The Wise Economist
In this world full of intelligence, we rarely find wisdom.
The Debt Problem
We all have some or the other form of Debt weather its a Car loan, a Mortgage, Personal loan or Credit cards.
Similarly, Businesses big and small also have some or the other form of Debts.
Furthermore, most of the countries of the world are drowning in debts of extreme levels.
If we look at the balance sheet and income statements of a country we realize that most of the countries are paying a huge amount of interest on its debt every year.
Imagine if your country is paying $50 billion annually in interest on its debt. This interest paid by each country is ultimately paid by the citizens in the form of Higher and higher taxes. So even if you do not have debt personally you still are in debt as you pay part of the interest of your nation indirectly in the form of higher and higher taxes.
The Vicious Circle of Debt and Taxes
The problem is that it doesn’t stop there. Because of the higher taxes, the disposable or spendable income in the hands of the citizens is reduced. With the reduced disposable income there is lesser demand for goods and services which results in lower sales and lower profits for the businesses.
With lower profits, the businesses cannot hire more employees or might have to let go of existing employees and even shut down business, which results into a further reduction of spending as people do not have employment.
With businesses shutting down the government loses its Indirect Tax revenue and have to resort to borrowing even more and pay more interest and increase the rate of Tax which ultimately brings the economy into a vicious cycle or higher debt and higher tax and lower disposable income for citizens.
Friends with Benefits
In the case of individuals, we see that John and Muhammad found a solution. Here John had a lot of debt and was paying 20% interest per year whereas his friend Muhammad had good savings but his faith doesn’t allow him to earn interest or pay interest.
Moreover, to avoid his money being used by the bank for earning interest, Muhammad mostly keeps his savings in Cash. If there was a way by which Muhammad can help pay off the debt of John. And John has to repay only the principal, then it would save John 20% per year and help him become debt free much faster and would help Muhammad get rewards for the afterlife as he saved his friend from paying interest.
A Quarter of the world Population
We have over 1.5 billion Muslims who can be a friend to us like Muhammad is for John. It might sound too simple in principle. But there are various issues, when in case of person to person, like default risk – What if your friend doesn’t pay back the loan, death of the borrower – What if the borrower dies before paying back the loan, Even if its done against some security then there will be legal cost of registration, there will also administrative costs and many other problems.
But there is someone who does not die and who almost never defaults and they can attach any security by way of their sovereign powers. Yes, it’s the Government.
More than 95% of all world governments are in debt to a greater or lesser extent. When these governments pay interest on their loans they need to add that amount as a funding requirement in their annual budget. And to raise this additional amount, the government has to ask its citizens to pay a higher tax.
Freedom Account
Instead, if the Governments work with Islamic communities and allow them to hold their money in a separate financial entity within their existing bank, known as “Freedom Account”
With the “Freedom Account”, the bank is not allowed to lend the funds to anyone except the government nor can they charge any interest from the government.
Why separate financial entity?
The reason for a separate financial entity is because “Freedom Account” Cannot go Bankrupt, whereas other entities can go bankrupt. And in order to save the depositors of “Freedom Account” from Bankruptcy, the Bank would have to create a separate financial entity to keep the Funds separate.
What about Deposit insurance?
The “Freedom Account” will not have to pay for “Deposit Insurance” since the funds are only given to government which is sovereign and will always return the funds. The government if short of funds to return to Freedom Account then the government will either print new currency, issue new public debt, increase Taxes but will always return the money. So the Financial entity doesn’t need to spend money on Deposit insurance.
Why would the Muslims pay additional fees to keep their money in freedom account?
The bank would earn its income by charging an additional fee of around 0.5% per year from the depositors. Now the question is why would the Muslims pay this fees. Well, the first answer to that is why do we give money in charity? the answer is for following their religion.
The Muslims already donate 2.5% of their wealth every year as compulsory charity. And most do even more than that. So paying just 0.5% of the cash savings will not be difficult since it will save them from one of the major sins.
Moreover, this fee is refundable as a tax credit so for people who have tax payable they will be able to offset it against the tax payable. Which means that the net additional fees will be Zero for as long as the government allows.
Tax Credit
The government may allow the depositors to claim this fee as a Tax credit until the country becomes debt free. e.g. If a person is supposed to pay a total Tax of $2000 and has paid the Additional fees of $200 in a year for Freedom Account then if allowed by the government as Tax credit then the person will be able to offset this fees of $200 against the $2000 Tax payable. Which means the actual tax the person will pay will be $1800. So effectively the person gets a full refund of the Additional fees paid by the person for Freedom account.
In another scenario, if a person has a Tax payable of $2000, but has paid $3000 for Freedom account fees, then the person will be able to offset the full $2000 tax and will be able to carry forward the balance $1000 Freedom account fees to future years, if carry forward if allowed by the government.
Will Tax credit be considered Halal for Muslims?
As long as the bank charges the 0.5% fees as an “Additional fees”, the Tax credit will be Halal. Because the depositors are only getting the additional fees back. The individual depositors will not get a tax credit for other fees they paid to the bank. However, if the depositors get any type of special services or even special treatment or get any other product for free because of the additional fees they pay on the Freedom Account then that additional benefit will not be Halal.
