This is an extract from the book ‘The Islamic Khilafah: A Manifesto for Change’ by Hizb ut-Tahrir Britain.
PART II: THE ECONOMY – Empowering Individuals, Business and Government
a. THE SHARI’AH FREES WEALTH BY ELIMINATING INTEREST (RIBA)
Islam categorically prohibits riba at any interest rate in all its forms. And when one looks at the impact of interest based loans on the economy (as we do in the following subsections) then one can immediately see the damage it causes and the relief to the economy of removing it.
i. CRIPPLING DEBT – IMMEDIATE ELIMINATION OF THE INTEREST (RIBA) BASED ECONOMY
The Egyptian government for example spends 63% of its revenue in debt repayments most of which is payment of interest on the underlying loans. 20% of this debt is owed to foreign institutions and 80% to domestic institutions.
Payments will be ceased on all outstanding interest based loans subject to investigation.
The original loan agreements will be reviewed to determine their legitimacy based on principles such as whether they were undertaken in a responsible manner or whether the funds were siphoned to personal accounts. Those loans considered for repayment where the interest paid to date exceeds the capital, will be deemed repaid and no further payments will be made. For those where this is not the case then only the remaining principal amount will be paid on a timescale suitable to the strategic interests of the State.
ii. PREVENT THE ONE WAY MONEY FLOWS TO LENDERS
In an interest based debt economy the lender is not taking any substantial risk as the law guarantees his return. The borrower may be a start‐up company that is taking all the risk in a business venture. The venture may succeed or fail but the lender will still get his money. This violates a clear principle of economic morality in the Shari’ah: the principle being that commercial transactions must couple the opportunity to make profit with the risk of making a loss. An interest based lender receives his profit on the loan without taking a real commercial risk, as secular law guarantees he gets his money back and the law reduces the risk of default. The dangerous consequence is that over time all the wealth in society flows to the interest based lenders. This fact is painfully apparent when looking at the most advanced Western economies, where wealth is continually being concentrated in the hands of the banking sector and multinationals.
iii. RIBA INCENTIVISES LENDING WITH FRAUD
Another consequence of interest based lending is that it incentivises lending more than you actually have to lend, this is in itself regarded by the Shari’ah as fraudulent (even if the loan wasn’t based on interest). With a currency that is not backed by any asset like gold or silver, banks and government are literally able to create money out of thin air when making loans. This expands and destabilises the money supply, constantly devaluing the currency and consistently reducing the value of savings and salaries. The banks again make risk free profits while the rest of society has its wealth eroded. Additionally debt based growth results in the destructive boom‐bust cycle that causes untold misery and is characteristic of the capitalist macroeconomic model.
b. STABILISING MONEY SUPPLY & PRICES
Historically the banks of nations that had paper currency fully backed by gold/silver were tempted to print more paper currency than they actually had assets to back, so that they could spend and lend this
money out at interest. This resulted in more paper money in circulation than assets to back it. Thus they moved to currencies unlinked from assets and an era of unstable prices along with currencies that could be easily destabilised and manipulated by both governments and speculators.
The Shari’ah mandates a currency that is fully backed by gold and silver.
The state currency would be reverted immediately to a gold and silver standard by either issuing new paper currency or backing the existing paper currency with gold/silver at a rate determined by the government and taking into account factors such as the country’s gold/silver reserves.
The money supply would consequently be stabilised with a knock on stabilisation effect on prices of goods in the domestic market.
c. LOW TAXATION PROMOTING ENTERPRISE & WEALTH GENERATION
The Shari’ah philosophy on taxation is that the government should be prevented from imposing taxes on citizens and businesses in arbitrary manner. Consequently all forms of indirect taxation such as sales tax etc are illegitimate.
The main form of taxation is a wealth tax that is taken solely on the surplus, unused wealth of citizens. This creates an incentive to spend or invest this surplus wealth which has a positive effect on the economy, reducing the burden on government finances.
Thus citizens including business owners are encouraged to earn and spend their wealth rather than have the drive for work and enterprise crushed by a heavy tax burden.
