Transcript The role of taxation, expenditure and debt in an Islamic economy.

The Role of Taxation,
Expenditure and Debt
in an Islamic Economy.
Dr. Abdel-Rahman Yousri
Professor of Islamic Economics
University of Alexandria
Egypt
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Lecturer
Abdel-Rahman Yousri Ahmad
Egyptian, Borne 1940
B.A Economics, Cairo University, Egypt, 1960
PhD Economics, St. Andrews University, U.K,1968
Professor of Economics and Islamic Economics,
Alexandria University, Egypt (1968- now)
Author of three books and many articles in Islamic
Economics.
Winner of the Islamic Development Bank’ Prize in
Islamic Economics (1997)
Formerly:
Head of the Economics Department, University of
Alexandria, Egypt.
Director General of the International Institute of
Islamic Economics, International Islamic
University, Islamabad, Pakistan
Introduction
It is quite essential to recognize
major Characteristics of the
Islamic Fiscal System before
dealing with Taxation ,
Expenditure and Public Debt in
an Islamic Economy
1.Collection and distribution of
the Islamic fiscal Duty: Zakat
2.Collection and employment of
Non-Zakat revenues: Taxes and other
State revenues.
3.Control and Management of
Public Property and Resources.
4. Provision and development
of Public services and utilities.
5.Employment of Fiscal tools when
necessary for purposes
of public interest.
6. Estimating need for
Public Borrowing
If necessary and
Management of Public Debt.
FUNCTIONS
THE ISLAMIC
FISCAL SYSTEM
CORE
Zakat
Collection
And
Distribution
Non-Zakat
Revenues
and
Expenditure
Public
Expenditure
Zakat
Distribution
According to
Quranic Rules
Expenditure
according to
Shariah and
Ijtehad
Budget
Public
Revenues
Zakat
Revenues
Collection
according to
Sunnah Rules
Non-Zakat
Revenues
(Taxes and other)
Collection
according to
Shariah and
Ijtehad
Shariah and its intents
Targets
S fiscal system
of the Islamic
Islamic Ideology
Public Interest
Socio-economic
justice
Public Interest and Socio-Economic Justice
• Public Interest is inseparable from the Islamic
conception of socio-economic justice .
• Public interest should be guided by Ijtehad within
boundaries of Islamic Shariah and its intents.
Socio-Economic Justice Requires:
• Fair collection of Zakat, and other duties that may
be levied, in accordance to Sunnah and Ijtehad.
• Fair allocation of Zakat revenue among the
categories which the Quran specifies.
• Observing and giving priority, within Shariah, to
the interests of the majority of population through
public expenditure policies.
• Management of public ownership resources in a
manner which maintains a just pattern of income
and wealth distribution in society.
The Role of
TAXATION
Historical View
• Only Zakat (the Islamic Fiscal Duty ) was
collected from Muslims and no Taxes were
imposed on them in the early centuries of
the Islamic State. Taxes were only imposed
on non-Muslims because they were not
committed to Zakat.
• Historical experience reveals that Zakat
revenue was in some periods more than
sufficient in covering public expenditure,
and in other periods insufficient.
History: “Jizyah” and “Kharaj”
• Jizyah was a poll tax imposed on nonMuslim people living in the Islamic state,
because these were neither paying Zakat
nor serving in the army like Muslim citizens.
• Kharaj was a tax levied on arable land
owned by non-Muslims in provinces
conquered and ruled by the Islamic State.
• Kharaj was firstly introduced by the Caliph
Umar ibn Al-Khatab after conquering rich
agricultural countries such as Iraq, and
Egypt.
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• Caliph Umar ’s view was that distributing
conquered arable land among Muslims who
achieved the conquest was bound to
concentrate wealth in their hands, whereas
Kharaj revenues paid by the indigenous
owners of the conquered land, would in the
long run be much beneficial to ordinary
citizens living in the Islamic State .
• It should be noticed that Muslims
landowners, who lived in countries, that by
virtue of their conquest joined the Islamic
State, paid only Zakat (5%-10% in case of
Agricultural products) which carried a
much lower rate of taxation than Kharaj.
• During the Umayyad period, a question was
raised with respect to treatment of Kharaj
land when leased to Muslims? Should it pay
Kharaj or Zakat?
• Umar II (Umar ibn abdel-Aziz) ruled out that
land from which kharaj was paid could not
be transferred to Muslims, who could lease
such land, but in that case, they would be
required to pay kharaj.
• Under the Abbasids and thereafter the mass
conversion of Christians and other nonMuslims to Islam eroded the Kharaj (tax)
base of the Islamic State.
