Modes of Financing
Economic Issues
Question asked by .
Answered by Asif Iftikhar

If all the forms of interest or mark-up are held to be repugnant to the Islamic injunctions, what modes of financing do you suggest for (a) financing trade and industry; (b) financing the budget deficit; (c) acquiring foreign loans; and (d) similar other needs and purposes?


Before attempting to understand the answer to this question, it is important to keep certain general principles in mind:

i) In reformation of society in areas where not resorting to a gradual change carries the strong risk of causing greater evil, it is prudent and in consonance with Islam to adopt a gradual mechanism of change.

ii) Islam has not given any specific system for the economy. It has only given some ethical directives to purge the economy of such evils as cause or may cause oppression and, thereby, impair the purification of man’s soul. Therefore, any strategy, procedure or system that does not violate these ethical principles and is in line with their spirit is acceptable to Islam for running the economy. It is needles to say that, as a common sense rule, the system itself should be a sensible and reasonable one.

iii) ‘Ideals are often like stars. You can’t always reach them, but you can use them to chart out your course’. That an ideal cannot be achieved immediately is not reason enough to distort it. For if the ideal is changed, then one can never reach the goal. No one in his right mind would suggest that corruption should prevail in society. But just because we cannot eradicate it fully right now, we should not have, say, only 60 percent eradication as our ultimate target.

One of the greatest sins that an individual or a people can commit is to change the Divine law or to interpret it wrongly. Even when this is done unintentionally, the consequences are far reaching. There are times when, owing to peculiar (and usually not-so-preferable) circumstances or owing to the failings of a people, it is not congenial to live up to an ideal. But that does not mean that the ideal is wrong in itself. It merely means that gradually the circumstances have to be changed and the failings overcome. If we can’t eradicate corruption in our society, it does not mean that we should re-define corruption. Justification of failings in this manner closes the door to repentance and reform.

iv) Quite often, the solution to a problem lies in looking beyond given premises. A seemingly anomalous idea can sometimes offer the required breakthrough and, as such, such an idea as is presented by an established scholar deserves serious deliberation, if nothing else.

Now, in consideration of these general principles, one can say that whatever solution is adopted to solve the problems pointed in the question,

a) the solution may be implemented gradually so as to avoid imbalances in society

b) any solution that does not violate Islamic principles and guidelines may be adopted,

c) even if the solution is not practicable immediately, un-Islamic strategies should not be justified through the subterfuges of new definitions; rather, gradual change in  circumstances that hinder the implementation  of the correct solution should be made the aim,


d) help should be sought from economists to work out the solution. Scholars of Islam should give them clear guidelines regarding what Islam prohibits. But, it must be remembered that:

i) any real solution would entail some material sacrifice on the part of the affluent in society; for example if we wish to eliminate corruption, those who roam about in their BMW’s and lament about the state of affairs in the country may have to settle down for a Toyota or even a Suzuki; the companions of the Prophet (sws) had to do much more to receive the blessings of Allah; God does not shower the blessings of His religion on those who do not have the moral courage to live up to nobler ideals.

ii) to make a breakthrough, new approaches are required; they in turn require moral courage, political will and sagacity.

Now, coming to the question specifically, let us take each issue seriatim:

a)  Financing trade and industry

After the failure of three peoples1 to find an alternative to Ribā as a basis for institutional credit creation (which is what banking is actually about), especially in working capital loans, it is high time we realised that, in a business enterprise, Ribā is an indispensable basis for the extension of credit at an institutional level. The obvious corollary is that one must look not for an alternative to Ribā as a basis for institutional credit creation but for an alternative to institutional credit creation itself as a basis for the economy. The notion may seen radical at first, but, as already pointed out, quite often the solution lies in exploring new frontiers, especially those that have been presented on the basis of serious academic work.2

In the analysis of any such solution, the point to remember is that apart from institutional credit creation, all other forms of financing would still be available, for example floating stocks, inducting new partners, better financial management, etc., and that when all are in the same boat no single person would have the competitive edge, which is more often the reason for seeking a loan than any other requirement.

Furthermore, the constraint on the private sector to set up large scale industry does not mean that the economy would be centrally controlled. In fact, this change may form the basis for a congenial mixed economy that not only promotes entrepreneurship and industry but does that without negating the interest of the majority for the sake of a selected few.3

b)  Financing the budget deficit

It is unfortunate that our dependence on loans has reached a stage where we usually think of only one way to deal with the deficit in the budget: loans.

It is true that borrowing can help in mobilising resources and stimulating economic activity, but unless the borrowed funds are used with sagacity, effectiveness and long-term vision, the result can be a negative leverage that spells disaster in more than just one way.4

Instead of resorting to risky palliatives as deficit financing that have caused enough ill already, the government should try to move towards real solutions as expanding the revenue base and decreasing expenditure. This may not be as difficult as is usually imagined. For instance, Zakāh is used on a very narrow basis to raise funds. Actually, it is a broad based tax (as well as an ‘ibādah) which encompasses almost every kind of wealth produced in the economy, and funds raised thereby can be used for all state functions.5 This huge base for revenue has remained unexplored.6

Similarly, on the expenditure side, we seem to be unwilling to even explore the possibility of changing our expense structure. Not only is there the need the curb wasteful expenditure, but there is also the need to find ways to deal with counter-productive expenditure as debt-servicing we are stuck up with and with indispensable expenditure as defence.7

Until we learn to reduce the gap between our revenue and expenditure by expanding the revenue base, increasing production, expanding the production base and reducing and restructuring our expenditure, our reliance on loans can only add to our reliance on loans and to our woes.

c)   Foreign loans

As already explained, when acquiring loans becomes unavoidable, paying Ribā does not amount to co-operation with evil as such. Our country, however, should gradually come out of the situation where it has to borrow on Ribā.



1. The Jews, the Christians and the Muslims.

2. In this regard, a strategy worthy of consideration has been suggested by Javed Ahmad Ghamidi; (see Appendix 2). This strategy may not be the ultimate solution, but it has certainly paved the way for thinking about new ways of tackling the problem effectively rather than just superficially.

3. See Appendices 1 and 2.

4. See Appendix 3.

5.See point 5 in Appendix 2. It must also be kept in mind that members of the undocumented sector, who, it is believed, produce as much wealth as those of the documented sector, are usually interested in paying Zakāh despite their aversion to the payment of tax.

6. See also points 2&3 in Appendix 2.

7. See III (1), Appendix 1 for an important suggestion in this regard. See Also point 3, Appendix 2.

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