Again the wisdom of the Shari’ah is apparent when one notes that most current government taxes are used to fund debt repayments and inefficient or corrupt administrations.
d. GUARANTEEING BASIC NEEDS
The Shari’ah guarantees basic needs for every citizen by obliging every able bodied person to work to earn a living wage for themselves and their dependents. The Shari’ah obliges children or other heirs to support parents if they are unable to work. It also encourages neighbours and community to support each other. Finally for those who are genuinely unable to obtain support through the means above, the government steps in with funds from the State Treasury.
e. ENABLING THE CONSTRUCTIVE PURSUIT OF WEALTH
Neither relentless consumerism nor an extreme ascetic lifestyle are endorsed by Islam. The Shari’ah holds no principled objection to the individual pursuing as many of the luxuries of life as he is able and creates the economic environment to facilitate this. Intervention is only from the perspective of preventing the pursuit and acquisition of commodities that Islam defines as harmful for society such as alcohol or usury. In doing so the Shari’ah rules ensure that society is protected.
f. ENSURING THE CIRCULATION & DISTRIBUTION OF WEALTH
As we shall see the Shari’ah has a variety of means to guarantee the circulation and distribution of wealth, ranging from taxation of excess wealth, to incentivising spending, through to preventing hoarding of wealth and preventing risk free commercial transactions like interest based lending. These and other measures ensure that wealth does not end up in the hands of the few as is the case in Egypt and indeed all Muslim and non‐Muslim countries of the world.
a. FREEING GOVERNMENT EXPENDITURE
The government in Egypt spends more than 60% of the revenue it collects in debt repayments. This amounts to over 120 billion Egyptian pounds annually.
The government expenditure model will be reformed to a Shari’ah framework in order to target available funds optimally as the State requires ‐ eliminating illegal expenditure such as interest debt repayments and focussing the remaining funds on the critical needs of the State.
Significant burden on government resources would be removed immediately by the cessation of payments on interest based loans.
The Shari’ah prohibits subsidies, which prop up inefficient and unproductive businesses. Food subsidies are unnecessary due to aforementioned mechanisms for price stabilisation and reduced taxation. In Egypt this would free 30 billion EGP of government expenditure.
Ending subsidies will release government funds to target assistance to those people who have no dependents and other specific areas where the Shari’ah has obliged a priority or a focus e.g. schools, hospitals and infrastructure.
b. STABILISING GOVERNMENT REVENUE
The Shari’ah specifies a wide range of sources for government revenue. The government will transform the revenue model to collect funds from the ample and diverse range of Shari’ah sources.
These are more than adequate to allow the government to fulfil its role of looking after citizens and of spreading Islam, without imposing crippling taxes on the people.
The Shari’ah defines the following sources of government revenue that would be immediately available to the state:
i. Zakat ‐ an excess wealth tax set at 2.5% above a minimum amount (nisab) applicable to all Muslim citizens including business owners.
ii. Kharaj – a tax on the productive capacity of land. E.g. Egypt has over 3 million hectares of arable land that is more than enough to supply Egypt’s population given the appropriate high yield technology.
iii. Energy/Minerals ‐ Revenue from the mining of minerals and the extraction of fossil fuels. E.g. Again Egypt has around 4.4 billion barrels of proven oil reserves coupled with 2.1 trillion cubic metres of proven gas reserves.
iv. Jizya ‐ A nominal, means tested, head tax for non‐Muslims (excluding women, children, the infirm and the elderly) exempting them from other taxation. This would be set at a value that promotes community cohesion and the loyalty of the non-Muslim citizens of the state.
v. Emergency surplus wealth taxation – as a last resort, if the need arises, a temporary tax can be levied against the very rich in society.
3. DISTRIBUTING WEALTH & PROTECTING THE PUBLIC INTEREST
a. WEALTH DISTRIBUTION AND PREVENTING HOARDING OF MONEY
The state is obliged to ensure there is an economic equilibrium in society such that each individual has the means to access wealth.
The disparity between the ultra‐rich and the wider society is acute in Egypt, because the Capitalist system inevitably traps wealth amongst an elite. This is accentuated where wealth and access to wealth are unfairly allocated based on nepotism and patronage. All the rest of society is effectively disenfranchised.
In this situation the government needs to break this stranglehold. Illegal acquisition of wealth, property and resources will be reversed. The Shari’ah also prohibits the hoarding of money (gold and silver in the case of the Islamic State). This refers to wealthy individuals who accumulate money without spending it, regardless of whether or not they pay Zakat. Hoarding reduces the money supply be removing money from circulation. This means less spending, less demand for goods, less production and thus more unemployment.
The Shari’ah recognises the relationship between hoarding money and damaging the economy and so prohibits it completely. This necessitates disclosure of excess wealth and the investigation and prosecution of citizens who attempt to hoard money. Shari’ah inheritance laws ensure wealth is precisely broken up and distributed amongst defined family rather than being transferred to favoured individuals.
b. ADMINISTERING NATIONAL ASSETS IN THE PUBLIC INTEREST
All Shari’ah defined national assets will be brought under government ownership or oversight. This is not carte blanche nationalisation since the Shari’ah classifies resources such as water sources, pasture, forestry, minerals and energy sources as national or public assets, and it clearly identifies the classes of assets and companies that the government cannot nationalise.
