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Thinkers Trends Resources

in collaboration with
Department of Finance, Kulliyah of Economics &Management Sciences,
International Islamic University of Malaysia
&
International Islamic University College Selangor (KUIS)

2nd World Conference on Riba

The Riba Conundrum Impartial Outlook from Accounting, Legal and


Religious Perspectives
18th-19th July, 2011, Kuala Lumpur, Malaysia

Contact: Shirazdeen Adam Shah,


Principal Consultant, Thinkers Trends Resources,
Email: thinkerstrends@time.net.my
27 A, Jalan PJS 10/24,
Bandar Sri Subang,
46000 Petaling Jaya,
Selangor, Malaysia.
Tel: 603-56313589
----------------------------------------------------ABSTRACT, PAPER & CV

Riba-free Economy and the Islamic awakening


Younus Abdullah Muhammad
PhD candidate
Lecturer in Business and Economics, Casablanca

islampolicy@gmail.com

Riba-free Economy and the Islamic Awakening

Younus Abdullah Mohammed

Bismillah ar-rahman ar-rahim

Abstract:This paper identifies recent uprisings in the Muslim world as part of a broader Islamic Awakening.
In these countries populations dominated by despotic regimes for more than a generation managed
to overthrow decades of authoritarianism with collaborative public protest. As this
revolutionary spirit is replicated elsewhere, an important distinction must be made: any
effort to break away from the old networks of domination and privilege must modify and
break away from the international, riba-based economic order. The paper identifies the
norms and oppressive circumstances that arise from the riba-based system and the reality
that the conditions for unrest today were largely influenced by U.S. monetary policy. By
discussing the nature of central banking and fractional reserve lending alongside the wave of
financialization that has accompanied globalization a root threat is identified. Ultimately, it
is argued that if riba-free alternatives are not included within efforts at reform then
alterations within these societies will prove merely cosmetic. The solution of riba-free
endogenous loans, loans issued from a monetary authority that fundamentally alter the
nature of monetary policy, are proposed both as a practical solution for the issues internal to
these nations and as a means of advancing development toward truly just, riba-free societies.

Riba-free Economy and the Islamic Awakening


"Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away
from them, but leave them the power to create deposits, and with the flick of the pen they will create
enough deposits to buy it back again..." ~attributed to Sir Josiah Stamp
1. Introduction
Recent events in Tunisia and Egypt are remarkable. Decades-old despotic regimes were overthrown
in weeks. However, while it is true that these uprisings create the potential for positive change, they
also run the risk of reinstituting politically authoritarian structures resulting in cosmetic, rather than
fundamental, change.
Political authoritarianism apart, there is the further problem that fundamental domestic economic
and financial changes would be taking place in a hostile international environment. Any effort to
break away from old networks of domination, therefore, must address the international
macroeconomic norms, in particular, those that result in social and economic injustice.
Those norms include the assumption that riba is necessary and inevitable; that riba does not
disproportionately transfer wealth to a tiny elite; that fractional reserve banking promotes efficiency
and justice; and that the creation of money out of nothing is necessarily a good thing even though
there is little, even no, concern for whether or not the money is lent for the purposes of the real
economy and its distribution to every individual.
This paper addresses those norms, in particular, that riba is necessary, inevitable and the cause of
efficiency and justice. It also proposes that fiat money can, in effect, have the qualities of
commodity money (such as gold) and can redress the weaknesses of commodity money IF the fiat
money is clearly and specifically related to the real economy. This must be done not only to develop
the real economy but to spread it to every individual in society so that producers and consumers
become the same people. It is proposed that this be done through the use of riba-free endogenous
loans issued by a monetary authority.
2. Contextualizing the Cause of Dissent in Tunisia and Egypt
The uprisings in Tunisia and Egypt, like those elsewhere, were caused by an array of grievances, but
most international media coverage tended to minimize the economic aspects preferring to
concentrate on the political ones. This concentration, of course, is convenient for internationally
dominant democratic powers seeking to downplay the role of Western support for authoritarian,
torturing regimes over the years, but it largely ignores the fact that the uprisings were mainly caused
by things such as rising prices, unequal economic opportunity, and unfair distribution of wealth.
More specifically, on November 5, 2010 Ben Bernanke, Chairman of the Federal Reserve,
announced the quantitative easing 2 program inserting billions of dollars into the global economy
through a near zero percent interest rate policy because the pace of recovery in output and
employment continues to be slow. This insertion took place despite earlier efforts that purchased
$1.7 trillion in government bonds and emergency lending and that took $12.3 trillion worth of toxic
debt from off the books of private banks and placed the risk onto the American taxpayer 1. Chairmen
Bernake then announced the second wave of easing by saying, the Committee intends to purchase
a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.
One member of the committee voted against the strategy expressing concern that it, increased the
risks of future financial imbalances and, over time, would cause an increase in long-term inflation

