enterprises are effective source ofproductive engagement of manpower, particularly, in the capital-scarce developing countries. As sole proprictorships do not like to associate others with their enterprises, they cannot utilize Musharakah or Mudharabah finance. The capital structure of these enterprises may contain debt as a natural result of shortage of internal resources to finance either the establishment of the enterprise or its expansion. But, cince these are solely owned by a single percon, by definition, the capital structure of such firms shall never contain external funds such as Mudharabah, Musharakah, or common stock. In other words, due to their typical ownership structure, these enterprises could not benefit from the traditional Islamic participatory modes of financing or from the equity finance. It may not be just to ask the enterprises to sacrifice their ownership characteristics if they need financial accommodation. Nor, such an administrative arrangement sounds efficient or even logical economy wise. The right approach, in our opinion, is therefore, to evolve a scheme of permissible financial accommodation which could also be consistent with the universal preference of these enterprises for the form of capital structure. The problem is one of meeting the cash needs of a sole proprietorship for establishment or growth, but at the same time, without changing the structure of the enterprise. Thus conceptual efforts as well as institutional arrangements are required to provide such a financing mechanism in conformity with the ban on interest.....the actual problem of the elimination of Interest also requires an alternative mechanism which can be used by common people and millions of sole proprietorships. ...there must be hundreds of thousands of enterprises in the Muslim World which may not have interest-based funds in their capital structure. Many of these enterprises must be looking for funds in conformity with the shariah requirements but due to their preference for strong internal ownership these enterprises may be in difficulty to cornpromise with the ownership structure underlying Mudharabah and Musharakah arrangements.......the problem of capital participation in enterprises is in fact a problem of devising a comprehensive Islamic Financing Mechanism - a mechanism which can provide financial accommodation {n the form of money, but simultaneously remain neutral to the longer-run ownership structure of the enterprise. +..once a comprehensive Islamic Financing Mechanism is provided, the infant enterprises are expected to have a proper environment to avoid interest while financing their growth.”6 ii. Research Paper No. 41: "The issue of a short-term excess liquidity is one of the problems facing IBs (Islamic banks), However, this problem is exacerbated by the fact that there is neither a money market in the countries where most IBs operate, nor adequate and efficient financial instruments that can be used to manage these surplus funds in order to recycle them among IBs themselves or among other financial institutions. ‘he seriousness of this problem is incrcased since some TBs hold temporarily idle balances whereas other IBs need these balances, and both groups are unable to benefit from these funds due to the lack of short-term financial instruments which are not in contradiction of shariah laws” iii, Seminar Proceedings No. 39: "When an Islamic Government (or any economic agent) needs money to acquire goods, they can buy them through Murabaha. !t they need funds to build a 1wad, they can use Jstisna or Musharakah, But what if the government needs cash (to pay salaries or buy services) and needs it now. The options available, so far, is borrowing from the public or the banking sector at interest. It is no accident that while great advances had been taking place in the Islamization of the private financial transactions in many Muslim countries, very little has been done in the public sector. Almost all Islamic governments borrow on interest.” iv. Occasional Paper No. 2: "While Islamic banks use Mudarabah on the resource mobilization side, they use a number of Shariah-compliant financial instruments on the asset side. It is generally observed that the modes of finance used by Islamic banks are dominated by fixed- return modes especially Murabahah ... .The profit-sharing modes account for less than 14 percent financing. Ta case of financing by sectors trading gets the biggest proportion i.e. 42 percent. The second Jargest sector is real estate which accounts for 13%. Agriculture claims only 2 percent and industry 12 percent of the financing. This calls for rethinking the role of Islamic banks in economic development against the