It is quite clearly not in the public interest to allow private individuals to own and exploit these critical properties by holding the public to ransom. The Shari’ah obliges the government to reclaim strategic properties and associated assets and to administer them on behalf of the public.
Also included in this are items of infrastructure that are critical to the public interest such as roads, waterways, communications infrastructure, schools and hospitals. The community cannot do without these. Consequently the Shari’ah obliges the government to maintain oversight here in such a way that sufficient of these resources remain in non‐private hands, in order that the public interest is preserved.
The government would be required to take a view and if necessary confiscate assets and then administer them on behalf of the public.
c. PROTECTING AGAINST CORPORATE MONOPOLY
The Shari’ah makes it illegal for an individual or company or group of companies to seek to corner the market in a product and then use this position to inflate prices. The government will investigate and prosecute those attempting to monopolise the market and break up existing monopolies.
In Egypt for example in the steel industry 67% of the local market share is held by one company whilst 2 private companies control the entire mobile phone industry.
Dismantling monopolies would also provide business opportunities by opening market access.
d. PREVENT CORPORATE DAMAGE TO SOCIETAL VALUES
Whilst business in general is encouraged by the Shari’ah, businesses trading in prohibited goods and services or those leading to public harm will be required to cease such activities by the government.
Government will dramatically increase other sources of revenue and it is envisaged that this will dwarf the volume of tourism based revenue. The tourist industry will be encouraged to showcase the society of the Islamic State but it will in no way be allowed to defy the Shari’ah by promoting alcohol consumption, nudity on beaches and other socially polluting activities. There is no legitimate rationale to allow tourism some form of exception and to build a country’s economy on tourism as a mainstay is an example of extremely poor and short term policy making.
4. ECONOMIC POWER TO THE CITIZEN
a. TOWARDS ELIMINATING POVERTY AND HUNGER
The government is obliged by the Shari’ah to target the elimination of poverty by placing the full resources of the state towards this end.
A comprehensive poverty elimination programme would be put in place immediately, as detailed below.
Anyone without food and other basic needs will be able to contact a local department where the responsibility for assistance will be allocated in the following order:
- Establishing that the individual is unable to work or otherwise unable to support himself
- Determine why immediate family have not assisted
- Assess the ability of neighbours and the local community to assist
- Failing all these State Treasury funds will be made available
It is worth pointing out that the Shari’ah allows a hungry person who cannot afford food to take food from a shop or market without payment and without punishment. Muslim citizens cannot accept that a single individual (Muslim or non‐Muslim) be in poverty even for a day.
b. GETTING RID OF THE TAX BURDEN
Citizens pay a huge amount of tax via sales and income taxes which siphon resources from the economy. This taxation is grossly unfair as it does not take into account the spending needs of the person. The taxation regime will be simplified with immediate effect with most people paying only Zakat on excess unspent wealth above the nisab at the end of the year – the poor will pay NO taxes.
E.g. In Egypt EGP 92.4 billion (approx. USD 16.22 billion) is collected annually in income tax. This money would be available to spend for citizens including business owners ‐ they would be incentivised to earn more and spend more thus boosting economic activity, by the imposition of hoarding penalties.
c. MAXIMISING EMPLOYMENT AND ENTERPRISE
The government policy will reflect the Shari’ah motivation for every able-bodied person to either work or trade to support themselves and their families.
The government would not accept over 3 million people from the labour force unemployed as is the case today in Egypt. Education, training and start‐up funds will be provided to achieve the full earning potential of each citizen.
The Shari’ah does not permit an able-bodied individual to neglect financial obligations to themselves and their families.
5. PROMOTING BUSINESS
a. LOW TAXATION FOR ENTERPRISE
The Shari’ah removes anti‐business taxes such as corporation tax, so that entrepreneurs are encouraged to spend and invest excess funds by expanding their business and creating employment.