See http://www.federalreserve.gov/newsevents/reform_transaction.htm

expectations that could destabilize the economy.2 He was right the inflationary effects of this
policy represent a key element mostly missing from current coverage of uprising in the Arab world.
Within 24 hours of Bernankes announcement stock markets around the world jumped nearly 2
percent and the price of commodities prepared for an inflationary push. The Egyptian Central Bank
met in emergency and the UK pound experienced the largest appreciation in six years against the
dollar. In both Tunisia and Egypt the central banks maintained interest rates 3 denying inflationary
concerns based on Household Expenditure Survey data 4 that reports only aggregated expenditure
and contains no information on quantity making it virtually impossible to derive any information
about prices whatsoever (Fabiosa and Soliman, 2008).
However, inflation became a global phenomenon immediately; a global commodities benchmark hit
a two-year high5 and trekked back towards levels that had led to protest in April, 2008. A
confidential World Bank study later revealed that the inflation was caused by a confluence of
factors including bio-fuel production, speculative activity, the decline of the dollar and higher
energy prices (Mitchell, April 8, 2008).
In actuality the Federal Reserve is pumping liquidity into an environment where domestic
investment is virtually impossible in light of the pernicious private and public debt of American
society. In essence the policy represents the United States attempting to export its food inflation to
the rest of the world and putting pressure on foreign economies to increase their exchange rates to
combat the inflationary pressure affecting commodity prices.
3. Consequences of Quantitative Easing
Zero interest rates have generated a gain for stock markets and maintained asset prices that were
inflated for many years but this policy has done little to stimulate U.S. employment or lending and
has initiated a currency war amongst developed economies where the cheap dollars create an
opportunity for arbitrage known as a carry trade. Banks benefit while developing nations are
crippled and forced to either print their own currency to absorb the dollar inflows or to heighten
rates to defend exporters and control for inflation. Former World Bank economist Joseph Stieglitz
acknowledged on October 5, 2010 that instead of helping the global recovery, the flood of
liquidity was causing chaos. He stated, The irony is that the Fed is creating all this liquidity
with the hope that it will revive the American economy Its doing nothing for the American
economy, but its causing chaos over the rest of the world (Brandimarte, Oct. 5, 2010).
By December 17, 2010 Mohamed Bouazizi of Tunisia had immolated himself and on January 6,
2011 Algerian youth were protesting over high food prices shouting bring us sugar (Ouali, 1).
Within months the leaders of Tunisia and Egypt were deposed and protests were regional.
Today, inflationary trends remain at highs, yet the Federal Reserve expresses little remorse. The
current Federal Reserve Chairman of St. Louis was recently questioned about the connection
between quantitative easing 2 induced inflation and Middle East unrest. He said that despite their
being evidence that U.S. monetary policy is imported by central banks around the world Middle
East countries choose to have a flexible exchange rate and that is up to them and then ended by
saying that the only concern of the Federal Reserve is U.S. interests (Bullard, Feb. 28, 2011)
denying any accountability for the potential alternative reality aforementioned or acknowledging
2

See http://www.federalreserve.gov/newsevents/press/monetary/20101103a.htm
See http://www.bct.gov.tn/bct/siteprod/english/actualites/evenement.jsp
4
See excel data from Central Bank of Egypt:
http://www.cbe.org.eg/public/MPC_InflationCoreFebE.pdf
5
Seehttp://www.jefferies.com/cositemgr.pl/html/ProductsServices/SalesTrading/Commodities/Reu
tersJefferiesCRB/IndexData/index.shtml
3