hopes which had been raised in the past regarding their ability to finance agriculture and industry. While Islamic banks and investment funds have so far mobilized huge financial resources, a large part of these resources have found its way into Western financial markets. Likewise, the same thing happened with resources mobilized by conventional banks. There is no Islamic (or for that matter, conventional indigenous) financial institution which has been able to channel savings from Western countries into Muslim countries in spite of the great demand for such resources in the latter countries. This is another challenge for Islamic banks with very important7 implications for Muslim countries. Islamic banks have succeeded in mobilizing large amounts of funds. However, it will require much more strenuous efforts to maintain a reasonable rate of growth in future. There are several reasons for that. Firstly, it must be realized that much of the deposits now with the Islamic banks came not due to the attraction of higher retums or better services but because of religious commitment of the clients. Most of this money has already found its way into the coffers of Islamic banks. Therefore this source has been almost dried up. Secondly, so far Islamic banks had a fairly large degree of ‘monopoly’ over the financial resources of Islamically motivated public. This situation is changing fast. Islamic banks are now facing ever-increasing competition.” Late Prof. Shaikh Mahmud Ahmad was applauded in Supreme Court Shariat Appellate Bench unanimous judgment in Riba case as "our country's most outstanding economist, researcher and thinker". He felt the urgent need of an Islamic lending instrument for replacing interest in the banking system. He devoted a considerable part of his life in the search for an Islamic alternative of interest and by ALLAH's grace he succeeded in inventing a novel device which could instantly replace interest without any disruption in the banking system. He named it TIME MULTIPLE COUNTER LOAN-— TMCL. 5. TMCL Principle of interest-free lending: TMCL transaction comprises two simultaneously exchanged interest-free loans between two parties such that multiple of the amount and period of one loan (loan value) equals the multiple of the amount and period of the other loan. It facilitates interest-free loans of large sums against counter loans of much smaller sums advanced for proportionately longer periods. For example a trader can get interest-free loan of Rs. 10 million by advancing counter- loan of Rs. 1 million to the bank for ten years. Thus TMCL fulfills the client's need of funds and enables the bank to cover its expenses and eam profit for its share holders and depositors by long term investment of counter loan amounts. TMCL based transaction is just and equitable as in this transaction, unlike interest-bused transaction, none of the two parties is a definite gainer or loser and each one of them may gain or lose by investing the loan amount borrowed from the other party. As in TMCL transaction both parties do good to each other it conforms with Quranic precept "hal jaza ul ihsan illa al-ihsan" and thc noble teaching of our Holy Prophet saws that a favour done should be reciprocated. Hence TMCL-based banking system is sure to have ALLAH's blessings and succeed in bringing prosperity to the people.8 6. Operation of TMCL-based interest-free banking: Full details are available on website www.realislamicbanking.com. Following is a brief description of this system:- TMCL can perform all functions as are performed by interest and it can instantly replace interest without any disruption in the banking system. Immediately upon receipt of an order to eliminate interest banks will stop receiving and paying interest and switch over to advancing loans on TMCL basis. All other transactions involving credit will also be executed on TMCL basis. Banking services not involving credit will be provided against appropriate fees and charges. Banks will continue to receive deposits and issue cheque books. Depositors will have the option to keep their money in investment or current accouut. Investment account holders will share profit/loss with the bank on daily product basis. Banks will utilize current account deposits and will be bound to pay back upon demand. Outstanding interest-based loans will be converted into TMCL-based transactions. Borrowers will pay only the principal amount of loan. Instead of paying interest, they will advance to the bank appropriate counter loan depending upon amount of the loan and period for which it was availed. Interest already paid will not be refunded. If a borrower took a loan of Rs. 10 million for two years of which