Whether a system with no Riba (zero interest rate) can be evolved
In Corona virus epidemic which looks more dangerous for the economies than 2007 financial crisis, questions are rising that whether interest rates can be totally waived by bringing it to zero and the difference in real sector and money supply can be patched up or whether we can reach to the point of full employment through Islamic financial system.
In this respect first of all we have to see what monetary policy means.
Monetary policy is the process a government, central bank, or monetary authority of a country uses to control (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy . Monetary theory provides insight into how to craft optimal monetary policy.
Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates to combat inflation. Monetary policy is contrasted with fiscal policy, which refers to government borrowing, spending and taxation.
Now we have to come to the point that how current markets have evolved.
The origins of capitalism and free markets can be traced back to the Islamic Golden Age and Muslim Agricultural Revolution, where the first market economy and earliest forms of merchant capitalism took root between the eighth–twelfth centuries, which some refer to as “Islamic capitalism”. A vigorous monetary economy was created by Muslims on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent. Innovative new business techniques and forms of business organization were introduced by economists, merchants and traders during this time. Such innovations included the earliest trading companies, big businesses, contracts, bills of exchange, long-distance international trade, the first forms of partnership (mufawada) such as limited partnerships (mudaraba), and the earliest forms of credit, debt, profit, loss, capital (al-mal), capital accumulation (nama al-mal), circulating capital, capital expenditure, revenue, cheques, promissory notes, trusts (see Waqf), startup companies, savings accounts, transactional accounts, pawning, loaning, exchange rates, bankers, money changers, ledgers, deposits, assignments, the double-entry bookkeeping system, and lawsuits. Organizational enterprises similar to corporations’ independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.
Now coming to current world, time value of money or in other words inflation is dominant in this world. We cannot refrain from reality that after industrial revolution Islamic economic system also needs to cover this existing fact.
Islamic economics refer to the application of Islamic law to economic activity either where Islamic rule is in force or where it is not; i.e. it can refer to the creation of an Islamic economic system, or to simply following Islamic law in regards to spending, saving, investing, giving, etc. where even the state does not follow Islamic law.
The former paradigm, particularly as developed by modern scholars such as Mahmoud Taleghani, and Mohammad Baqir al-Sadr, seeks not only to enforce Islamic regulations on issues such as Zakat, Jizya, Nisab, Khums, Riba, insurance and inheritance, but to implement broader economic goals and policies of an Islamic society. It seeks an economic system based on uplifting the deprived masses, a major role for the state in matters such as circulation and equitable distribution of wealth and ensuring participants in the marketplace are rewarded for being exposed to risk and/or liability. To them this system as neither Socialist nor Capitalist is a third way with none of the drawbacks of the other two systems.
The latter paradigm is of necessity more limited, revolving around a few main tenets of Islam: the payment of zakat charity by believers, borrowing and lending without payment of fixed interest (riba), and socially responsible investing. The key difference from a financial perspective is the no-interest rule since most other religions favor charitable giving and socially responsible investing.
So from here, how we need to move forward? Let us make Pakistan a testing lab for bringing this system in to reality. What we have done so far. No legislation that how government can borrow (Still Public Debt Act of 1944 is in vogue with no relevance what the government is doing. On leaving SBP I had forwarded new securities Act to the government with the approval of SBP and legal authorities but nothing has been done so far.). Parallel Banking with no legislation on Islamic Banking. Still definition of Riba is pending before our judicial system. No framework exists for even Islamic financial institutions that how they should work for the welfare and elimination of poverty in this country.
Everybody says that with strong will we can do this but in real world, system matters and that we have not tried to build. We are now living in 21st century based on its new disciplines and technology and this we have to employ particularly on our economic framework based on pillars of Islam.