that the U.S. system is co-ordinated so as to run an international financial, military, and corporate
empire.
Furthermore, modern international monetary policy suggests that nations are to manage exchange
rates through interest rate adjustment. Countries that run a current account deficit 6 are to raise
interest rates in order to attract a capital inflow of foreign funds whereas countries with low interest
rates expect that international and domestic capital will flow elsewhere. However, the United States
runs a persistent balance of trade and current account deficit and by all standards should have to
heighten interest rates in order to follow convention; U.S. quantitative easing directly contradicts
this decree. The net effect of such a policy is to support an astronomical asset bubble in the U.S., the
result of artificial market manipulation pushing money into stocks and lowering the dollars
exchange rate to help U.S. exporters. It has also created cheap American dollars flowing into
foreign markets creating imbalances, widespread commodity inflation, and political unrest that has
the potential to dampen any recovery.
4. The International Monetary System: A Riba-based Phenomenon
The international monetary system is heavily influenced by the Federal Reserve due to the dollars
role as the reserve currency. Neglecting to recognize the influence of dollar dominance in creating
conditions of inflation and poverty will plague any effort to promote true justice. True reform must
address the cancerous nature of the international monetary system. At the head of this order lie two
institutional norms: independent central banking and fractional reserve lending. Any effective
solutions must address the effect the international, riba-based system has on national policies today.
The modern order of globalized finance was ushered in at the end of World War II with the Bretton
Woods agreements and signified an increased role for transnational institutions (IMF, WB) and
monetary policy in the international arena but on August 15, 1971 President Nixon discontinued the
gold standard and effectively transitioned into a completely fiat order granting monetary authorities
the power to issue currency without legal constraint and thus the dollar to run the world.
Today almost every nation relinquishes control of its currency to central banks that serve the
interests of the private banking system. Central banks are responsible for regulating the money
supply by controlling interest rates but the banking system creates 95% of the new money supply
through fractional reserve lending. In the U.S., the Federal Reserve may claim that it is
independent within the government, however the institution admits its banks are organized much
like private corporations, that they issue shares of stock to member banks and stock that may
not be sold, traded, or pledged as security for a loan. 7 This relationship places the planning of a
national economy in the hands of the banking sector. It has been replicated across the globe today
and is important for one trying to understand the root source of economic oppression.
With riba added to the equation, the international monetary order represents a feudal system where
the cost of money is gradually more expensive at different layers of access in a pyramid. At the top,
the Federal Reserve and the banks it serves create dollars out of nothing and therefore have no real
cost. Thereafter, elite investors, multinational corporations and foreign central banks are granted
preferential treatment due to the relationships that evolve in a system that utilizes the factor of riba
alongside floating exchange rates, speculative instruments and the bond market to place banking
institutions over sovereign nations and their populaces. Internationally, the American power has
ultimate ability to determine its own policy followed by other major nations and allies and then
decreasingly the developing economies must adopt international norms that lead to their
domination. The system is very similar to the structure of the domestic credit market in the U.S.
6

Defined as the difference between the value of exports of goods and services and the value
of imports of goods and services http://www.imf.org/external/pubs/ft/fandd/2006/12/basics.htm
7
See http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm

where the Federal government pays much less for bonds, followed by state and local governments
that are now going bankrupt and only finally, at the base of the pyramid, the population itself.
Similarly the international financial order forces developing economies to obey financial dictates
and forms a system of monetary empire paid for completely with money created from nothing and
using riba to influence policy around the world.
The global economy is dominated by banks, financial institutions and the wealthy. A recent study by
Credit Suisse reported that, At the top of the wealth pyramid, there are over 1,000 billionaires
globally at the base of the wealth pyramid there are three billion people with average wealth per
adult of below $10,000 (Global Wealth Report, 2010) Riba extracts wealth from below to
reallocate upwards as scarcity, taxes and a higher cost for money forms a monetary order similar to
a Ponzi scheme8; with riba there is never enough currency in circulation to cover all debt and people
at the bottom keep working and borrowing to perpetuate a system that can never attain equilibrium
and that functions like a parasite.
The method is termed globalization but really represents a financial form of imperialism. Thomas
Friedman famously classified the policies associated with this order as a golden straightjacket, the
defining political-economic garment of this globalization era. The system mandates that countries
open their economies to global capital markets, multinational corporations and the electronic herd,
a group of often anonymous stock, bond and currency traders and multinational investors,
connected by screens and networks (113). In reality, this order creates global financialization, a
process whereby financial services, broadly construed, take over the dominant economic, cultural,
and political role in a national economy (Phillips, 268). As a consequence, the entire world
economy almost collapsed in 2008 however policy since has maintained and in fact worsened the
effects of these norms. The protests and uprisings across the world represent potential opposition to
this perpetuation however and generate an opportunity to alter the riba-based order altogether.
5. Cases in Point: Egypt and Tunisia in the Run-up to Revolution
Since the revolution, nothing has changed We threw out Ben Ali, that's all."
~Kamid Hamdi Tunisian, March 12, 20119
The international monetary system creates a dollar-dominated empire and the international arena
manifests this neo-colonialism by means of foreign capital, aid, and technical know-how from
institutions like the World Bank and IMF that act as the central banks and planners of developing
nations. These institutions utilize natural, economic or political crisis to extend assistance under
structural adjustment conditionality (Klein, 2007) and thereby attain control over key aspects of
policy, implementing reform that runs counter to the interests of general populaces.
As a consequence of foreign intervention, less developed economies replicate similar banking
models domestically, leading to shared control of the economy between an internal elite and
international finance. Quantifying the relationship of banks and government in developing
economies is extremely difficult because, laws are often incomplete, ambiguous, or simply not
respected (Farraq and Kamaly, 2007). The banks are mostly an embedded component of the
corrupt regime and thus help to maintain authoritarianism through adherence to the international
order; Tunisia and Egypt are prime examples.
Tunisia and Egypt were the World Banks poster children for economic success. A few weeks
before the protests, World Bank commentary praised the state of the Tunisian economy claiming,
Tunisia has boosted its global competiveness and seen exports double over a little more than 10
8