one year has passed and he has paid interest for one year, now he can either pay back Rs. 10 million or advance a loan of Rs. 1 million to the bank for ten years and repay Rs. 10 million to the bank after one year. In TMCL system interest- bearing bills and bonds will cease to be issued. Premature bills and bonds will be encashed at face value by the bank against an appropriate counter loan. For example if a bill of Rs. 10,000 is required to be encashed 30 days before maturity, the bank will encash it at face value against a loan of Rs. 1000 for 300 days. In TMCL system banks will deposit 20% of each counter loan amount with the central bank for ten years against which the central bank will allow the bank to draw 200% of counter loan amount for one year. This will provide 20% liquidity to the bank. Additional 2% liquidity will be obtained by retaining 20% counter loan amount as till money. The balance 60% of counter loan sums will be available to the bank for long term inyestment in profit carning modes. Bank Management will decide from time to time as to how much of the available funds should be allocated for advancing loans and how much for investment.9 With initiation of TMCL system Central Bank may set up a framework of Central Depository-cum-lender of last resort for receiving surplus funds of banks, Federal and Provincial governments and autonomous bodies on TMCL basis and for advancing loans to them on the same basis in times of need. For example, if a bank is short of liquidity and requires Rs. 10 million for one week, it can obtain loan of Rs. 10 million for one week by depositing Rs. 1 million in the Central Depository for ten weeks Similarly ifa bank has surp]us funds of Rs. 10 million for one month then this amount may be deposited in the Central Depository against receipt of Rs. | million for ten months. 7. Socio-economic benefits of replacing interest by TMCL are many, some of which are as follows:- i. Prices of goods and necessities of life will fall considerably. At present industrialists borrow large sums on interest and ex-factory prices of goods include interest and also an element of profit on the amount of interest. Stockists, Distributors, whole-salers and even some retailers also borrow on interest for investment in their business. At each stage of transfer of goods interest charge is added to the cost of goods. Ultimately the consumers bear the entire burden of interest. In TMCL system there will be no interest charge at any stage and as such there will be considerable reduction in consumer prices of goods and necessities of life. ii, Savings and bank deposits and subsequently supply of finance for development will increase. Lower prices of goods and necessities of life will result in less expenditure and more savings that will of course come to banks as deposits. Thus banks will be able tc supply more loans for production and economic development. ‘ iii, Employment opportunities will rise and production will be boosted. With availability of interest-free finance in plenty together with skill, labour and material already available in plenty in the country will bring expansion in industrial and agriculture enterprises that will provide employment to presently millions of unemployed and hopefully every one willing to work will be employed. Only those not willing to work, who may not exceed 0.5% of the able bodied, will remain unemployed. So elimination of interest will lead tw virtual extinction of unemployment and boost in industrial and agricultural production.10 iv. Budget deficit will vanish and domestic debt retirement capability will be generated. With boost in production and extinction of unemployment revenue receipts will increase. With saving in interest Payments expenditure will decrease. With increase in budgetary receipts and reduction in expenditure government will be able to commence retiring domestic debt. In the financial year 1998-99 budget deficit was Rs. 197.6 billion, net tevenue receipts Rs. 367.1 billion and interest payments Rs. 164.6 billion. In Economic Survey for the year 1997-98 unemployment percentage was given as 5.37 and the employed included even part- time employed for one hour per day. Assuming 50% of the employed to be full time, 25% three quarter time employed and 25% half time employed, full time unemployment works out to be 23.11% Allowing incurable unemployment of 0.5%, with TMCL system in 1997-08 reduction in unemployment would have been 22.61%. According to Okun's law, enunciated by Prof. Arthur M. Okun, each percentage point reduction in unemployment lifts GNP by 3.2%. Applying this law, increase in revenue receipts in TMCL system in the Financial year 1998-99 would have been Rs, 