The Role of Taxation, Expenditure and Debt in an Islamic Economy.

Dr. Abdel-Rahman Yousri Professor of Islamic Economics University of Alexandria Egypt

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

Lecturer

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

Budget

Public Revenues

Zakat Distribution According to Quranic Rules

Zakat Revenues Collection according to Sunnah Rules

Expenditure according to Shariah and Ijtehad

Non-Zakat Revenues (Taxes and other) Collection according to Shariah and Ijtehad

Shariah and its intents

Targets S of the Islamic fiscal system

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.

 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.

 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 , Ushr was 10% or equal to rate (s) imposed by these countries on Muslims entering their land with merchandise.

History: Ushr

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.

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.

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: >>

i.

(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. (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. (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 societys 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 peoples 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.

 The need for imposing Taxes besides Zakat could arise for several reasons. Public Interest within boundaries of Shariah may render and its intents 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.

Islamic 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 with 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. Otherwise taxation would entail a sinful bedaa (origination 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 Societys 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.

 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.( ) 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.

Third: Taxes against harmful consumption

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

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

(e) Provision and maintenance of Domestic Security and the Judicial System, (f ) Maintenance and running of the Hesba System . 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.
All previous items of Public Expenditure would be financed from Zakat revenues. 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. 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 :

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 (the 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.

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?( ) 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? ( ) 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 Muslims 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 (Treasury). 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 Debtors, 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 (Quran, 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

before getting Good Loan 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.

 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.

8. A Public Debt in an Islamic system should never be initiated or used for businesses or economic activities in expectation of Profit.

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 . 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