Economy — 27 January 2012
A Real Radical Solution to the Financial Crisis

Jamal Harwood

Much can be said for the commitment, drive, and sheer doggedness of the many thousands worldwide which are braving the winter elements to keep their dignified “occupy” protests alive. It has caught the imagination of the populous and no little degree of irritation for the banking and governing elites. Whilst opinion surveys indicate that the biggest gripe of those protesting centers around corruption, particularly in the finance sectors which have brought the world to the brink, much more needs to be done to develop real, workable alternatives to the shambles which has led us to our current state. The area where the protesters have come in for the most criticism has been over their lack of comprehensive solutions, and whilst it is quite right to highlight the dominance and bias of the 1%, leadership of the masses requires forthright and clear solutions.

What of the Islamic solutions?

How would a new Caliphate tackle the crisis?



All interest in Islam is forbidden. The half a percent that governments are giving on government securities, the 5 or 10% banks charge on sovereign bonds, the 25% on credit cards, or the 4,000% of the loan shark (payday loans)—all are forbidden. In desperate attempts to get economies moving, governments have been steadily reducing interest rates to nearly zero, but only for their financial institutions. Interestingly, banks charge what they like with impunity with the opportunity to make enormous margins. The system gives the banks carte-blanche to win from this free lunch and surely this should be at the top of the list of demands for change. Imagine the positive impact of reducing all sovereign debt interest rates to zero – far better for Greece, Portugal, et el to pay zero percent and repay their loans than plead for haircuts or to simply default. Why should society tolerate these “middlemen” that constantly steal from the public with little regard for the usurious rates they charge and with relatively little risk?  How much better would we be now if the bailouts were making all mortgages at zero percent rather than the zero rate money and hundreds of billions of tax paid loans given to bankers?


Gold/Silver standard

How absurd it is that governments get away with the paper fiat money standard and all the misery it causes. “Large budget deficit and no one prepared to loan to you? Not a problem, your government will just print more paper money.” Financial sleight of hand. It’s been called quantitative easing, operation twist, and now GDP money targeting; all mean an unsubstantiated increase in paper money to meet more government spending. And it is the public which pays this stealth tax as their money constantly declines in purchasing power. Since Nixon arbitrarily removed gold backing from currencies in 1971, the US dollar (and the other core currencies) has declined in value versus gold on average10% per annum. This has meant a very high price for the public to pay in terms of diminution of the value of their money and through inflation in the price of goods and services.

The Caliphate operates the bi-metallic gold/silver standard and any notes, coins, or electronic money must be 100% backed by gold and silver. The State cannot wantonly increase money supply at the leaders’ whim. The US 15 trillion $ debt (6 trillion of which has arisen since 2008) highlights an out-of-control government with little regard to the wealth of all that use the dollar.

[Please see this article for a more detailed view on Gold Standard and a link to a recent report addressing the subject of its implementation]


True Financial Reform

The UK fudge called the Vickers report gives the banking sector 8 years to implement a few relatively minor changes including a degree of separation between investment and retail banking. It is shocking—in its sheer underwhelming lack of recognition—of the failings in the sector of recent years. The unbridled money creation, ballooning of derivatives, widespread excessive gambling, and topped by Government bailouts with public money can be summed up in the fact that no one was arrested or charged, and no significant change of tack has been taken. It’s as if nothing happened.

Islam does not allow government bailouts of finance companies, short selling of financial assets, trade of gold and silver on futures exchanges (only spot trading for immediate delivery), sale of assets which are not owned, and a whole host of gambling contracts which are interest, insurance (CDS), and futures oriented. The ramifications in terms of instability and a drain on the public purse have already been witnessed and can only worsen. As long as these fundamentally corrupt practices which add nothing to the economy continue, and no legislation is brought to ban them, the public will suffer to the benefit of the banks.