367.1x22.61x0.032 = Rs. 265.6 billion. With this increase in revenue Teceipts and saving of Rs. 164.6 billion interest paid in that year would have converted budget deficit of Rs. 197.6 billion into surplus of Rs. 232.6 billion. With such surplus in successive annual budgets government will be able to clear the entire domestic debt within a few years of the initiation of TMCL system. v. Foreign Exchange earnings will rise and foreign debt retirement capability will be generated: Export earnings during 1997-98 were around $8.5 billion and import bill around $10 billion. With reduction in cost of production in TMCL system all exportable goods manufactured in the country could be sold at competitive prices in foreign markets. With reduction in unemployment production of exportable goods will also rise in the same Proportion as GNP. Applying Okuns's law increase in export earnings in 1997-98 would have been $8.5x0.032x22.61 = $6.15 billion. This could convert negative balance of $1.5 billion into surplus of $4.65 billion. With such successive surphns in halance of payments the government will be able to retire the entire foreign debt in a few years without begging for rescheduling or further loans at the cost of our economic independence.4 vi. Inception of TMCL for lending will enable ates Islamic banks thriving on religious sentiment of Muslims to become truly Islamic. Then the advocates of interest will not be able to claim that interest-free banking is not feasible and that Islamic banking is heela banking. Due to lack of interest-free lending device these banks give loans neither to one another nor to Islamic governments. Mufti Taqi Usmani is chairman/member of Shariah Advisory hoards of a dozen or more Islamic banks. In his book ‘Introduction to [slamic Finance’, he writes, "... Islamic banks turn to conventional banks for their short-term needs of liquidity which the conventional banks do not provide without either an open or camouflaged interest." Against Pakistan's urgent requirement of funds in 1998 after nuclear explosion IDB together with several other Islamic banks offered a loan on interest at 5% above LIBOR!. Moral hazard restrains them from providing finance on profit and loss sharing. They mostly invest in tisk-free fixed return modes compliance of which with Shariah is highly doubtful. In ‘Elimination of Riba’, Prof. Khurshid Ahmad writes, "What is being done is a fictitious deal which ensures predetermined profit to the bank without actually dealing in goods or sharing any real risk." In ‘Islamic Banking and Finance’, Andrew Cunningham write, "Islamic banking in practice is often very different from Islamic banking in theory. The majority of actual Islamic transactions involve disguised interest rather than genuine sharing of risk, profit and loss." In ‘Islamic Finance — Theory and Practice’ by Paul S. Mills and John R. Presley is stated "The asset side of Pakistan's interest-free banks mirrors that of Islamic banks elsewhere. Approximately 80-90 percent of return bearing assets have been devoted to trade related mark-up techniques with some participation in equity investment and musharaka partnership. The mark-up contracts used bear striking resemblance to interest-bearing trade credits." TMCL will enable Islamic banks to provide interest-free loans to one another and to millions of enterprises who require finance for running expenses or expansion but are keen on protecting their independence and ownership structure, and also to government for meeting its needs of cash and funds for welfare and defence projects. Without providing finance to these very large sectors of the economy, Islamic banks will not be able to serve the Muslim Ummah and compete with western banks who have started opening Islamic windows aud capluiting religious sentiments of Muslims like Islamic banks themselves.12 vii.TMCL will facilitate utilization of the financial resources of Muslim countries in developing Muslim countries through financial intermediation among them by way of Central Depository. In IRTI- IDB Publication ‘Challenges Facing Islamic Banking’ there is a comment "While Islamic banks and investment funds have so far mobilized huge financial resources, a large part of these resources have found its way into western financial markets" When the matter of shortcomings and misdoings of Islamic banks was personally raised with IDB President, it was responded in writing as follows "Referring tc the documents submitted to H.E. the President of Islamic Development Bank (IDB) about your observation on the Islamic banking movement, we appreciate very much your good efforts and insights. The Islamic Banks’ office of IDB will try its best to communicate to the Islamic banks the shortcomings that you had mentioned in your document." Apparently Islamic banks have not so far done anything to attain true Islamic character." 