Just like any other citizen business owners will have to spend or invest their profits or face zakat tax and potential hoarding penalties.
b. BUILDING VITAL INFRASTRUCTURE FOR BUSINESS
There will be a public works programme to build adequate infrastructure in energy, transport and communications in order to develop a thriving economy. This type of infrastructure is the lifeblood of the nation and the delivery here needs to be on a timescale of years not decades.
c. THE VIBRANT REAL ECONOMY AGAINST A FALSE FINANCIAL ECONOMY
The Shari’ah recognises that investment money should go to businesses for commerce rather than going to banks to earn risk free interest or invested in complex financial instruments that are vehicles for interest (riba). Consequently the banking and financial sector will be immediately required to close interest debt and speculation based activity, and transform their business models to focus on a venture capital and consultancy based model of channelling investor funds. Given the innovations in Shari’ah compliant financial products, this transformation is well within the capabilities of the financial sector.
The treasury will deal with bank clearing activities however the private sector may also participate.
The overall effect will be that excess earned wealth will be channelled straight back into businesses.
d. TARGETED GOVERNMENT GRANTS
Government grants will be directed preferentially to those sections of the private sector that can assist with the development of strategic industry such as defence, machine tools, infrastructure, energy and agriculture.
e. RESPONSIBLE PROFIT SHARING COMPANY STRUCTURES
The Shari’ah encourages a multiplicity of profit sharing partnerships (mudharaba/inan/abdan/mufawaddah) which share and handle risk responsibly. This is in contrast with Capitalist limited liability structures which allow the owners of businesses to take irresponsible risks whilst being able to walk away from the consequences. This violates their obligations to ‐ and causes immense financial difficulty for ‐ creditors, customers and employees.
Companies will be immediately required to transform their company shareholding structures into Islamic ones and will be assisted in doing so.
6. PROMOTING AGRICULTURE
a. DEVELOPING UN-UTILISED LAND
The Shari’ah confers ownership rights on anyone who fences off undeveloped land for the purposes of agriculture. This promotes the efficient and productive use of unutilised land. The government will facilitate this by creating land registries, grants, training and developing rural infrastructure.
b. REASSIGNING OWNERSHIP OF UNUSED FARMLAND
The Shari’ah requires the government to either force landowners to utilise unused agricultural land – allowing a maximum of 3 years grace ‐ or to confiscate and reallocate it to those who will.
This will be enforced retrospectively once the Islamic State is established. Suitable management training and assistance will be given should the land be transferred to new owners.
c. BANNING EXPLOITATIVE LEASING OF FARMLAND
Leasing farmland violates the Shari’ah principle of profit being coupled with risk. The government will protect the rights of farm workers by ordering the immediate elimination of farmland leasing agreements. The landowner can either sell the land to the tenant, or employ the tenant or arrange a profit sharing agreement. This will have a massive transformative impact by widening agricultural land ownership, eliminating bonded labour and dismantling the modern day feudal system.
7. THE ECONOMIC CONTRIBUTION OF SADAQAH
Charity whether donating or interest‐free loans is highly recommended in Islam – simultaneously releasing, circulating and redistributing wealth.
The government will promote the creation of a large and vibrant charities sector in order to channel the public desire to seek their Creator’s pleasure into projects that assist communities.
8. STRATEGIC ENGAGEMENT WITH THE GLOBAL ECONOMY
a. SELF SUFFICIENCY
The government will maintain a favourable international trading stance by encouraging domestic industry and agriculture particularly in strategic goods such as food, cotton etc. An approach will be taken which eliminates critical dependency on international trade for the state whilst allowing it to flourish.
There will be no unilateral imposition of tariff controls, however the government reserves the Shari’ah right to impose reciprocal border tariffs for foreign traders based on treaty.
The Shari’ah dictates that domestic companies engaging internationally should be unimpeded by regulation and export taxes.
Clearly the movement of prohibited goods into the country will be blocked. As will the movement of goods out of the country that could assist the enemies of the Islamic State such as certain weaponry or oil to an enemy with which there is an active war.
b. AN INTEGRATED ECONOMY
The Shari’ah recognises that the unification of Muslim lands one by one produces economies of scale, which should be a political target. For example Egyptian labour, coupled with Sudanese agricultural wealth coupled with Libyan energy resources ‐ these combine to form the makings of a regional and then global power.
c. LEVERAGING RAW MATERIALS, LAND & LABOUR
The government will leverage the concentration of agricultural, mineral and energy resources in Muslim lands to extract favourable international trading terms that secure strategic objectives.
d. IMPACT OF INTERNATIONAL CURRENCY EXCHANGE
The state will move to a fully gold/silver backed currency along with eliminating any interest based debt obligations, thus:
- Preventing predatory currency speculation and financial market volatility
- Promoting domestic price stability
This will in turn facilitate international trade and create a stable domestic investment environment. Government bonds at interest will of course no longer exist nor will the markets in shares of limited liability companies thus further insulating against international markets.