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Sheikh Mahmood Ahmad’s Concept of Time Multiple Counter Loan
Economic Issues
Asif Iftikhar


Ever since the question of developing an Islamic Economic system was raised, the problem of evolving a system of banking based on Islamic principles has remained an important issue.

One of the major problems in developing an Islamic Economic system is that of finding an interest-free alternative to our present system of banking. The interest-free alternatives suggested uptil now either lack viability or fail to truly eliminate “Riba” (interest). The late Sheikh Mahmood Ahmad, a meritorious scholar of our country, presented a model of banking, which in his opinion, gives a viable basis for truly eliminating Riba. He called his concept “Time Multiple Counter Loan” (TMCL). In this article we shall attempt to present the basic concept of this model and some of the objections raised against it.

However, before we discuss the model let us see what the basic functions of a bank in an economic system are:

1. Banks keep the deposits of people secure. They return money out of these deposits on demand, and remit the money from one place to another as and when required by a depositor.

2. Banks provide credit for private or business use.

The first service is genuinely required by almost all the people and there seems to be nothing wrong with it nor with any reasonable service charge for such services. But since the second service is based on interest, it is criticized for being un-Islamic. The TMCL model proposes to solve this problem by introducing the concept of “credit value”. To understand this concept, credit must be seen not merely as an advancement of money but also as the advancement of an amount of money for a period of time. Credit value, then, can be defined as follows:

Credit Value =Amount borrowed  X  Time period for which it is borrowed

Now the TMCL model suggests that for every loan given by the bank the loanee should return to the bank an equivalent loan value which would be a fraction of the amount of loan received, the difference being covered by a multiple of time. This procedure is based on the concept of “Equivalent Credit Value”. For example, all the following amounts of loan have Equivalent Credit/Loan Values:

Rs 1000 borrowed for 1 year

Rs 500 borrowed for 2 years

Rs 250 borrowed for 4 years

Rs 100 borrowed for 10 years

Now supposing Mr A goes to the bank for a loan of Rs 1000 for 1 year and the bank asks him for equivalent loan value, as determined by the banking policy of the country, which comes to Rs 200 for 5 years, then an interest free basis for credit has been provided: Mr. A will return Rs 1000 after 1 year to the bank without any increment thereon. Similarly the bank will return Rs 200 to Mr A after 5 years without any increment on the original amount lent.

The amount borrowed by Mr A will be invested in a business and the profits earned on it would be entirely his own. Similarly the profits earned by the bank on Rs 200 would be kept by the bank itself. In case Mr A does not have Rs 200 to give against Rs 1000, the bank can open an account for Mr A of Rs 1200 and advance him Rs 1000 out of it. The remaining Rs 200 will be accepted as equivalent loan value from Mr A After one year Mr A will return Rs 1200 to the bank and the bank will return Rs 200 to him or to his heirs, after the time period determined for Rs 200 is over. Whether or not this special arrangement should be made is a question that would be a part of the credit control policy. However, if the basic principle of exchanging equivalent loan values is accepted, then, all the functions of banking can be performed.

A. Technical Analysis

An interest free alternative to banking is confronted with at least nine major problems. Following are the solutions to these problems that the TMCL model offers:

1. The first problem is whether a viable alternative basis of credit would be available. We have understood the concept of “credit value”. Using the concept, the TMCL model offers a feasible basis for extending credit because equivalent credit values can be exchanged easily.

2. If it is accepted that a feasible basis for credit would be available, the next question is whether or not the society would continue to save at zero rate of interest. Orthodox economists insisted that savings were a function of interest; that savings were directly proportional to the interest rate prevailing in the economy. Keynes refuted this belief and revealed that savings are not a function of interest but of income. This is because lower interest rate results in higher investment, which, being conducive to employment, increases the income of the people. Higher income, in turn, leads to greater savings.

In fact, savings seem to be inversely proportional to the rate of interest. Empirical data seems to corroborate this observation. For example, in the following table, Real Interest Rate (Interest rate after taking inflation into consideration) was negative in certain countries, yet the level of savings continued to increase.


Country Year

Real Interest Rate

Increase in Bank Deposits.

Japan  1974



U.K 1974



U.S.A 1975




The following figures from the world Bank’s report on Pakistan’s economy also indicate the inverse relationship between interest and savings.


Year Level of  Savings

Bank Rate

1965 13% 5%
1985 5% 10%


Thus, it can be safely concluded that at zero rate of interest the economy will not only continue to save but the level of savings will, in fact, rise.