For example see http://news.yahoo.com/s/ap/20110228/ap_on_re_us/us_madoff_scandal


Bernie Madoff, convicted of a $50 billion Ponzi scheme has recently alleged that banks were
complicit in his operation and claimed that the whole government is a Ponzi scheme."
9
See interview at http://www.npr.org/templates/story/story.php?storyId=134482424

years. The best illustration of Tunisias improved competiveness is its total factor productivity
growth, which often drives investmentTunisia ranked as Africas most competitive country in
Davos 2009 Global Competitiveness Report (World Bank, Oct. 27, 2010).
Egypt was not far behind. The IMF reported in an Executive Board summary that Egyptian
adherence to IMF dictates, spurred rapid output growthunderpinned by foreign investmentdriven productivity gains and the favorable external environment. Reforms also reduced fiscal,
monetary and external vulnerabilities, leaving some room to maneuver on macroeconomic policies
in the event of negative shocks (IMF, April 14, 2010). The World Bank concurred calling Egypt,
one of the champions of economic reforms in the Middle East and North Africa region.10
In reality, economic growth was at the expense of the majority of the population. Tunisian reform
began in 1986 when the country adopted structural adjustment policies in line with the golden
straightjacket and Western powers ushered Ben Ali to presidency so that economic reforms could
be implemented wholeheartedly. In 1999 a former head of Italian military secret service declared to
a parliamentary committee that "In 1985-1987, we (in NATO) organized a kind of golpe (coup) in
Tunisia, putting President Ben Ali as head of state" (Chianura, October, 1999).
Ben Ali implemented every recommendation of the international monetary order. However, despite
professing liberalization, reform actually made those on the bottom of society, worse off
economically as older forms of clientelism reappeared, undermining the prospects for political
democratization (King, 2003, p.6). Inflation, high unemployment, and a low quality of life for
those at the bottom of society meant little to World Bank and IMF analysts as aggregate growth
promoted the notion reforms were working and that the Tunisian economy was an economic
miracle.
Egypt started implementing IMF and World Bank policy around the same time as Tunisia, but in
2004 with the appointment of a new government that adopted every recommended adaption,
reform efforts were accelerated. Egyptian growth remained above 6 percent from 2004 thru 2010
as the economy was continuously deregulated and open to further foreign investment and
privatization and as political power was decreased for unions at the hands of a repressive state. In
reality aggregate growth absent inclusion of distribution hid the impoverishing effects on the
general population. This was expressed by Kamil Abbas, Union Leader, in an interview in August
2010 with the Wall Street Journal. In it he explained, The gains touch only certain segments of the
population the upper crust of society You have employees making $20 a month in some new
businesses. What kind of reform is that?11
The Egyptian and Tunisian economies opened up to foreign investment but neglected industrial
and infrastructural development in favor of low-end manufacturing, tourism and menial jobs. Land
privatization and agricultural reform rendered both nations food dependent as in Egypt 6 million
tons of mostly U.S. wheat is imported each year despite having ample arable land and being food
independent as early as the 1960s. Military support and foreign aid from abroad created a
dependency that propped up dictatorial regimes: before his Cairo speech in 2009, Barack Obama
referred to Hosni Mubarak as a "stalwart ally of the United States" and "force for stability and
good" and Nicolas Sarkozy excused Frances positive regard for the Tunisian regime shortly after
Ben Alis deposition by exclaiming, "Behind the emancipation of women, the drive for education
and training, the economic dynamism, the emergence of a middle class, there was despair, a
suffering, a sense of suffocation. We have to recognize that we underestimated it.12 Today Western
10