History: Ushr
• A Tax initiated by Caliph Umar ibn al Khatab and
was, levied on merchandise brought from outside,
once its value reaches Nisab.
• To Muslims, rate of this Tax was equal to Zakat on
trade, i.e. 2.5% on value. Ushr (Zakat) had to be
paid to the Asher (Collector of Ushr) on the instant
of coming with merchandize from outside.
• To Christians and the Jews (People of the Holy
Book) Ushr was 5% (i.e. double that of Zakat)
• To Other Merchants coming from countries that
were hostile to the Islamic State ‫ دار الحرب‬, Ushr was
10% or equal to rate (s) imposed by these
countries on Muslims entering their land with
merchandise.
Taxation: Defence and Other Purposes
• During the Crusades’ military campaigns against
Middle Eastern Muslim countries in the 11th - 13th
AD Centuries, Muslim Fuqaha issued fatwa
pronouncing Shariah permissibility of collecting
taxes from Muslims for purposes of Defence.
• This fatwa was justifiable by shortage of Public
Revenues that were available for defence.
• The Rulers in the late period of the Abbasside
State as well as during the Ottoman State imposed
other Taxes on their subjects( Muslims and nonMuslims) to strengthen the armies as well as to
cover expenses of their lavish style of living.
• Taxation became quite burdensome in some
periods to the extent of hindering development.
(Quote Ibn Khaldun)
TAXATION IN A CONTEMPORARY
ISLAMIC ECONOMY
• Taxation, in Principle, is acceptable within an
Islamic economy.
• The Role of Zakat as an Islamic tax is fundamental.
• Zakat should be the heart of any proposed modern
Islamic Tax System.
• Yet, philosophy, targets, and Characters of Zakat
as an Islamic Tax should be clearly distinguished.
• Rules for Taxes that could be imposed besides
Zakat within an Islamic Tax System should be high
lightened.
Principle of Taxation
• Taxation is accepted in all civilized (or democratic)
societies as a fundamental element in the social
contract between Ruler and citizens.
• The Quran reports a version of a “social contract”
in Sura 18:94 : People living under the continuous
threat of some foreign invaders (Yajuj and Majuj),
expressed to the new ruler (Dhul Qarnain) their
readiness to pay for him Kharaj (tax) if he erects a
barrier (Wall) which would protect them against
those enemies.
• The ruler (Dhul Qarnain) concluded this social
contract with people on condition that they would
help him in all efforts needed for building the
barrier.
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Zakat is the Heart of the Islamic Tax System
Nothing can be said about Taxation in an
Islamic system without firstly knowing the
nature and role of the Zakat system.
We have to recognize similarities and
differences between Taxes and Zakat.
This is important particularly to those who
have objections at calling Zakat “an Islamic
Tax”
It is also important because any tax that
may be imposed besides Zakat should be
guided by the basic principles of the Zakat
System and should not contradict or
duplicate Zakat.
i.
Just like taxes, Zakat strictly speaking is neither
voluntary payment nor a donation and should be
collected and distributed by the State (though it
could be given directly to its recipients without
government intermediation). In Shariah a central
treasury ( Beitu-almal) is trusted to collect it
annually. In recent times, Pakistan, Sudan, and
Saudi Arabia have enacted legislation to enforce
the Zakat.
ii. Zakat unlike taxes which are imposed and
enforced through man-made legislations. Zakat
is a duty commanded by Allah as part and parcel
of religion and, in principle, is a personal
exercise intended to purify human soul.
iii. The religious aspect of Zakat establishes
differences with Secular Taxes in three major
areas, namely Tax burden, Tax avoidance and
Tax evasion: >>
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(a) Tax burden; Tax imposed on producers and
sellers is considered part of their costs and a burden which
could possibly be transferred to consumers through
market mechanism ( depending on elasticity of demand
and supply). This is quite different from Zakat, whose payer
consider it a religious duty and never a burden and
therefore should not be transferred on other people.
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(b) Tax avoidance; which is utilization of the tax
regime by means that are still within the law (or by
exploitation of lope holes in the law,) to one's own
advantage in order to minimize the amount of payable tax.
A Muslim who knows that he is paying Zakat by order of
Allah SW will never do this. On the contrary A believer is
normally pleased when his income and wealth are
increasing and hence would be paying more Zakat.