3. If the people continue to save, the question is why should they deposit their savings? Why shouldn’t they invest in real assets like land, and buildings and get rent and capital gains?

Actually, if there were a single banking system in the economy, then whatever would be advanced or spent, for whatever period, it would come back to the banking system. This is because a person would be able to purchase something only if there were a seller. The seller would have to deposit the money he received in a bank otherwise the risk and time involved would be too costly. In fact, depending on the velocity of money the amount borrowed by a client would return to the banking system even before he pit back to the bank from which he borrowed it. This derivative money is infinite in its flow unless it is artificially interrupted by the creation of bank reserves. Therefore, under the TMCL system, vast sums of money would always remain in the banking system.

4. Even if people deposit their savings in a bank, how will it meet the interminable demand for credit, which will because of the zero rate of interest?

As already said, scarcity of capital is artificially created through bank reserves. Interest is actually charged for the use of the scarce capital. This artificial hinderance cannot be justified. Elimination of reserves will not only let the flow of derivative money remain uninterred but multiple expansion of credit will also become infinite. In Pakistan, the reserve ratio required is around 35%. This means that the banks can lend upto 2.85 multiples (100/35) of the initial deposits. If the reserves are lowered, the multiple expansion would increase. As an example consider the following:


Reserves Multiple Expansion
35% 2.85
20% 5.00
10% 10.00
5% 20.00
0 infinity


For practical purposes reserves cannot be taken below 5%. However in a system, which somehow allows the banks to acquire as much additional capital as is required for maintaining the reserves, it would be possible for the banks to do away with the reserves altogether.

In the opinion of Sheikh Mahmood Ahmad, the TMCL model offers one such system. If the ratio for a counter loan were set at a point where it was equal to the ratio required for maintaining a reasonable reserve, then the capital needed for reserves can automatically be obtained from the counter loan received from every loan given. Therefore, banking would have a system with infinite possibility of credit expansion.

5. The next problem pertains to liquidity. Without reserves, how will banks maintain liquidity? Supposing one fine day a large number of clients came to withdraw deposits, then, what would be done? The answer is again in the concept of counter loan value. The bank can extend the idea and deposit some amount out of the counter loan received with the central bank of the country. For example, if the ratio for counter loans is fixed by the monetary authority at 12.5% (Rs 125 for 8 years = Rs 1000 for one year), out of the 12.5% received as counter loan every scheduled bank can deposit 2.5% for 8 multiples of time with the central bank on counter loan basis. Then the bank can borrow 20% for one year from the central bank. Moreover a further 2% can be kept as till money in the bank’s own deposits. Therefore, even without reserves 22% liquidity can be maintained. The ratio for counter loan can of course, be adjusted according to the requirement of the bankers.

6. Having answered the question pertaining to liquidity, we come to another problem---inflation. Would not the infinite expansion of credit lead to inflation? To answer this question it must be understood that price level is determined by the quantity of money and the quantity of goods available in the country. For example if the price for an article in the present year is one rupee and credit increases by 33% in the year, the price level will increase by 33% only if an equivalent increase in productivity does not take place. If productivity also increases by 33% no inflation would result. So the TMCL model proposes that loans for only productive purposes be given (at least for six initial years) to tackle the problem of inflation.

7. After inflation the problem which deserves discussion is that of budgetary deficit. Fiscal deficit, actually, is a consequence of interest. Elimination of interest on one hand will abolish unemployment, except for a fractional unemployment (0.5% to 1%), and on the other hand, according to the Ocans law, an increase in the income of the economy by 3.2% will result with every 1% increase in the level of employment. This means that the income of the government will increase automatically without even changing the revenue or expenditure structure. Moreover, expenses related to domestic debt-servicing will also be eliminated. Therefore, in a single year or so the government will be in a position to meet the budgetary deficit and also overcome the unemployment crisis. By eliminating unemployment, the government will also be in a position to hand over large scale enterprises to the private sector.

8. Perhaps the most important question that remains to be answered is that after all the virtues displayed by the system of TMCL, would it still be able to earn profits?

Sheikh Mahmood Ahmad worked with the State Bank of Pakistan on a theoretical model of the TMCL system and compared its performance with a bank working under the conventional system of banking. The results were startling:


(It has been assumed that both the began working with initial deposits of Rs. 1000)


Year of
Income of the
Conventional Bank
Income of the


64.48 39.96


172.43 242.36


484.00 1317.80


The reason for these amazing profits is in the nature of the TMCL system of banking. In our discussion on liquidity, we took an example where out of 12.5% received as counter loan by a bank 2.5% was deposited with the central bank and another 2% kept as till money. The remaining 8% can be invested by the bank in some business. Moreover, the loan given by the bank, will return even before the depositor pays it back. So there will be so many funds available to invest that in the third year of its working the profits of the TMCL bank will be even higher than its initial deposits.