8. Unjustified and inexcusable bias against TMCL: Many a time in history logic has failed to prevail upon prejudice when innovative fruitful ideas were rejected to the detriment of mankind. This is happening with the novel concept of TMCL. Following extracts from two publications Tepresenting mainstream thinking among professional Islamic economists show that they ignore the vital role which TMCL can play in eliminating interest instantly. Only God knows why they prefer gradual elimination of interest which depicts disbelief in that ALLAH's commands are all good for mankind and are for full implementation at all times and in all circumstances. This thinking shows utter lack of enthusiasm and urgency for finishing the on-going war with ALLAH and His Rasool saws. They neither offer any interest-free banking plan workable in prevalent low standard of morality nor do they give serious thought to TMCL plan which being neutral to moral hazard is workable in our environment just like interest-based system. I- ‘Towards a Just Monetary System’ by Dr. M. Umer Chapra: f the Islamic commercial bank faces a liquidity crises and is unable to make an alternate arrangement for liquidity, the Central Bank cannot afford to remain indifferent. It should act as lender of last resort within the framework suggested later, but of course, with appropriate penalties and warnings accompanied by a specially tailored curective programme." In TMCL system, as already mentioned above, liquidity crises can be handled easily without involving any specially tailored programme or penalties and warnings.13 ii"The method of Time Multiple Counter Loans could be adopted for small scale financing particularly within the framework of cooperative institutions. For commercial banks it would be of limited capability". No reason is given for limited capability of TMCL. Annex-1 proves capability of TMCLfor largescale financing. It shows by exact calculations how an industrial project costing SR 133 million presently under execution in Jeddah with SR 33 million equity and SR 100 million loan ‘on 8% interest could be financed in TMCL system. iii"It would nevertheless, be a mistake to try to achieve the transition from the conventional capitalist money and banking system now prevalent in the Muslim world to the just Islamic model in one stroke or over a very short period”. This mis-guided advice shows lack of faith in ALLAH’s words “If you will aid (cause of) ALLAH, He will aid you”. iv. “Interest should be declared illegal, allowing a certain grace period over which it may be tolerated as a necessary evil, but after the expiry of which it should be abolished from all domestic transactions”. Nobody is authorized to recommend or permit defiance of ALLAH’s command for any period and limiting its application to domestic transactions. Sayyid Abu-al-Aala Maudoodi in his book, ‘sood’ asserted “interest shall have to be banned by law in one single starting step”. “All interest-oriented financial institutions should be converted gradually irrespective of whether they are domestic or foreign origin, into profit sharing institutions”. It is unrealistic approach for eliminating interest as profit sharing has extremely limited applicability in the prevalent low standard of morality. Moreover idea of gradual elimination of interest is as absurd as gradual cease-fire in war. < vi. “All normal international transactions would, however, have to remain on the basis of interest until the Muslim countries can free themselves from the interest element through an expansion in their mutual relations and some reciprocal arrangement with non-Muslim countries. This cannot be done until the economies of Muslim countries become stronger and capable of satisfying their mutual needs”. This unsound strategy is like putting cart before horse as elimination of interest in abidance of ALLAH’s command is essential for economies of Muslim countries to become stronger. Nothing can be as repugnant to common sense as seeking co-operation of non-Muslims for achieving an Islamic14 objective and ignore capability of TMCL for expanding mutual relations among Muslim countries and satisfying their mutual needs. IL - The Blueprint of Islamic Financial system including strategy for elimination of Interest - published by International Institute of Islamic Economics - International Islamic University Islamabad. Dr. Sayyid Tahir Director General IJK claimed “This blueprint offers a comprehensive treatise on the Islamic Financial system”. But the comment in the blueprint, “It