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(c) Tax evasion; is the general term for efforts by
individuals and other entities to evade taxes by illegal
means, and this can never be done by any believer.
iv. Based on the Islamic conception of justice Only
Muslims having Nisab (a set level of income or
wealth; money and real assets) are obliged to
pay Zakat. On the other hand Zakat revenues are
distributed among several categories, with
special preference or priority given to the
society’s poor and the needy groups.
v. In most contemporary democratic and
developed societies Taxation would, to one
degree or another, have socio-economic justice
amongst its targets. Yet, no special right or
priority in Tax revenues is necessarily given to
low income groups as in Zakat.
vi. On the other hand, historically as well as in nondemocratic and developing societies socioeconomic justice is often missing.
a. Historically in non-Islamic societies,
e.g. in medieval feudal Europe taxes
were collected from ordinary folks in
favour of the Nobility and rich
landlords.
b. In non-democratic and developing
societies taxation is a source of
injustice. Taxation imposes more
burden on low and middle income
groups , e.g. through taxes of
regressive rates and through ability of
the politicians and rich people to
evade taxes by means of corruption.
vii. The Islamic system of Zakat enjoys a
permanent and stable character. This is
unlike secular Taxation where a Tax may
be removed or added and its rate is
subject to adjustment by Legislators .
viii.Whereas Tax rates may be excessively
progressive to the extent that they
discourage individuals or firms to produce
more and earn more income, or may be
regressive to the disadvantages of low
income groups, Zakat rates are
proportional and can be generally
described as low or relatively quite
moderate when compared with tax rates.
The Economic Role of Zakat
Zakat which is the core of the Islamic
Taxation System has three major
Economic Effects :
• (a) Distribution Effect,
• (b) Income Effect, and
• (c) Growth Effect.
(a) Distribution Effect
• Zakat is collected annually from rich
people’s income and wealth and is
distributed amongst the poor and
needy and other groups which normally
need financial support (wayfarer and
heavily indebted people). Zakat,
therefore, plays a regular and active
role in re-distribution of National
income and wealth in favour of lower
income groups.
(b) Income Effect
• Private spending of Zakat by recipients
whose marginal propensity of
consumption is normally high has a
direct effect on aggregate demand and
National income in the short run.
Besides, regular public spending of
Zakat on some major items, e.g.
National defence has also its direct
affect on National income.
(c) Growth Effect
• Zakat spending on poor and needy
should partially be assigned for
investment. This kind of investment is
necessary for poverty elimination and
human resource development in the
long run. The larger is Zakat spending
that is devoted to investment every
year the greater will be the effect of
Zakat on growth.
Islamic Taxation
• The need for imposing Taxes besides Zakat
could arise for several reasons.
• Public Interest within boundaries of Shariah
and its intents ‫ المصالح الراجحة‬may render
Taxation necessary for fiscal, economic or
non- economic purposes.
• Laying Rules for Islamic Taxation is
therefore an essential and important task.
• The Role of Taxes in an Islamic Economy
would naturally be linked and influenced by
ethical and Shariah constraints imposed on
taxation.
Principles and Rules for Islamic Taxation
1. A Tax should not be levied, for any reason,
by an Islamic government except after
intensive consultation ‫ شورى‬with eminent
Fuqaha and Muslim experts in fiscal and
economic matters.
2. Any proposed Taxation should not
duplicate Zakat of any type. For example a
Tax imposed to provide sustenance to the
poor people or to subsidize their
necessities would duplicate Zakat : >>
Zakat should specifically fulfil this
target. In Hadith; “ Allah SW has
imposed on rich people a duty
(Zakat) to be paid from their amwal
(i.e. wealth and income), and this
would suffice poor people. If the
poor in society should ever face
hunger or clothing insufficiency, it
would only be due to rich people
not fulfilling their duties”.
3. Any proposed Taxation should not
contradict the basic principles of
the Zakat System. For example no
tax should be imposed on low
income people or on orphans
wealth, or levied at a rate that
involves injustice because of its
regressive or progressive nature.
Taxes should therefore
complement and not contradict
the Zakat System.
4. A Tax, should never carry or assume
the same obligatory and permanent
nature of Zakat. A Tax which would be
originated for purpose of achieving a
given fiscal or economic target (that
could not be done by Zakat) has to be
removed once this target is done.
‫ليس فى المال حق سوى الزكاة بمعنى ليس ثمة حق ثابت‬
‫دائم‬
Otherwise taxation would entail a sinful
bedaa ‫( بدعة‬origination of idea or action
that changes religion) and injustice..
• 5.Taxation with respect to Non-Muslims
• All previous principles of taxation are applicable
to Muslims. The case of Taxation with respect to
Non-Muslims requires different treatment.
• Non-Muslims will necessarily be subject to
taxation because Zakat is not collected from them.