9. One last question about credit control policy remains to be answered. How would the monetary authority manage credit without its conventional tools of interest and reserves? Reserves, Sheikh Mahmood Ahmad believes, are more theory than reality. The artificial scarcity of capital created through reserves is always harmful in the long run. The monetary authority can control credit without reserves or interest by simply raising or lowering the ratio for counter loans.

Finally, it must also be noted that Sheikh Mahmood Ahmad has suggested a 110% security requirement for each loan given. So the loans will not be freely available to everyone. The credit facility will, therefore, not be given in a way which makes its management impossible for the monetary authority.

B. Philosophical Analysis

Some scholars opine that the TMCL model is not truly congenial to Islam. Basically, two objections have been raised by them in this regard:

(i) The element of collateral security remains in this model.

It is evident from Sūrah Baqarah (verses: 282 and 283) that the Qur’ān prohibits the pledging of collateral security against advanced loans except when it is not possible for the parties to write down a legal document for the transaction, for example during a journey1. Moreover, it is evident from the Qur’ān that any financial arrangement which leads to the concentration of wealth in few hands cannot be allowed2. Such arrangements as allow the facility of loan to only those who have enough capital to give as collateral increase the disparity of income in an economy. Sheikh Mahmood Ahmad used to counter the argument by saying that since the implementation of his model will lead to an increase in employment, the criticism does not apply. However, disparity of income is not the only adverse effect of concentration of wealth. It is just one flower of an evil tree3. Many other problems emanate from the element of collateral in banking and the resulting concentration of wealth. An entirely different trend of resource allocation is set from the one actually required in the economy, especially in developing economies. For example, the direct beneficiaries of bank loans, the industrial bourgeoise, may want to adopt capital intensive methods of production to increase their profit margin whereas labour intensive methods may be more suitable for the economy as a whole. It is primarily because of the problems associated with of wealth that we find forty percent of the population in our country without even potable water whereas a small segment of the society produces industrial goods and uses luxury products.

For whom are these industrial goods as television, VCRs, etc. produced? The forty percent people without potable water want them? Yet the production of such goods eats up a massive portion of the available resources. Why shouldn’t the indigenous skills be provided with capital so that enterpreneurship develops and pervades the economy and builds up the infrastructure for industrialization in the true sense of the word? To those who criticize Sheikh Sahib’s idea on these grounds, these and many other related questions are important enough, and cannot be answered just by saying that the TMCL concept envisages an increase in employment.

2. Sheikh Mahmood Ahmad believed that from the Islamic point of view if any name should be given to this model, it should be “Ihsaan” (kindness). A loan given without interest is nothing but kindness. The TMCL model, according to Sheikh Mahmood Ahmad is, therefore, in consonance with the following Qur’ānic verse:

“What else is the reward of kindness except kindness.” (55:60)

Apart from the fact that the verse in question has a different context---the Day of Judgement rather than the TMCL---another important argument against this basis of credit creation must be mentioned here.

In an Islamic society, Infāq, spending in the way of Allah, is one of the most essential values. In the basic concept of capitalism, the destitute are not the direct responsibility of the society unless, of course, the two or three percent needy always found even in the affluent countries start becoming ten or fifteen percent and pose such danger to the affluent as cannot be averted merely by the logic of the laisser-faire concept. In an Islamic society the destitute are the direct responsibility of the society and cannot be ignored by saying that the ‘natural’ adjustments of demand and supply should take care of things.

Riba, in essence, is totally against the spirit of Infāq, therefore, if my brother, a fellow Muslim, needed some money, Ihsaan would demand Infāq, not a counter loan. It is only when Infāq is absolutely impossible that a loan would be extended by a Muslim to his brother, and that too without the condition of a counter loan and collateral security. It seems, therefore, that in the TMCL model, two parties extend loans to each other on the basis of equivalent interest. Although, the interest rate is zero, there is the spirit of interest about it.









1. For further details see ‘Tadabur-i-Qur’ān’, Amin Ahsan Islahi, Vol 1, Pages 642-4.

2. “... In order that it [wealth] may not make a circuit [merely] between the wealthy among you.” (59:7)

3. For further details see “Renaissance”, May 1992, ‘Outline of a New Economic Framework’, Pg 5.

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