is also recognized that banks should not be expected to enter into pure lending operations” directly negates hadeeth qudsi mentioned earlier in this paper. Dr. Tariquilah Khan a senior research scholar in IRTI-IDB in an article published in IRTI-IDB Journal “Islamic Economic Studies” wrote, “Dayn (which includes both loan and debt) financing plays an important role in the Islamic Financial system”. Dr. Fazal-e-Ilahi in his research thesis “Preventive Measures in Islam against interest’ concluded the chapter on gard hasan with the assertion “expanding the field of this way of lending will, by ALLAH’s grace, aid in blocking the way of interest. Therefore in this context I urge upon all those who want to abolish interest to do whatever they can to expand the field of this way of lending”. On TMCL the blueprint contains an unrealistic thoughtless comment: “One may argue that TMCL instrument offers an ingenious solution to the problems of Riba, gharar and having two mutually exclusive conditions in one contract. But its viability is questionable for several reasons. Some of these are as follows. Counter loans would be liability of the banks. Therefore, while the sum generated might be used to meet their operating expenses it would not be distributable as profits among their share holders or depositors wha provide funds on partnership basis. This will compel the banks to turn to trading, leasing and other profitable options. It is also possible that clients may use loans from banks, whether directly or indirectly, to give, the counter-loans, This, in turn, casts further doubts on the usefulness of the TMCL option. Last but not the least, a recourse to TMCL is not advisable because the ensuing credit expansion is likely to fuel inflation.” Obviously the above cursory remarks on TMCL have been made without taking into account the following important points. The sum generated by counter-loans will be invested in long-term profitable business, The profits eamed by the banks will be shared with the depositors in18 investment accounts. There is no harm in the banks turning to shariah- compliant trading modes. Every loan will be advanced against collateral and will have to be returned on due date. There is no reason why any sensible person will use the loan from bank to give counter —loans for further loans instead of utilizing it in meeting his business requirements. Credit expansion will be controlled by raising or lowering the time multiple ratio in TMCL just as it is controlled in the present system by raising or lowering interest rate. In the chapter on strategy for elimination of Riba the blueprint states “The move towards Riba-free banking system may start in earnest with the establishment of one model Islamic branch each by all existing banks. This experience may be replicated by them and applied to their other branches such that all branches ofa bank and, thereby, the entire banking system gets converted into the Islamic made in approximately one and a half years.”, “The terms of reference of the above Coordination Committee should be: i. to chalk out the blue print and documents for the model branches. ii. To recommend necessary action to the concerned quarters, such as the State Bank and the Ministry of Finance.” Strangely enough the authors of the blue print reject a definite one step action plan of replacing interest instantly by TMCL and recommend a plan blueprint of which still remains to be chalked out and implementation of which would tentatively take one and a half years and no body knows how many more years it may take to eliminate interest completely from the banking system. It would be appropriate to prove, by definite example, conspicuous superiority of TMCL-based financing over the proposition made in IIIE’s blueprint which states:- “13.4.1 Asset Iarah Securities involving a financial intermediary (AIS- IF). Suppose the Ministry of Defence needs a training field spread over a 10- acre piece of land in central location... . 13.4.2 The Ministry may contact an Islamic bank to prepare an issue of asset jarah securities that allows the Ministry to acquire the needed land. 13.4.3 The line of action on the bank’s side can be as follows: i. It may initially buy the lot for, say, Rs. 10 M in its own name.16 ii. It may rent the lot to the Ministry for, say, Rs. 900,000 per year. iii, The Jjarah contract with the Ministry may have a period of, say, 10 years after which it may be renewed for 10 years at atime, iv. The hank may issue, for example, 1,000 asset Jarah securities with each security representing 1,000" of the lot and a claim to Rs. 900 a year (=1,000" of Rs. 900,000) as Tent. v. The bank may claim an issuance commission of, say, 