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/EGYPTEXTN/0,,menuPK:28
7166~pagePK:141132~piPK:141107~theSitePK:256307,00.html
11
See http://blogs.wsj.com/economics/2010/08/03/egypt-critical-take-on-a-model-reformer/
12
See http://www.guardian.co.uk/world/2011/jan/24/nicolas-sarkozy-tunisia-protests

politicians express rhetorical support for the uprisings as they prepare to influence the new regimes
to do similar bidding.
The policies manifested in both Egypt and Tunisia were only possible with the complicit support of
the international monetary order that ignored the ravaging effects these policies had on the majority
and the reality that reform could create instability and lead to a replacement of the regime
altogether. Despite a warranted celebration in favor of political reform, any alteration will prove
cosmetic unless it addresses the inherent injustice of the riba-based order and moves in an
alternative direction.
As it stands now, it seems there will be little change. Immediately after Bin Alis deposal major
rating agencies downgraded Tunisian debt13 and Tunisia's Central Bank Governor Mustapha Nabli
said, "We will need financing and we are working with the World Bank, the IMF, the African Bank,
the European Union and Arab Funds,14" adding that Tunisia will pay back its debts, estimated at
1120 million dinars for 2011 ($800 million), on the due dates15.
Conditions are similar in Egypt: currency reserves declined by a billion dollars 16 as the stock market
remained closed for over a month and the pound suffered from expectations of near term decline. 17
It is expected that the balance of payments at the end of the third quarterwill register a deficit of
more than $3 billion," the central bank said in a statement. Inflation continues to rise steadily and
Egypts currency and stocks will be exposed to speculation and possession at the hands of
international finance as trading resumes.
Finance chiefs from G20 nations issued a joint statement exclaiming, "We stand ready to support
Egypt and Tunisia, with responses at the appropriate time well coordinated with the international
institutions and the regional development banks, to accompany reforms designed to the benefit of
the whole population and the stabilization of their economies," and IMF chief Dominique StraussKahn said his global lending institution stood ready to help Egypt and Tunisia if asked. 18 All of
these indicators suggest that, absent any radical alternative, these economies will remain at the
mercy of the international financial order.
These internal situations exist alongside a global macroeconomic reality of continued quantitative
easing and subsequent commodity inflation. If the economic dimensions are not understood and
included in reform efforts then there is little hope that the uprisings in Egypt, Tunisia or any other
country for that matter will prove effective. Any competent reform must address these economic
phenomena; absent an address of the repressive nature of money as debt-control mechanism, there
can be no truly fundamental alteration or justice.
6. Monetary Policy Today: Interest Rate Relations and the Real Economy
Inflation is always and everywhere a monetary phenomenon. ~Milton Friedman
Monetary and fiscal policy represents the two primary tools for affecting macroeconomic behavior.
The relinquishment of monetary policy to the financial sector limits government to fiscal matters.
As austerity measures follow massive monetary intervention that socialized the losses of banks, it
should become clear that something is fundamentally wrong with these relationships.
13

See http://www.ft.com/cms/s/0/21b42d54-23f3-11e0-bef000144feab49a.html#axzz1GVHEou9b
14
See http://en.ce.cn/World/Africa/201102/26/t20110226_22249802.shtml
15
See http://www.bct.gov.tn/bct/siteprod/documents/20110125.1.ang.pdf
16
Seehttp://www.bloomberg.com/news/2011-03-07/egypt-s-february-foreign-reserves-declineto-33-3-billion-1-.html
17
See http://af.reuters.com/article/egyptNews/idAFLDE7250C320110306
18
See http://www.reuters.com/article/2011/02/19/us-g20-mideast-idUSTRE71I2MG20110219

The development of todays privately-controlled economic order is largely a byproduct of a