Obsession with Growth

With debt spiraling out of control, a return to growth is seen as essential, not only to generate tax revenues to pay back loans, but also to restore growth in employment. But, with the economy so beholden to the finance industry – whether via expensive bailouts or protective legislation – and with the banks sitting on cash to bolster their weakened balance sheets, there is a significant drain on the economy. The only solution put forward has been a toxic mix of money printing and austerity. There is another way. To get public investment back on track requires an environment in which spending and investment is encouraged. Islam tackles this in two ways. Firstly, by removing all interest based investments, and coupling that with laws preventing the hoarding of wealth/money, society will naturally seek returns on capital via business investment. Consequently, the Islamic company investment market in an Islamic state is very vibrant and participants share in risks and rewards with investment dependent upon actual participation in the company rather than anonymous “trading” in/out as espoused by western markets. A second key element is the taxation system which taxes heavily uninvested capital, providing another incentive for full investment.

The State’s key concern is with ensuring the basic needs of all citizens are met, not growth targets that seldom translate into wealth for all.



The plethora of taxes imposed on the public today is a great oppression. Islam has a simplified system which is predominantly based on wealth as opposed to income tax. By focusing upon accumulated wealth which is not invested (zakat at 2.5% per annum), taxes on the productive capacity of the land (kharaj) and head taxes (jizya) for those who can afford them, the State is encouraging work/enterprise and investment and discouraging the withdrawal of wealth from circulation, exactly the conditions which banker dominated western economies are suffering most from. Inevitably, the consequence is a smaller footprint for the state which coincides with the general perception that governments in the western world have taken on too much responsibility and are stifling recovery with ever higher taxes—taxes which fall unevenly on the poorer via income and consumption taxes.


Social Welfare

Forty-eight percent of Americans now receive some form of government welfare payment. In the UK, a third of the overall annual state budget (£200 billion) is consumed by welfare payments. Although this indicates a serious indictment of capitalist society and its enormous divisions between the wealthy and poor, at the heart of the problem is the relentless drive towards individualism we’ve witnessed in recent decades. The radical difference with Islam is that the primary responsibility for welfare falls to the mature males in the family, then the wider family (parents, mature children, siblings) before only finally when these avenues are not available, will the State step in to meet the basic needs (food, shelter, clothing) of the disadvantaged. The State supplements this obligation of a final backstop with the provision of basic education and healthcare.

UK Prime Minister David Cameron is championing a new Big Society, but individualist Britain shows little appetite for adopting community collective responsibility, let alone family accountability.


Land Reform

The Quran stresses:

“In order that it does not make a circuit between the wealthy” [Hashr 59:7]

The aggregation of vast land tracts into the hands of a few has led to widespread poverty amongst the masses. In the US, 15% of the population now depends upon food stamps for basic food needs. Land ownership in one of the largest and most fertile countries in the world is but a dream for most, as it sadly is in most of the Muslim worlds as Islamic law is not applied. Islamic law in this regard is very dynamic and enables widespread ownership amongst the many. If land is not utilised for a period of 3 years, it reverts to the State and will be re-allocated to those that will use it. Any member of the public can claim dead or unused lands, and leasing of lands by those that cannot utilise it directly is forbidden. This coupled with strict restrictions against any form of price fixing translates into dynamic land utilisation and far wider participation in the core wealth of the land.



It is extremely implausible that the World leaders who are currently failing to solve this global crisis will learn lessons from Islam to deal with it, mostly because Islam has a very different worldview of how societies function, and that challenges the elites who sit on piles of wealth made out of everyone else.

But, the lessons can be learned in those parts of the world that are undergoing a dramatic change – such as, the Middle East. These regions face a choice:  To either mimic the Western capitalist system and expect all the same system problems that are plaguing the world today to arrive on their door step in years to come, Or to build a different vision for the future, and set about building their economies in a way that leads by example, and which avoids the boom and bust casino economy driven by interest based banking, derivatives trading, and fiat currencies.

The Islamic society cannot be easily summarised in the few words mentioned above, and the financial crisis is nothing if not complex. Yet, the rich tapestry of human solutions Islam provides contrast starkly with the overwhelmingly banker oriented solutions which continue to plague the world. If we are to see progress, then radical solutions must be presented and debated.



Jamal Harwood is a regular contributor to New Civilisation.  He is a lecturer in Finance, and a member of the UK Executive Committee of Hizb ut-Tahrir Britain.

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