Additionally, any other special treatment by the Government to the depositors of “Freedom Account” beyond the tax credit would be considered not Halal. This is the strictest criteria. However, the depositors and the government in the respective countries can apply the rulings as per their interpretation of the religion.
What happens if government doesn’t give Tax credit?
Even if the government doesn’t allow the fees as a Tax credit, depositors will still keep the deposits in the “Freedom Account” to keep their money legally safe. Many people of other faiths will also keep their money in Freedom Account as it is safer than the conventional bank accounts. If you search “Negative Interest Rates” on YouTube you will find videos about how people kept their money in the bank even at a negative interest rate of around 1% in Japan and other countries.
The government can only use the float amount from the “Freedom Account” to pay off its debt. This would lower interest payment for the government the benefit of which should be passed on to the citizens by way of lower Taxes. Lower taxes would result in higher disposable income for citizens, resulting in higher consumer spending resulting in more consumption of goods and services which would result in higher economic growth of the country and higher profits for businesses and higher tax revenue for the government. The government can pass on the benefits of higher tax from businesses by paying off remaining debt faster which will further result in lower and lower debt for the government till it reaches zero.
Top 3 countries with most Muslims
Let us see the potential effect of “Freedom Account” in the top three countries with the most amount of Muslim Population.
Turkey
There are over 80 million Muslims in Turkey and a total approximate debt of around $250 Billion. So If Turkey implements “FREEDOM ACCOUNT” and uses only around 50% of the funds available in Freedom account then the average deposit needed per person is around $6250 to pay off an entire debt of Turkey.
Once the National Debt becomes zero. The government can start to pay off individual debts of its citizen as explained in the video. Being the country with almost 99% Muslim population, Turkey can become Debt Free and low Tax country in less than two years. It may sound simple and sometimes unrealistic. But a lot of things in the world are very simple if we try to think with wisdom.
Pakistan
There are over 200 million Muslims in Pakistan and a total approximate debt of around $230 Billion. So If Pakistan implements “FREEDOM ACCOUNT” and uses only around 50% of the funds available in Freedom account then the average deposit needed per person is around $2300 to pay off an entire debt of Pakistan.
Once the National Debt becomes zero. The government can start to pay off individual debts of its citizen as explained in the video. Being the country with the second highest Muslim population, Pakistan can become Debt Free and low Tax country in less than five years. Surprisingly less than 25% of the Population has bank accounts, they are quite similar to the character “Muhammad” in our video, once they know that they can keep their money in the bank without dealing in interest then most of them would open bank accounts, and help the country become debt free.
India
There are over 180 million Muslims in India and the total approximate debt of little over 1 Trillion. So If India implements “FREEDOM ACCOUNT” and uses only around 50% of the funds available in Freedom account then the average deposit needed per person is around $11000 to pay off an entire debt of India.
Once the National Debt becomes zero. The government can start to pay off individual debts of its citizen as explained in the video. Being the country with the third highest Muslim population, India can become Debt Free and low Tax country in less than 10 years. If the Government allows and Muslims cooperate with implementing the concept of “Freedom Account” then it can also help create a feeling of love and tolerance in the country between people of different faith.
How will it Benefits the Banks?
The Banks are in a spread business, that means they borrow at a certain rate and lend at a markup of say 1% to 2%. But when doing this they have to manage a lot of risks since they are giving guaranteed return to the depositors who can withdraw their money at any point in time. Whereas the money lent by the bank is at a huge risk especially when it is lent without any security. As a result, a lot of banks are incurring a loss and often have to shut down.
With Freedom account, the bank will make a guaranteed 0.5% income without any risk whatsoever since it will be collecting funds from depositors by charging them additional fees of 0.5% and lending the funds to the government interest-free. Moreover, banks will be charging the regular fees for bank account monthly fees, transaction fees, cheque book fees, debit card fees and many other similar fees that they charge on normal bank accounts. The net effect will be that banks will be able to earn a more stable income without taking the risk.
What about long term investments?
In our upcoming videos, we will cover the topic of long term infrastructure projects.
Why only Muslims?
Historically many Christians and Jews also considered any type of interest as illegal. The Freedom Account will be open to everyone who wishes to make it’s country and citizens debt free.
What do you mean by Government can Assume Individual debt?
Assumption means a change of creditor on a loan. In case of Freedom account. Once the Government has paid off its debt, and still have enough funds accessible in “Freedom Account” then it can start to pay off the individual and Business debts of its Citizens by paying it off and then creating a new loan for the same amount which now they owe the Government but at zero interest rate. This will save the interest cost for the individuals and Businesses resulting in higher Disposable income for them.
The effect of interest free Mortgage
Imagine you have a $100000 Mortgage @6% interest rate for 30 years. The monthly payment will be $594.83. And you will pay $114,132.28 in interest over the life of the Mortgage. Yes, more than the actual principal. Now if the same mortgage is at 0% interest. You can either pay $594.83 for just 14 years and 1 month. Or pay $277.78 for 30 years. Which leaves you with $317.05 in savings every month, which can be used for other expenses and which would increase consumption in the economy and overall growth in the country
Why contact the local Politicians?
Since this has to be implemented at the Provincial level or Federal Level we need the support of the Government.