philosophical worldview rooted in usurious conquest, private triumphalism and the belief that the
pursuit of profit absent moral judgment is ultimately benign. Thus contemporary monetary policy
has evolved inside an environment that necessitates a justification for imperial patriarchy. As
Thomas Friedman put it, Unfortunately, this Golden Straitjacket is pretty much one size fits all
It is not always pretty, gentle or comfortable. But its here and its the only model on the rack this
historical season (104). Monetary policy represents the means by which old colonial relationships
are maintained and the global elite retain control.
Contemporary monetary practice is sophisticated and complex but is largely derived from a body of
theory that preceded the study of macroeconomics and stems from the quantity theory of money.
The quantity theory of money holds that there is a direct proportionate relationship between money
and prices or inflation. It is important to note that the theory is rooted in deliberation about the
effects of new money, coming from the new world and thus introducing inflation as a result of
an inflow of gold and silver due to conquest,19 but the theory had been successively and successfully
sophisticated over several generations and appeared to receive a clinching verification during the
Great Inflation of 19691983 (Coleman, 3) a period heralded as a triumph for central banking due
to shifting perceptions with respect to the importance of price stability (Volker, 4), when it was
accepted that targeting money supply was the means of curbing inflation.
The triumph was short-lived however as evidence called into question the link between money
supply and inflation. Instead central bank policy was understood as a reaction to price alterations
and demand for loans from banks inside the fractional reserve system and not the cause of them.
The primary instrument of monetary policy for central banks became targeting nominal interest
rates and the quantity of money and money supply has almost disappeared from importance.
Primary evidence of this reality lay in the fact that the Federal Reserve no longer publishes data
affiliated with the M3 measure, the measure showing the fastest growth in monetary supply, after
claiming that the monetary aggregate has not played a role in the monetary policy process for
many years20. Thus interest rates dictate money supply today and are the major means by which the
monetary empire is controlled.
Contemporary analysis of the quantity theory of money has however shown that there is indeed a
proportionate relationship between money and inflation in the long run but that there is no
correlation between the growth rates of money and real output (McCandless Jr. and Weber, 1995).
This is evident when we look at the effect of expansionary policy in recent years where real growth
was low despite massive efforts at stimulus. This is typically referred to as pushing on a string or
trying to get out of a liquidity trap but being unable to influence variables of the real economy.
If there is a positive aspect of these developments it is that talk of a riba-free monetary policy need
not seem so foreign anymore. The Bank of Japan has effectively had a near-zero interest rate since
1995 and the Federal Reserve rate has been reduced to near zero since September of 2008 with no
end in sight. Conventional theory suggests that it is time for monetary stimulus but with interest
rates at zero there is no room for maneuvering under present norms. With the promised long term
inflation evident and little to no real growth as a consequence it is safe to say something is
fundamentally wrong.
These developments are important. First a theory that has stood the tests of time for centuries has
largely been eradicated from policy consideration and the consequences can be seen in the failure of
contemporary efforts at stimulus. Secondly, debate about the exogenous or endogenous nature of
19

See Nicolaus Copernicus Memorandum on Monetary Policy (1517) or Jean Bodin, Responses
aux paradoxes du sieur de Malestroict (1568).
20
See http://www.federalreserve.gov/releases/h6/discm3.htm

money demand documents a blind acceptance of the system itself while creating a haphazard
argument of circularity that ignores the reality that riba-based central banking and fractional reserve
lending makes the entire banking sector endogenous to the real economy as injustice prevails.
These factors guarantee that globalization is predominantly dominated by old colonial nations,
banks, multinational corporations and a global elite powered by access and ability to leverage debt.
As a consequence, greater portions of indicators, variables and economic statistics are composed of
purely financialized denominations and give the false impression that the real global economy is
growing.
Over a 20-year period almost all nations adopted the dominant model of independent central
banking with price stability as the stated objective (IMF, May 27, 2010) and in reality the debt
hierarchy of a riba-based order led to inflation everywhere, a bubble of financial products many
times larger than the real economy and a disintegration of real productive development in most
countries. Crises were temporarily deferred via interest rate manipulation and further extraction
from the poor but serious problems persist. The U.S. government recently completed a Financial
Crisis Inquiry that explained this reality. It reads, From 1978 to 2007, the amount of debt held by
the financial sector soared from $3 trillion to $36 trillion, more than doubling as a share of gross
domestic product. The report concluded that, this financial crisis was avoidable The captains of
finance and the public stewards of our financial system ignored warnings and failed to question,
understand, and manage evolving risks within a system essential to the well-being of the American
public. Still policy has not changed despite all signs indicating it is fundamentally flawed.
Today a countrys currency is nothing more than a floating debt instrument controlled by banks. The
riba-based nature of these underlying relationships also means that cumulative debt always exceeds
money in circulation leading to the reason why this model produces debt hierarchy and an inability
to develop the real sector. It becomes increasingly apparent, as policies fail to attain intended
results, that there are deep systemic issues leading to possible collapse. The domination of the
banking sector as a monetary authority can only be altered in the event the riba is removed from the
equation altogether.
7. Immediate Solution: Endogenous Riba-free Loans
The uprisings of Egypt and Tunisia created a spark for reform stretching from Wisconsin to Bahrain
and are representative of an outcry of those most affected by the international monetary order. They
also mark an indication of potential systemic disintegration in the event they are unable to render a
comprehensive challenge to the dominant order today. It is therefore necessary to connect political
repression and economic subjugation under a riba-based system. A solution that can fulfill this role
is the utilization of what has been termed Islamic endogenous loans.
There is actually no need for sovereign governments to relinquish control over the money supply to
banking institutions. Sovereign nations can simply issue currency without entering the bond market
and paying interest at all. Islamic endogenous loans allow a nation to issue currency in a manner
that targets the development of the real economy. Economist Rodney Shakespeare explains this
alternative,
In contrast to conventional endogenous money, an Islamic money supply is a modification of
present practice so that there can be central bank issuance of interest-free loans for the purposes
of productive capacity. The issuance is administered by the banking system, and is ultimately
repayable to the central bank, does not have interest attached, is always directed at productive
capacity and thus serves the real economy, efficiency and resource-allocating purposes of a
market economy, has wide ownership, social and economic justice purposes.(p.2)