• Islamic Shariah provides for treatment of NonMuslims within framework of Justice and Society’s
Public Interest.
• Taxes imposed on Non-Muslims in our time have
to take into consideration their role in the Islamic
economy, benefits they draw from public utilities,
their ability to pay and their socio-political
obligations.
• Full citizenship of Christians in some
contemporary Muslim societies may call for equal
fiscal treatment with Muslims.
Examples of Taxes and their Role within
an Islamic Economy
• First: Taxation against Zakat avoidance
• Collection of Zakat by a Central or Local
Governmental authorities in our time is not
expected to run smoothly as in early days of
Islam.
• A percentage of Muslims, whose Islamic culture or
belief is not profound are bound to avoid Zakat
payment by misusing Shariah rules.
• Taxation can play a definite preventive role to stop
or minimize Zakat avoidance in contemporary
Muslim Societies. Collection of full Zakat revenues
is quite important particularly for categories which
are classified as poor or ultra poor in the society
• Second: Taxation for Macro-Economic
Adjustment
• In a contemporary Islamic economy Taxation can
be used within boundaries of Shariah and its
intents, to affect or modify macro-economic
variables.
• For example at times of inflation taxation can be
used to reduce Aggregate Expenditure by
imposing taxes on luxurious consumption.
• Taxation is also needed to modify the structure of
production if resources are allocated in a pattern
which is unfavourable to goods and services
needed for poor and low middle income groups, or
in a pattern that is unfavourable to economic
development. These are, in fact, important issues
for all developing Muslim countries.
Third: Taxes against harmful consumption
• Taxes can be levied to discourage any kind of
consumption or activity that may be potentially
harmful to human health or to Islamic ethical
values.)‫(الضرر وال ضرار‬
• Consensus of Muslim Fuqaha is always needed
before issuing fatwa (Shariah pronouncement)
that a new kind of consumption X or Z is definitely
harmful and therefore should be prohibited (i.e.
Haram).
• Whereas Consensus is often difficult to reach and
Fatwa is delayed, harm of X or Z has manifested
practically in some cases, and potentially is
expected to spread and becomes serious.
• Examples: heavy taxes that can be imposed on
tobacco smoking, or on some types of undesirable
entertainment.
Fourth: Taxes against Pollution
• Islamic jurisprudence has rules against water and
air pollution since the early centuries of Islam.
• The problem of water and air pollution has
become so serious in our time and all the world is
seeking a cleaner and healthy environment.
• Taxation of all activities which cause air or water
pollution is economically better solution than
closing these activities. Taxation should sooner or
later encourage these activities to take all
necessary technical measures that would stop
pollution.
Fifth:Taxation for National defence
• Taxation is proposed for strengthening
national defence if Zakat revenues are
insufficient.
• Taxation for this purpose may become
quite urgent if the Muslim Nation is,
facing foreign aggression or expected
to be attacked by foreign forces.
The Role of
PUBLIC
EXPENDITURE
Traditional Public Expenditure Pattern
• Historically, over centuries, Public Expenditure in
the Islamic State was mainly based on Zakat
Distribution or emplyment.
• Zakat resources according to the Quran should be
spent on eight categories; The Poor, Needy, Zakat
collectors, new converts to Islam, the heavily
indebted people, Slaves and Captives that have to
be liberated, Way farers, and for the Cause of Allah
SW.
• The Islamic State also spent on public works and
infrastructure such as bridges, irrigation canals
and road construction. This Public Expenditure
relied upon Revenues from Kharaj and Jezya
which also represented other important regular
sources to the treasury particularly in the early
centuries.
Public Expenditure :Determinants in an
Islamic Economy
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The Philosophy, Values and Institutions of the
Islamic System determine its Social, and
Economic targets.
The Scope and Nature of the Government
Economic and Fiscal Role is determined within
the System’ Social, and Economic targets.
The Size and Pattern of Public Expenditure in
the long run would basically be shaped by the
Government Economic and Fiscal Role.
The basic and permanent Role of Public
Expenditure would necessarily depend on
previous determinants: namely the Economic
and Fiscal Role of the Government within
policies designed to fulfil the System’ Social, and
Economic targets.
First:
The Government within Philosophy, Values, and
Institutions of an Islamic system and upon its
responsibility of Disbursement and Employment
of Zakat resources would always be responsible
to assign Public Expenditure for:
(a) Covering needs of all Zakat recipients in the
household sector, and in particular sustaining
Low-income categories (the Poor and Needy)
with necessities, and nourishment.