5%as a premium above the purchase price of land and, hence, sell the securities at Rs. 10,500 each”. In the above mode of financing the government will never own the defense facility and will have to continue to incur recurring expense of Rs. 0.9M as annual rent. In the first 12 years the government will have paid Rs. 10.8M which exceeds the actual cost of the facility by 0.8M. Under TMCL system of financing government will obtain a loan of Rs. 10.8M for 1 year against counter loan of Rs. 0.9M advanced to the bank for 12 years. From this loan the government will spend Rs. 10.0M to acquire the facility as state property. Calculations in ANNEX 2 show iat under TMCL system government will clear the bank loan within 20 years and apart from having a surplus balance of Rs, 2.0M will have receivable counter-loan amounts from the bank Rs. 0.7 + 0.5 + 0.7 + 0.5 + 0.4 + 0.5 +0.5 + 0.5 + 0.5 + 0.4 + 0.4 + 0.4 =6.0M. As the government will own the facility it will permanently save Rs. 0.9M annually. If the project is financed under Asset Zjarah securities system as recommended in IIIE’s blueprint the government will remain a tenant permanently incurring annual expense of Rs. 0.9M as rent of the facility. Is it not sadly astonishing that the blueprint rejects TMCL and prefers Asset farah securities system? Tragic result of the persistent bias against TMCL is that about 200 Islamic banks have mobilized Muslim Ummah's financial resources of billions of Dollars and are running profitably but they are unable to ward off interest which is the foremost fundamental requirement of Islamic financial system. Nothing can be so tragic and ridiculous as Islamic banks indulging in interest-based transactions and not advancing interest-free loans.It is highly regretful and unfortunate for the Muslim Ummah that professional Islamic economists, as is evident from the above writings, neither present their own workable plan nor do they support TMCL plan for eliminating interest in abidance of ALLAH’s command. 9, The great tragedy: Supreme Court of Pakistan (Shariat Appellate Bench) order of 23 Dec. 1999 for eliminating interest was set aside on 24 June 2002 because proponents of Islamic economic system firstly did not produce any interest-free banking plan for replacing the existing system, secondly they did not refute the proclamation of the advocates of interest that interest-free banking was not feasible and that current Islamic banking was heela banking, and thirdly they did not answer the following challenging questions posed in an article published in daily ‘Dawn’ of 12 Feb 2000 written by a senior Pakistanibureaucrat strongly in favour of interest-based system. i. _ Is there any single bank in the Islamic or non-Islamic world which is truly on interest-free basis ? ii. Can a Central Bank conduct its monetary policy without a norm of interest ? iii, Are not the practices of Islamic banks a queer blend of interest- based modes of finance carrying a facade of Islamic names ? iv. What are exactly the Islamic-complaint instrument of finance ? Can these instruments meet the myriad and diverse needs of modern trade, finance and banking ? v. When aud where have these instruments been applied and with what degree of success ? vi. Does the Islamic Development Bank as the model Islamic bank operate on interest-free basis? If that is the case why did it offer to extend a loan to the government of Pakistan after nuclear detonation at an interest rate 5% above LIBOR ? vii. By what mechanism cau Islamic banks undertake financial intermediation which is the primary function of all commercial banks throughout the world ?18 10. Matter of regret and shame for Muslim Ummah: In recent times hundreds of books and pamphlets on Islamic financial system have been published and innumerable conferences, seminars and symposia have been held on Islamic finance and banking. Islamic banks started emerging in mid-seventies of the last century and now about 200 Islamic banks having mobilized billions of dollars from Muslims are prospering in many countrics. And yet Islamic banks use LIBOR as benchmark in their financing operations and Islamic Banks and governments have to borrow on interest! 