The use of riba-free endogenous loans creates a solution for all of the aforementioned issues. This
intervention not only solves the issue of unemployment immediately but can also control for
inflation while taking major steps toward educating publics about the harm of riba-based structures,
an argument that is already widespread in Muslim societies. Under this model money is issued by
the government, interest free and then administered through the banking system which may make a
fair charge for administration. Thus the use of Islamic endogenous loans can link all sectors of
society. Demand is no longer determined by interest rates set by either a monetary authority
(exogenous) or by the demand for loans in the banking sector (endogenous); instead money is part
of a holistic relationship based on the real needs of society as a whole.
Riba-free, endogenous loans are a means of monetary intervention for funding physical projects
deemed useful and necessary in order to facilitate productive infrastructural development (e.g.
railway, road, canals, bridges, etc.) or productive economic activity. If conducted effectively then
from the banks that administer the funds to the workers building the projects on the ground to the
new economic activity generated from wages and business, a new money multiplier effect in the
short term would persist within society akin to Keynesian stimulus but absent long term inflation
because of interest-free amortization.
One of the catastrophes of the post-Bretton Woods order is that it has virtually wiped out the
potential for infrastructure development internal to nations. Factors that contribute to this reality
include the notion that state intervention is a sign of socialism; that floating exchange rates make it
impossible to invest in long term infrastructure projects; and that interest payments on such projects
make them unfeasible. These factors have created a world where physical development is virtually
nonexistent. In the United States a huge disintegration of infrastructure is present. A recent
evaluation by The American Society of Civil Engineers gave infrastructure in America a grade of
"D" and stated that U.S. roads, airports, schools, levees, dams, and other infrastructure are in
overall poor shape and require a $2.2 trillion investment to bring them up to par. 21 Obviously the
banks are not allocating resources efficiently where they are needed.
Where the predominance of speculative financial products has destroyed real economic
development, the use of riba-free endogenous money allows the government to play a larger role in
determining where resources are allocated thus adding a creative dimension to policy formulation
that can target specific components of aggregate demand (consumption, investment, government,
and exports minus imports) and seek to stimulate real economic variables. There are many
structures from the Islamic finance sector that can be used to facilitate the return on initial
investment through user fees, profit sharing agreements or many other possible alternatives.
Additionally, the project proposals and collaboration may prove to be a prerogative of the people
which could create a macroeconomic dimension of participatory democracy.
The widespread adoption of such practices would be a major step toward restoring the relationship
and measurability of prices to currency in circulation and could ultimately prove counterinflationary in the long run as the riba-free arrangement means a temporary increase in the money
supply lead to a long-term increase in productive potential. It is a simple solution that attacks every
principle dysfunction outlined in this report.
The Finance Minister in Egypt has already expressed an interest in a stimulus package but has
emphasized that it will require help from "our development partners.22" In Tunisia the Central Bank
announced that it was developing a Civic Fund targeted at collecting resources from donations and
contributions of private individuals and legal entities to use them in financing regional development
21
22

See http://www.infrastructurereportcard.org/

See http://www.reuters.com/article/2011/02/22/us-egypt-finance-idUSTRE71L4ZA20110222