• (b) Investment that would directly or indirectly
benefit the poor, needy, wayfarers, and
• (c) Subsidies to help micro or small enterprises
facing particular financial difficulties or heavy
indebtedness.
(d) National Defence, to protect the Muslim
Nation from actual or existing enemies or from
expected or potential ones ‫وأعدوا لهم ما استطعتم من قوة‬
‫ومن رباط الخيل‬
• (e) Provision and maintenance of Domestic
Security and the Judicial System, ‫األمن وإقامة العدل‬
• (f ) Maintenance and running of the Hesba
System‫ نظام الحسبة‬. This system ensures that
markets are not involved in activities or
transactions that are prohibited by Shariah, but by
no means intervenes in the private economic
activities or in market mechanism.
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All previous items of Public Expenditure would be
financed from Zakat revenues.
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yet in case of insufficiency of Zakat revenues Public
Expenditure will depend on non-Zakat resources (taxes
and/or loans).
Second: Public Expenditure based on Targets
behind additional Taxes.
Within the spirit of the Islamic Taxation System,
Government is responsible of Employment of
Tax revenues in accordance to purposes for
which a tax was imposed.
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Examples: Government would be responsible
to assign Public Expenditure for:
• (a) Medical treatment of people who suffer illness
because of tobacco smoking, when a Tax is
imposed to for this purpose.
• (b) Educational Programs designed to make
people aware of the harmful effect of types of
entertainments that implicitly carries non-ethical
values, when a Tax is imposed to for this
purpose. Or alternatively for the same purpose
providing or subsidizing types of entertainments
that are Shariah permissible.
• (c) Financing Medical Centers that offer free
treatment to people suffering from pollution
as well as Research Centers which target the
development of cleaner and environmental
friendly methods of production. This when
Taxes are imposed for purposes of fighting
Pollution and improving the environment.
• (d) Financing Research Centers for purposes
of modernizing and improving the defence
system when a Tax is imposed for such
target.
Third: Public Expenditure for Public Utilities.
• Within the Islamic Conception of Welfare the State is
responsible for establishing, maintaining and running
“necessary” Public Utilities.
• (a) The State during the period of the Prophet Pbuh
showed concern with provision of clean water for
household use.
• (b) Later on, in the early Hijri centuries , with the great
expansion of the Islamic State, the government
constructed and maintained roads, bridges and canals for
irrigation.
• The government during the Abbasside State assigned
Public expenditure for purposes like: building houses for
poor people, homeless widows, helping young men getting
married, giving financial support to scholars and students ,
translation works, and founding public libraries.
HISTORICAL EXPERIENCE SHOWS :
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With the great expansion of the Islamic
State, Income and Wealth were growing
fast as well as Zakat and non-Zakat
revenues.
Within the Islamic Conception of
Human, Social and Economic Welfare the
Size and Pattern of Public Expenditure was
positively influenced by income and wealth
conditions.
How Far Public Expenditure At Present Can
Be Extended For Public Utilities?
• Within an Islamic System Three Main Factors
determine the answer of this question:
• (1) The Islamic conception of social and economic
welfare, which is never in opposition with
betterment of human, social life as long as this is
does not mean targeting excessive Affluence or
Extravagance.
• (2) The Nature of Public Utilities, For example
Public Necessities that cannot be provided by
individual or private efforts or through Market
would be the responsibility of the Government.
• (3) Fiscal Policy and availability of Public
Revenues that can be assigned for extra Public
Expenditure.
• The criterion of “Dharorat alKhums” ‫(الضرورات الخمس‬the Five
Necessities) of Imams Ghazali and
Chatbi, when considered at the
macro level can be very useful in
high lightening some of the
Necessary Public Utilities that the
Government within an Islamic
economy would be responsible for.
• For example Basic Education is related to
Necessity of teaching Religion and Intellect
Maintenance. Provision of Sanitations, and
Medical Care are related to Necessity of
Maintenance of Human Life, Family and
Progeny.
• Argument asserting that the Government
within an Islamic System is responsible for
provision of Utilities such as Basic
Education and Public Health, Sanitations
and Medical Care , means that Public
Expenditure has to be expanded
continuously with growth of population.
However, because of the “Shepherd-like
Nature” of the Islamic government, and
Liberal Nature of the Economic System,
Extension of the Government Role in
provision of Public Utilities should be
subject to careful economic argument
within Shariah and its intents.
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We have to know:
Where from financial resources would be
obtained to cover Public Expenditure? Or
How far income and wealth conditions
would allow the Government to provide
necessary resources for an expanding
Public Expenditure?
financial resources: Where from?
