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Mon, 22 Mar 2010 | 05:31 GMT
Mon, Mar 22, 2010, 05:31 GMT
 

'Islamic finance can be panacea for the crisis'

Emirates Business 24/7
 
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Emirates Business 24-7, 15 October 2009

As the world struggles with the blows dealt by the economic downturn, a freelance economist said the recession can be reversed in 30 days. Moreover, he claims mass employment can be created within a month, without any cost to the state - all through Islamic banking.

Dr Niaz Ahmed Khan predicted the current recession in his book, written in 2006. Emirates Business spoke to this doctor-cum-budding economist who is an ophthalmologist by profession and works at Al Zara Hospital in Dubai.

Dr Khan has received three PhDs, in economics, finance and business, from three accredited universities in the US and has written a book, Economic Revolution of the Century ,and appears every Saturday on a television channel called Decision Makers, which runs a show called Islamic Revolution of the Century.

Explaining how the recession can be reversed in a month, Khan said: "My theory does not change the existing system. It works in such a way that there is zero risk to the economy of any country irrespective of its situation.

"Second, there is no cost to the state as the system itself generates revenue in the form of six floodgates in a line of money, and the best part of it is that each gate is even bigger than the previous one.

"Every country floats bonds when it needs money to run the country but these bonds are interest-based instruments and are a debt, which has to be returned at a certain date of maturity with interest.

"Only banks and big institutions can buy these bonds and these can be sold in the secondary market at a profit. But the bonds I am suggesting are interest free, hence Islamic, and will help almost everybody to save up to 60 per cent from all the expenses incurred on government services as these bonds will replace the actual currency in the government sector."

According to Khan, the state will float bonds under the following conditions.

During the first 30 days, Dh1 or $1 (Dh3.67) will buy five bonds. In the second month it will buy four and then three for the rest of the year. This rate is only available if one invests Dh100,000 or US dollar or whatever the currency of the particular country.

So where will these bonds be used?

Khan said all state-controlled services and goods will be sold not with dollar or dirham but with the bonds. How? A simple formula will apply. A bill of Dh100 will be paid by 200 bonds. This will give a net saving of 60 per cent.

Initially, there will be a 10 million duty-free option on payment of Dh100,000 and this will be seven million in the next month and five million in the third month. After that there will be no duty-free option available. Also, there will be a Dh10m to Dh100m prize draw every day from the bonds purchased.

Giving the reasons why people should buy these bonds Khan said: "First there will be a saving of 60 per cent. Second, people would be able to sell the bonds at profit in the subsequent months. Third, winning of the prize money would be a tremendous incentive and last but not the least, anybody investing Dh100,000 can easily make 100 per cent profit within 30 days.

"By a very conservative estimate at least 20 per cent of the population will not be able to resist this excellent offer by the State.

"The net result will be that at least $5 trillion or Dh200 billion will be accumulated by the government without spending a dime, in a matter of days. And as it is not debt there is no interest being paid by the government. So the government will have much more by the end of year at the expense of losing one year's budget by not charging duties and taxes.

"Then where will this recession be? It will be over and that too in just 30 days."

He goes on to explain that by the end of a month a state will have so much funds that would make life easy for everybody with all kinds of taxes withdrawn.

Khan outlined how true Islamic banking would be established in this scenario.

A second floodgate of money would be opened as no bank or business would refuse this offer. Now the state is sitting in the driving seat and all the money in banks of private sector have transferred into government account and banks are no more the lenders but are borrower from the state, which is the only source left and will invest in business with sound feasibility study checked by the state bank, Khan said.

The state will offer to invest 80 per cent and the bank will bring investor who is willing to pool the rest 20 per cent. This 20 per cent will be deposited in the bank and the bank will oversee the business and running expenses will be given to the investor from its share of 20 per cent. There will be no collateral and share of the profit and loss will be shared in a 60:40 ratio.

"The bank will share the 60 per cent with the investor and 40 per cent will go to state funds. The state will provide every thing under its control below cost, which will further reduce the cost of production and at the same time will markedly improve the profit margins of all the businesses.

"No major business can refuse this offer. Any bank showing repeated loss will go out of business as there will be no more funds available from the government source and all other interest based sources are not available any more.

"Interest based banking is gone forever or it may be at a very small scale and the state will not offer debts on interest as these will not be profitable any more and risk-free as there is no collateral. The amount of profit the government will share will be unimaginable and this is another floodgate.

"Now compare this with the present situation in the US and other developed countries where the governments are busy in printing money, selling interest-based bonds and buying toxic assets of banks as a stimulus to support the failing economy. In the US this was not enough and now there is talk of second stimulus, and third stimulus is not for away."

Khan said that a fourth floodgate, which will be huge because black money will be flushed out. This is because once there is no tax, all the money will turn white and businesses and people will use their black or unused money to take the advantage of the duty-free option and invest in these bonds.

He said this theory will work as it is incentive-based and thus hard for humans to resist.

"My incentive-based theory appeals to human nature and the state will benefit immensely. And once a country implements this system, then no other country can survive without implementing it," he said.

So confident is Khan of his theories that he challenges people to disprove them and offers a reward of $1m to anyone who can.

He said: "My book carries a reward of $1m for anybody who can prove my theory wrong. This book was published in 2006 in the UK and USA with a prediction and analysis regarding this recession in the following words.

"The US economy is like a giant oak tree, which has rotten roots, hollow barks and dying leaves and it is quite possible that this mighty tree will fall and bury all the nations relaxing under its shade. Islamic interest-free bonds are the only fertiliser, which can bring back this tree to life."

Asked if he has taken this theory to any countries and if they are willing to put it in action Khan said: "There are a few countries who are seriously thinking of implementing this system, however the only hindrance is that this system is not seen in economic books and this is why the economic world is puzzled by this and considers it alien."

The talk show
Talking about the show Islamic Revolution of the Century, Samar Sayegh, CEO, Decision Makers TV, told Emirates Business: "It all started when Dr Khan gave us his book Islamic Economic Revolution of the Century, to read. It was a very interesting book that created quite a buzz and excitement in our offices. When we saw the interest and debate it generated in our organisation we decided to make a programme on it.

"Personally I believe even though it is a very Utopian idea of an ideal world wherein his theory is used to change the world order by removing poverty, debts of the state, reduce inflation, create industrial revolution, reduce the cost of living by at least half, start of interest free banking, rebuild ailing economies, it is possible. Even though it seems impossible but this has been proved mathematically and economically in the book that is based on hard facts. The theory is incentive-based and is acceptable to human nature. I wish governments around the world will implement his ideas. His arguments are very compelling.

"Needless to say, the response to the programme has been tremendous and people have written in and phoned in during the programme."

By Reena Amos Dyes

© Emirates Business 24/7 2009

 
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