projects and directly in the form of social assistance 23 With riba-free endogenous loans there is no
need for such proposals as money truly becomes a prerogative of government.
Any riba-free public works project in these societies would generate the results they are trying to
attain minus interest payments, potential speculation, or foreign domination. In Tunisia there is a
possibility for developing roads and highways, hospitals, technological infrastructure, transforming
agricultural output, advancing irrigation systems, developing factories and etcetera. In Egypt the
ability to improve the Suez Canal region, alter agricultural processes, improve refining capacities or
increase similar infrastructural deficiencies is present as well. The ultimate and ideal project would
be a collaborative effort between the two nations constructing high speed railways from the
Mediterranean ports in Tunisia to the Suez Canal over a generation. It is interesting to note that this
project would have to run through Libya, in civil war now, thus presenting the opportunity to
connect national struggles to region wide concerns and pose riba-free solutions as conflict
resolution.
All of these projects would provide immediate stimulus, employment and alter the physical and
social landscape of their respective nations while developing the talents of the population. All of
these can be conducted absent international debt, interest payments to a central bank, foreign
dependence or speculative attack. If applied to Egypt and Tunisia the use of interest-free
endogenous loans via sovereign credit represents a truly revolutionary next step in taking the fire
from the gods of monetarism, advancing the understanding and awareness of riba-free economics
and reconnecting governments, banks, industry and people in a truly endogenous way.
8. Towards an Interest-Free Economic Order
Have you not turned your vision to one who disputed with Abraham about his Lord because Allah
had granted him power? Abraham said: "My Lord is He Who Gives life and death." He said: "I
give life and death". ~Holy Quran 2:258
He is the only One who controls life and death. To have anything done, He simply says to it, "Be,"
and it is ~ Holy Quran 40:68
Taking away the power to create money from nothing while charging interest even to the very
governments a currency represents must be a component of any political or economic reform. The
creation of previously non-existent purchasing power from nothing allocates wealth inefficiently
and can give life or death to whole nations and their people.
Inserting the concept of endogenous riba-free loans at this ground-breaking moment represents a
major opportunity to advance practical efforts at transforming the riba-based monetary system.
Since around 2002 serious momentum has been building for the use of a gold dinar in international
trade. The primary proponent of such a call is former Malaysian Prime Minister Mahatir ibn
Mohamad and this call has the potential to challenge the fiat order altogether by restoring the
principles of a gold reserve system but not a direct gold standard. Dr. Mahatir has explained that,
"Gold prices can also be manipulated, but not as easily as the U.S. dollar or other currencies....
Speculation and manipulation will not be as easy as when local currency is valued against the U.S.
dollar." Introducing the concept of administered, riba-free endogenous loans represents a necessary
component of national monetary practice that can facilitate a transition away from the contemporary
order. Therefore the implementation of the policy outlined in this paper has broader ramifications
for efforts toward creating a riba-free world.
In his work The Lexus and the Olive Tree, Thomas Friedman belittled Dr. Muhatirs call as
nonsensical conspiracy theory, hopeless amidst the triumph of American globalization. He said,
23

http://www.bct.gov.tn/bct/siteprod/documents/LIST%20OF%20BCT%20CORRESPONDENTS
%20BY%20COUNTRY.pdf

Ah, excuse me, Mahathir, but what planet are you living on? You talk about participating in
globalization as if it were a choice you had. Globalization isn't a choice. It's a reality. There is just
one global market today, and the only way you can grow at the speed your people want to grow is
by tapping into the global stock and bond markets, by seeking out multinationals to invest in your
country and by selling into the global trading system what your factories produce. Today it is fairly
conclusive that Dr. Muhattir successfully saved Malaysia from a speculative currency attack during
the 1997 Financial Crisis by not adhering to international norms. As a result capital controls once
considered obsolete by the IMF are back in vogue; a recent IMF staff position paper admitted that
capital controls can usefully form part of the policy toolkit to address the economic or financial
concerns surrounding sudden surges in capital (Kaplan and Rodrick, Feb. 2001). other research
claimed the capital controls of Malaysia produced faster economic recovery, smaller declines in
employment and real wages, and more rapid turnaround in the stock market(IMF, Feb. 19, 2010).
Thomas Friedman must have wondered as the financial crisis of 2008 set in whether his
proclamation of victory was premature. Today as monetarists try to preserve a model that has
actually blown apart, the necessity that new thinking challenges convention is of utmost importance.
There has been little effort to connect the political alterations today to structural economic realities.
This paper presents concrete alternatives and highlights fundamental principles that must be
addressed by any movement today seeking real reform. Endogenous, riba-free loans are a means of
providing immediate relief to some of the causes of the present unrest (inflation, unemployment,
corruption) and reestablishing a connection between money supply and the real economy. Perhaps
most importantly however they represent a leeway into an expanding conversation with regard to
the development of a truly riba-free alternative and a step toward establishing alternative forms of
globalization apart from the golden straitjacket. Absent inclusion of monetary alteration, any and all
reform will prove insufficient. The solution is simple and creates the possibility that present
political alterations may separate holistically from a dictatorship that knows no nation, recognizes
no values and controls the imperialist machine largely through the riba-based monetary system.

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BIO
Younus Abdullah Muhammad is an activist heading the website IslamPolicy.com He is a graduate of
Columbia University with a Master's of International Affairs in Management and Institutional
Analysis and a concentration on the Middle East Region. He is currently researching for a doctoral
dissertation on Islam and Binary Economics and lives in Casablanca, Morocco where he lectures in
Business and Economics courses. He is a Certified Counselor and Psychotherapist in the United
States and spent many years there as a community advocate and social worker. He has appeared on
Press TV, Russia Today, BBC and other media outlets advocating for Islamic solutions and is
available for contact at islampolicy@gmail.com.

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