• A Surplus in Zakat Revenues would help in
extending Public Expenditure to cover some types
of Public Necessities or Conveniences as
happened in the past.
• Taxation is one solution to provide the needed
financial resources.
• However, Alternatives to Taxation have to be
explored:
• Examples; (a) Public borrowing , (b) B.O.T
contracts allowing the Private sector to establish
and run these utilities on commercial bases, or (c)
Voluntary Private Efforts on non-commercial
bases, or (d) Revival of the Waqf System >>
Revival of the Waqf System and
Effect on Public Expenditure,
• Whether or not Public Utilities can be provided
through non-governmental Organizations on nonCommercial Basis a matter that Should be
Explored.
• The Waqf System which relies on private altruistic
motivation played a serious role in the past in
providing Many Types of Necessary Public
Utilities.
•
A Revival of the Waqf System at
Present would reduce the need to
extend Public Expenditure in the area
of Public Utilities.
• AT PRESENT:
• With majority of Muslims in the Islamic World are
living in poverty: What is the Role of Public
expenditure in providing Public Utilities, other
than those provided through Zakat Expenditure?
• Within the Islamic Conception of Human, Social
and Economic Welfare, Public Expenditure should
at least cover “Sufficiency Level” of Public Health
and Education for low income groups (the poor
and needy).
• Therefore Public Expenditure would at least cover
provision of clean water for households,
sanitations, and health care for common diseases
as well as Primary or Basic Education for children
of poor families.
• The government, most likely would have to rely on
taxation for meeting such Public Expenditure. Yet
other alternatives to Taxation have to be explored
Public Expenditure :Other Determinants
In the short-run
Public Expenditure in the Short-Run is
dependent on;
1. The Scope and Nature of the Role which an
Islamic Government is permitted to play in
the economy for solving Macro-economic
Problems.
2. Available Public Revenues, and ability as
well as flexibility to change the size of
these revenues or to re-allocate them
according to targets and policies.
Cases for Discussions:
• Inflation accompanied by higher national income
and lower unemployment : Should the government
intervene by reducing Public Expenditure
volume? Which items could be reduced and to
what extent?)‫(واجب الحكومة فى محاربة الغالء‬
• Recession or Depression where income falls
below full employment level and unemployment
increased above its normal level: Should the
government intervene by increasing Public
Expenditure volume? Which items could be
increased and to what extent?
• )‫( واجب الحكومة فى توفير مناخ صالح للعمل والقضاء على البطالة‬
• Case of Stagflation?
PUBLIC DEBT
Framework
• History.
• WHY Public Debt?
• Public Debt is Optional and could be
Avoidable
• Islamic Ethics and Rules concerning
Indebtedness in general
• Islamic Ethics and Rules concerning Public
Debt
• The Economic Scope and Role of Public Debt
History
• The Prophet Pbuh encouraged Good Loans, in
money or in kind, to finance the Muslim’s army or
to provide Muslim households with clean Water.
• Companions of the Prophet Pbuh who granted
Good Loans waived voluntarily their rights in
these loans. Thus Loans had no burden at all on
Beit-ul-Mal ‫( بيت المال‬Treasury).
• During the late Abbasside period many Rulers
resorted to taxation ( frequently on unfair basis)
and increasing the supply of Fulus (Cheap Metal
Money) rather than Public Borrowing, in order to
cover deficit which resulted from a greater volume
of Public Expenditure above Public Revenues..
• The economy of the Islamic State increasingly
suffered from unfair taxation and greater cheap
money supply. (Ibn-Khaldun and al-Maqrizi).
• In the Late period of Ottoman State, Sultan AbdelHamid, and other Muslim Rulers, borrowed on
interest-bases from European Money Lenders.
• In our time the majority of Muslim States have
accumulated high Public debt from Domestic as
well as foreign sources on interest-bases which is
entirely against Shariah.
• While Public Debt is continuously growing in the
Muslim World, Majority of Muslim States are not
collecting Zakat, and are imposing direct and
indirect taxes on Muslim citizens.
• All this is absolutely against Islamic Sharia and its
intents.
WHY Public
Debt ?
• In a situation where Actual or Planned Public Expenditure
exceeds available Public Revenues.
• First : Should we think that such situation is not coercive
or binding, we have to find out ways to reduce Public
Expenditure in a manner that does not affect public interest
.
• Second: Should we accept such situation as inescapable
or undisputable , we have to find out means to cover the
resultant or expected Budget Deficit:
• (a) The government resorts to Borrowing from individuals,
corporations, financial institutions in or outside the
country, and from other governments. Accordingly Public
Debt results from Borrowing.