11. The hope and the remedy: As the Riba case will be heard afresh by Federal Shariat Court there is still some hope for the people of Pakistan and subsequently the whole Islamic world to benefit from interest-free regime. Conscientious Islamic economists are tequested to give serious consideration to the above submissions and produce for presentation in the Federal Shariat Court an interest-free banking plan which can readily replace the existing system and also answer the above cited questions. Alternatively they should support the plan for replacing interest by TMCL which can perform all functions as are performed by interest in the modern banking system and also satisfactorily answer the above cited challenging questions. Abdul Wadood Khan Email: aw_khan@hotmail.com 25/1 Street 15,Cavalry Ground, Web site: www.realislamichanking.com Lahore Cantt., Pakistan. Tel: +92-42-6676678 Post Box 62380,Riyadh 11585, Saudi Arabia. Tel: +966-1-4644915ANNEX-4 CALCULATIONS SHOWING USE OF TMCL FORLARGE SCALE FINANCING OF A PROJECT COSTING SAUDI RIYALS 133MILLION WITH AVAILABLE EQUITY OF SAUDI RIVALS 33MILLION Available Couner Loans Balance Toans From Bank Amount ‘Amount | period | Due back Against Counter Loans in year Period | Repayable] Total Years in Year as 0Mequiy 330 -167=16.3M 5 16.3M 16.3-15.6=0.7M | 66. 4 Previcus | Repayment | Balance | Repayable balance Due ext year 133.1-133.0+0.1425.2"°=260M 260-13.1-12.0=0.9M | _133.1M 13.1M 1200M_|_120.0m~ 0.9+24.1°=25.0N 250-12.0-12.0=1.0M | 120.0M [120M 1080M_|_108.0M* 4.0+22.06'=23.06M 27,96.9.6.12=2.36M | 108.0M | __ 120M 96.0M__ | 96.0M* 2.36+21.82°=24.20M 242-12.0-12.0=0.2M | 96.0M 120M 640M 84.0M* (0.2+20,72°=20.92M 20.£2-12.0-8.0=0.92M | €4.0M 120M 720M_|_72.0M* 0.92+19.6°=20.52M 20.£2-12.0-6.0=2.52M | _72.0M 120M 600M | 60.0M™ 2.52+18.43°=21.0M 210-10.0:10.0=1.0M [60.0% 10.0M 500m | 50.0M™ 4.0+77.36°=18.36M. 18.36-10.0-6.0=0.36M | _50.0M 10.0M 400m | 40.0M* 0.36+16.24=16.60M 16.6-8.0-8.0-0.6M | 400M 80M 320M_| 320M" 0.6+15.12=15.72M 15.72-8.0.6.0=1,72M | 32,0M ‘80M 240M_| 24.0 * 472442. 0v+12.07+12.0V=37 TOM ‘37.72-24.0=13.72M | _24.0M 240M ‘0.0M 13.72+10,0v=23.72M 23.72M. 5.12+8,6v76.0096 0v=49.52M 49.32 40.32+15.6v+8.0v+6,0V=78.32M 78.92M 78.92+16.7v+5.0v=101.62M 101.620 location from project eaming for repaying bank loan = loans lor settling the balance due for payment v= counter loan amounts receievable form bank A project costing SR133M is under execution with equity of SR 33 Million and bank loan of SR100M at interest rate of 8% pa.Construction period is 2 years and earnings are to start 3 years efter completion when repayment of loan and interest will also start and cleared by 10 successive yearly payments of SR25.2, 24.1, 22.96, 21.84, 20.72, 19.6, 18.48, 17.36, 16.24 and 15.12M. Loan was drawn from bank in 2 installments of SR 50M each in year 1 and year 2. This chart shows how the prcject could have been financed under TMCL system with saving of Saudi Riyals 101.62 M which is the amount of interest payable under conventional system.ANNEX-2 CALCULATIONS SHOWING HOW TMCL CAN BE USED FOR FINANCING A DEFENCE FACILITY REQUIRING CAPITAL EXPENDITURE OF Rs. 10.0M FOR WHICH GOVERNMENT CAN PROVIDE ONLY Rs. 0.9M ANNUALLY Coans From Bank Against Counter Loans Counter Loans Balance Amount Available Balance [os ote LC OL LC fa [ef tooo 06-01 oeM_—[ 2M | sa-o2-oom [oa [20 [ar 0.s050ac0n [8om_| 05M | _as-o0s-80m | eo] [of | .00505-0N | san | 05M | s.s0s60m| Son] A I EO [a00s=35M_[ SN 2a [zon] [204010 | To | a es | = counter-loan amounts receivable from bank *= loans for settling of balance due for payment ‘Aoove caiculatons show that under IML system of tmancing the government wil lar the Dank loan within ZU years and apart trom naving Surplus balance of Rs 2.(M will have receivable counte’-loan amounts from the bank Rs 0.740.5+0.7+0.5+0.4+0.5-0.5+0.5+0.5+0.4#0.440.4=Rs 6.0M. ‘As the government wil own the facility, it wil pemanenly save Rs0.9M annually. Ifthe project is financed under Asset jjarah securities system 28 recommended in IE's blueprint the government willremain a tenant permanently hncurting annuel expenditure of Rs. 0.9Mas rent of the facilty. {sit not sadly astonoshing that bhieprint rejects TMCL end prefars Asset jjara securities system?ALLAH'S COMMANDS ARE ALL GOOD FOR MANKIND AND. FOR FULL IMPLEMENTATION AT ALL TIMES AND IN ALL CIRCUMSTANCES. IDEA OF GRADUAL ELIMINATION OF INTEREST IS AS ABSURD AS THAT OF GRADUAL CEASE-FIRE IN WAR. EVERY MUSLIM MUST STRIVE FOR IMMEDIATE ELIMINATION OF INTEREST AS IT IS CONDITION OF Gnaan RULERS ECONOMY MANAGERS AND ISLAMIC ECONOMISTS MUST GIVE SERIOUS THOUGHT TO IMMEDIATE REPLACEMENT OF INTEREST BY ISLAMIC LENDING INSTRUMENT-TIMCL. FOLLOWING ASSERTIONS IN GOVERNMENT'S PETITION OF 13 FEB 1999 LEAVE NO GROUND FOR ANY ONE TO ARGUE FOR FURTHER DELAY IN ELIMINATING INTEREST. “ HIGHER COSTS OF BANK BORROWING ARE LIKELY TO LEAD TO PAKISTANI MANUFACTURERS BEING PRIED OUT OF FOREIGN MARKETS.INTERNALLY IT WILL LEAD TO PRICE INCREASES AND A HIGHER RATE OF INFLATION, AND EXTERNALLY, IT WOULD LEAD TO A FALL IN EXPORTS AND A GREATER DEPENDENCE ON FOREIGN LOANS AT HIGH RATES OF INTEREST AND A CONSEQUENTIAL TRANSFER OF ECONOMIC SOVEREIGNTY IN FAVOUR OF FOREIGN COUNTRIES.”