The Wisdom of Islamic Economics and Ibn Khaldun

By Santiago Sevilla Economist University of Zurich sevillagloor@yahoo.com The key issue here is the rate of interest. While the capitalistic world believes that interest must be paid on loans and time deposits, the Islamic belief is that interest is usury (Riba). Instead, only profit should be shared, due to the fact that risk is already covered by counter guarantees. Interest is not so much a problem of morals and ethics, but a matter for mathematic logics. Interest rates are the growth factor for money. In other words, if the macro-economic interest rate is at all to be paid, money supply must always increase. As a result, the western or capitalistic economy is awash with ever growing money. The unstoppable money tsunami causes long term inflation, particularly, price increases in real estate, and precious metals.

From another perspective, it looks that money is constantly devalued. Strangely enough, it appears that the Central Banks recently have been reducing the rate of interest to almost nothingness. When the interest rate is but nothing, business flourishes. So there is something foul about the rate of interest, as Islamic economics teach. Interest is equivalent to usury. How can this fact be explained? Interest rates cause money to grow. If there is no profit in an indebted business, interest rates cause bankruptcy in the end. But if there is profit in an indebted business, interest rates appear as profit sharing, equivalent to dividends. So, only when there is profit, sharing is reasonable. If the risk is properly covered, there is no need to bankrupt a business which is at a loss, by perpetually charging interest. It is like beating a dead horse. Banks call such business non performing, and apply different accounting for these assets. Here we see as obvious, the wisdom of Islamic economics. If interest rates were abolished, and replaced with profit sharing only, then, that excessive money growth would disappear. Public debt, also, this enormous burden on public finances, would vanish in due time. Undoubtedly, the vane and fallacious exchange of money against Treasury Bills between the Federal Reserve and the Executive Government would evaporate. These institutions are both one and the same. Nevertheless they pretend to be different corporations by sake of a legal fallacy. There is a need for Western capitalistic economic theory to be reconsidered, reviewed, and, if discovered to be contradictory, changed for the better. Let us not forget that the first economist in history was Ibn Khaldun (1332-1406), and, as we can see, his thinking

is valid still today. Riba or usury has always been a problem, both for morals as well as for logics. As a way to deepen our thought about the rate of interest, we should meditate about the mathematical constant e , or the logical idea of compound interest causing money growth by at least 2,7182818 ., according to Leonhard Euler and Jacob Bernulli. We must accept that interest rates accelerate pari passu with inflation. There is plenty of statistical evidence that galloping inflation feeds on interest rates, which tend, the more inflation grows, to explode and to shoot up at an exponential pace. Interest rate increases do not combat inflation, but cause stagflation first, and accelerating inflation, the more the rates grow. Islamic economics, to our surprise, are right. And there is much more to it, than it appears: The incredible achievements of Islamic investment in Dubai, where the Crown Prince Sheikh Mohammed has built a splendid city in the form of a palm tree in the ocean, without causing inflation, using his capital in a most productive, daring and magnificent way, shows that the penny pinching ways of western economics, always busy pretending to balance budgets and raising taxes again and again, wasting money in tiresome bureaucracies, neglecting public works, and ruining old peoples retirements as a way to save expenditure, proof that Economics as conceived in the West by Lord Keynes, and put in practice by the IMF needs to be re-considered due to its frequent failures. Bubbles and more bubbles caused by desperate greed, enormous damage to private investors inflicted by certain important disloyal banks shows a most vicious situation in our western economies.

There is a need of grandeur, decency and moral principles which are valid within the frame of Islamic Economics. The example of Europe ruined by excessive sovereign debt and corrosive interest rates show us the misconceptions of Economics as a science. A key issue which must be resolved, in accordance with the principles of logics, is the solvency of sovereign debt: If public debt is issued in the national currency, either in US$ or Euros, then it is contradictory to sound thinking to deny the repayment on maturity at face value, because the sovereign country is able to issue money. In the case of Greece, a member of the European Community, its sovereign debt should have had the guarantee of the European Central Bank at face value. Banks and other creditors bought sovereign debt well assured that it did not imply risk, due to the principle that sovereign debt can always be repaid in the national currency. This rule has always applied to Treasury Bills issued by the US Government. There is no logical reason why this principle would not be applicable to the European Community as a whole. In any case it appears as foolhardy that member states of the EU should have issued bonds to be sold in the capital market, instead of requesting such credit from the European Central Bank. At any rate it is contrary to sound thinking that sovereign countries who can issue money should go into debt at all. Interest payments by sovereign states, who can issue money, would be utter nonsense.