• (b) The government resorts to Taxation.
• ( Another option but unfamiliar one is selling some real
Public Assets owned by the State to finance Deficit).
• Public Debt , therefore, could be :
• Avoidable: Unless emergencies or
urgent circumstances such as war, are
calling for greater public expenditure .
• Optional : Whenever it is possible to
cover Budget Deficit by Taxation or
other means instead of Borrowing.
• As Public Debt results from Public
Borrowing, its benefit to the economy
or its burden depends on selecting
Borrowing in place of Taxation or other
means.
Indebtedness Within An Islamic Frame
• Islamic Ethics and Shariah Rules are
relevant to debt between individuals, i.e.
Indebtedness at the micro level.
• We have to recognize these Ethics and
Rules and see how far they are applicable
(or should be applied) to Public Debt, i.e. at
the Macro level.
• In its essential respect Public Debt is not
different from the debt of individuals. It is a
voluntarily transfer of Money or Assets from
one party to another, i.e. from a lender or
creditor to a borrower or a debtor.
Indebtedness: Ethics and Rules
Debt Repayment is a Religious Obligation:
1. On Shariah grounds, with exception of a Purely
Benevolent Loan, the Debtor is obliged to
repayment of the loan to the Creditor, as mutually
agreed between them when Debt is made.
2. The Debtor’s, financial and moral obligation
towards the Creditor is not dropped even by the
incidence of his (her) death. The Children or
relatives of the deceased person has to pay his
debt from any wealth that he left. If the debtor left
nothing and non of his relatives can pay for him
(her) the State should pay his (her) debt from
Zakat resources.
• Ethically, a loan is given voluntarily on basis of
benevolence . Thus:
1. Any increment taken above the principal from the debtor
on account of indebtedness, is unjustifiable and
considered Riba (usury or interest) which is absolutely
prohibited. In Hadith, the Prophet Pbuh says “the only
reward for a loan is thanksgiving and the repayment”
2. Ethics of Benevolence urges the debtor to pay back his
(her) debt before its due date if he becomes financially
capable of doing this. On the other side the Creditor is
urged to generously grant an extension to the Debtor if
insolvent and incapable temporarily of making due
repayment or even to grant a debt remission ‫وإن كان ذو عسرة‬
‫(فنظرة الى ميسرة وإن تصدقوا خير لكم إن كنتم تعلمون‬Quran, Sura 2, Verse
280).
3. A Debt, whether is paid in due time, before or after such
time, should be exactly equivalent in value to the amount
which the debtor received, no more and no less.
In Principle, Indebtedness is undesirable
1. Borrowing is undesirable unless circumstances
forces the person to do so. For example,
borrowing is permissible because of inability to
get basic necessities of life, or having to settle a
financial obligation which is beyond his (her)
own resources.
2. Hence borrowing is absolutely Undesirable for
purposes of getting goods or services that would
give the debtor comfort in life or luxury.
As a Rule Borrowing should be
regarded as a last resort, because
Indebtedness in itself is undesirable.
• Islamic Ethics and Rules concerning
Public Debt can be reached by
drawing an analogy between Private
and Public Debt.
• Two Main Factors are bound to affect
such an analogy and reflect
differences:
• (a) Differences between Micro and
Macro considerations.
• (b) Nature of Government
responsibilities which are different
from that of individual or private
responsibility.
1. On Shariah grounds, the Government would be
obliged to repayment of Public Debt. It can not
for any reason or under any circumstances
waive the rights of the Creditors whether these
were individuals, banks, foreign governments, or
else.
2. Repayment of Public Debt should be executed
promptly in due time according to conditions
that have been declared by the government
when the Debt was made.
3. Since interest (usury) is prohibited, an Islamic
government is not allowed under any conditions
to obtain interest-based loans from banks,
institutions or foreign governments, or to borrow
from the public by issuing treasury bills, bonds
or any interest-bearing securities.
• 4. Public Borrowing from non-Islamic
banking, financial institutions or
governments, even if interest- free and
within Shariah boundary should be
minimized. Foreign Investment is a better
substitute.
• Experience in the Islamic World showed that
the political consequences and influence of
foreign indebtedness is quite undesirable,
particularly under conditions of growing
Poverty Gap and continuously Increasing
Debt.
• 5. An Islamic Government should seek a
Good Loan ‫ القرض الحسن‬before getting
involved in Public Indebtedness.
• We have to Know what is a Good Loan in Islam.
• The government may accept from individuals or
institutions Purely Benevolent Loan which are not
repayable by definition.
