In the following part of an article by Muhammad Akram Khan, Chief Accounts Officer in the Ministry for Foreign Affairs, the writer explains that, at macroeconomic level, interest can never be accepted as a benevolent institution and urges those who support interest to consider its far reaching implications in an economy and its effects on the lives of common people. Khan is a profound scholar of Islamic economics and a prolific writer on that subject. The complete article was published in ‘Pakistan Banker’ (January-December 1996) under the title ‘Is Commercial Interest Riba?’ Here, part of the original article is being published with the kind permission of and with thanks to the Editor, Pakistan Banker. (Pakistan Banker is a magazine of The Bank of Punjab) – Editor
**Financial Imperialism **
Over the last two decades the world has seen an explosion of public debt. This is true for rich as well poor countries. In 1988, average indebtedness of industrially advanced countries had increased from 44.2% of GDP in 1981 to 58.6%. In the case of Italy, Belgium, Ireland, Netherlands and Japan. These ratios were 95, 134, 133, 77, and 73 percent respectively.10 The position of low-income countries was even worse. The total external debt of low-income countries was $ 111.855 billion in 1980. It rose to $ 489.297 billion in 1994, an increase of 337% in 14 years.11 This was the state of external debt. Domestic public debt was beside this. Let us look at interest payments. In 1970, all countries paid $ 1.643 billion as interest to their foreign creditors. In 1990, total interest payments of all countries was $ 45.441 billions - an increase of 1.3 times. Such colossal amounts of money were flowing from debtor countries to creditor countries.12
Creditor countries also feel that something must be done to reduce the transfer of capital from the poor to the rich countries. One such technique is rescheduling of debt. But it also adds to the agony of the poor world. For example. Willy Brandt writes:
**To take the case of Mexico: the second debt rescheduling, for a period of 14 years, will amount to one and a half times the original debt, i.e. $130 billion. At a meeting with government representatives in Mexico city I asked if it was true that parts of the first rescheduling had cost 30% in interest and fees. Yes, I was told, that might well be so.**13
Public debt has become a tool of modern imperialism and exploitation. Third World countries have gone under heavy debts. They are finding it extremely difficult to pay back the debts along with interest. The debt servicing ratio as a percentage of exports in the case of 20 countries had exceeded 30% in 1994 while the same ratio was only 10 in 1980.14 The result is that they have to borrow more capital just to pay back interest and principal of the existing debt. In a large number of cases the net inflow of foreign capital has, in fact, become negative, which means that capital, instead of flowing to poor countries, in flowing towards rich countries.
For example according to World Development Report 1990, 27 countries had a negative net transfer of funds from debtor countries to creditor countries. The quantum of this negative flow was $ 22 billions. The corresponding figure in 1970 was mere $ 2.31 billions. During 20 years, net negative transfer had increased 10 times.
The phenomenon has been pertinently termed as ‘financial hemorrhage’. The poor countries are toiling hard to pay back the debts. The situation is approaching a point where perhaps poor countries will be working only for rich countries. This will be the worst form of exploitation. The rich countries, with the instrument of compound interest on their loans, have been successful in keeping an effective hold on the poor countries without bothering to govern and administer them. They have been able to replace territorial imperialism by financial imperialism.
Interest and Trade Barriers
Interest is instrumental in restricting international trade in a subtle and intricate manner. Developed countries have raised tariff and non-tariff barriers against products of developing countries. Willy Brandt laments:
There is no doubt that the developing countries’ access to the markets of the industrial countries is obstructed by the same groups that like to talk of the free market economy and free world trade. Sixty percent of world trade is transacted under ‘non-free conditions’. Of the total industrial products consumed in the USA and the EEC, over 30% are now affected by protectionist measures; a few years ago, it was about 20%. In the first half of the eighties, the developing countries were affected more than anyone by an increase in protectionist measures, particularly in textiles and clothing, steel, and agricultural products. UNCTAD registered no less than 21000 cases in which ‘non-tariff’ barriers (i.e. barriers other than custom duties) had been employed.15
Industrially advanced countries do not feel compulsion to reduce trade barriers since they can expand their own exports to developing countries by providing suppliers’ credit. Suppose the world as a whole is able to abolish interest, developed countries will not be willing to sell their products on credit. Instead they will be inclined to enable the developing countries to expand their exports to their countries so that a reciprocal trade relation is established. At present, the compulsion to reduce trade barriers is minimal. The developed countries can sell their products on credit to developing countries and earn interest too. If the interest-bearing credit is not available and developed countries are also not willing to reduce trade barriers, developing countries will review their own import policies and will cut down unnecessary imports such as luxuries. In brief, interest-bearing credit is playing a tacit role in perpetuating the status quo in which the developed countries have been able to keep developing countries out of the international market. The abolition of interest from global economy will have a positive effect on world trade.
Direct Foreign Investment
The alternative to interest-bearing foreign finance is direct foreign investment (DFI). The developing countries resort to interest-bearing loans on the plea that sufficient funds are not available as DFI. The reason for the non-availability of DFI is not that it is unprofitable. In fact, the rate of return on DFI is usually higher than the rate of interest. For example, the rate of return on DFI in a number of developing countries was 35% per annum during 1984-89 according to IFC Emerging Markets Composite Index. This compares favourably with the rate of return of 20.3% on the US Benchmark Standard and Poor’s Index of 500 stocks.16 To the extent governments are borrowing for their consumption needs there may not be an immediate answer except that should review their financial policies to cut down on this type of borrowing. But for productive projects the need for encouraging DFI is imminent. Despite this realization, developing countries are unable to create a congenial atmosphere for DFI. The DFI needs a peaceful social life, irrevocable guarantees against nationalization, removal of bureaucratic hurdles in approval of projects, and simple regulations for repatriation of earnings. But developing countries have not paid proper heed to these factors. One reason is that they do not feel compelled to create such a climate since they can get interest-bearing loans from international financial market and other developed countries. Suppose that interest-bearing loans are not available. Developing countries will then make a serious effort to improve conditions for encouraging DFI. Interest acts as an indirect stimulus to keep the status quo in which DIF is discouraged.
Need for Further Research
Interest cannot be accepted as a beneficial institution for humanity. The intellectual efforts to distinguish it from Riba are not based on strong premises. This paper has argued that Riba and interest are one and the same thing but in our search for an alternative we have come across some nagging problems which need to be solved. For example, in case of inter-personal transactions, we still do not have any plausible answer for the protection of money value in view of the creeping inflation, assuming that we do not accept indexaction of financial claims. Similarly, there is need for the institutionalization of qard@ h@asanah. We still have numerous difficulties in applying the concept of profit-loss sharing for short term credit. Also, as yet we do not have any mechanism for interest-free credit to the government. The Islamic banks have not been able to find a solution to delayed repayment of principal sums. No doubt these are yet unresolved issues. A moderate statement will be that we need further research and thinking for finding answers to these problems. Sweeping aside the entire progress made in the areas of Islamic finance and going back to justify interest as a legitimate institution is an unbalanced approach.
**Financial Imperialism **