• The government should encourage the public to
finance voluntarily necessary Public Goods and
utilities through “interest-free or Good loans”.
• Revival of Islamic Culture (through education) and
moral suasion can play a major role in promoting
the role of Good Loans at the Macro Level as best
alternative to Public Debt.
• We have to Know how a Good Loan System
can be revived in our time.
• (a) Good Loans may be arranged through issues
of Sukuk or any interest-free securities.
• (b) It would be quite important to avoid any
serious depreciation in the real value of a Good
Loan’ interest –free securities over years. The
nominal value of such securities may be fixed in
terms of “Gold” or in terms of a “weighed average
of some selected transferable currencies”.
• (c) Good Loans securities should be redeemable
according to a given time schedule.
• Furthermore we have to know how Good Loans
played very serious role in providing Public
Utilities in the Past through non-governmental
entities. (System of Waqf)
• 6. If the government resorted to Taxation as
a means to repay Public Debt, it should
strictly maintain Islamic Rules Concerning
Taxation (as previously exposed).
• 7. A Public Debt should not be employed for
financing luxurious or semi-luxurious Public
goods or Utilities.
• This Rule is established by drawing an
analogy between Public and Private Debt.
• The Rule should be confirmed by the
government fundamental responsibility in
observing and promoting Islamic rational
patterns of consumption and investment at
the macro level.
• Contemporary Experience shows that while
Public Expenditure and Public Debt
increased together in an alarming manner in
many Muslim Developing countries, the
pattern of government spending has been
far from being restricted to Public
Necessities.
• In an Islamic economy this situation should
be subject to correction.
8. A Public Debt in an Islamic system should
never be initiated or used for businesses or
economic activities in expectation of Profit.
• First of all because borrowing, whether on private
level between individuals or on Public level, is not
a normal mode of Islamic Finance.
• Second, because government within an Islamic
Frame should not be involved in business and
,hence, enter into competition with the Private
sector. For centuries eminent Muslim scholars
were against government involvement in trade or
business as this thought would inevitably be
leading to State Monopoly and contradict its basic
responsibility in fairly monitoring markets.
• Government should, within the Islamic conception
of Public interest, do its best to provide most
favourable investment climate to private activities.
•
In secular economic systems Public Debt is
employed in financing public projects which are
expected to realize profits or at least whose future
returns would pay off their Debt .
•
This policy has been familiar in many developing
countries, among them Muslim countries,
particularly during the 1960s, and 1970s .
•
The policy proved to be mostly unsuccessful as
Public Projects financed in such way could not
only pay their Debt off ,but also faced losses.
• Governments, in consequence, had to borrow
again and again or had to issue new money, not
only to repay Public Debt used in financing such
Projects but also to subsidize them.
• 9. The government within an Islamic system
should resort to Public Borrowing only
under emergency conditions.
• Emergency in all cases ,at Micro or Macro level,
would permit Indebtedness.
• In principle we should not resort to Emergency
,which is synonymous to Dharora, unless the
government have ruled out all other Shariah
permissible alternative options to Public
Indebtedness as impossible or contrary to Public
Interest .
• It is in the Islamic Public Interest that cases of
“Emergency” Should be Clearly explored and
Defined .
• These cases should not be confused with other
cases that are not really urgent and can be treated
without resort to Public borrowing.
• Examples of emergencies:
• (a) War and the need to expand public spending
for defence.
• (b) Serious economic depression ( lower level of
real GNP accompanied by higher level of
unemployment) that would necessarily require
greater public expenditure in order to raise the
level of Aggregate Demand.
• (c) Acute shortage of necessities, e.g. basic food
stuffs, in domestic markets and inability of the
private sector to solve or eliminate the problem.
Under which conditions government intervention
is required and Public Borrowing would be needed
to cover exceptional public spending on imports
of the required necessities.
• (d) The private sector in all Muslim
Developing countries would never be
attracted to Investment in industries that
need heavy finance, advanced technology,
and skilled labour while not giving quick or
attractive returns before a long period of
time.
• In case if these industries are quite strategic
to economic development the government
would have to intervene in accordance to the
conception of Rational Public Interests
‫المصالح الراجحة‬. Careful feasibility studies
should be done before such intervention.
• Public borrowing would be necessary to
establish such industries and repayment of
such Debt can be arranged in the long run by
selling successful projects to the private
sector and/or by taxation.
*
Thanks
to all who Listened
and Carefully Followed
the Presentation.
*
Thanks to Allah SW
***
Abdel Rahman Yousri Ahmad