By Saandhy Ganeriwala
This is the age of inequality. The thinkers in our world seem to have only recently become aware of how disgusting it has become. We have all heard the stats by now – CEO to freshers Salary ratios, below poverty line populations, the top 1 (or, maybe 0.1) % wealth concentrations etc. We have also developed a science named Economics to solve this conundrum, but its proponents haven’t really been able to do much. And the probability of them coming up with a solution seems to decrease with every new student of economics who chooses to enter the world of the corporate multinationals. No one is wrong or immoral or selfish in maximizing their own welfare, but the collective result of this is going to be (to borrow one of Trump’s most eloquent phrases) – very bad.
I am one of those welfare maximisers too. But in the last few months, a realization has dawned upon me. We might not be very far from the solution to this shameful problem which the world hasn’t solved yet. And a part of the answer ironically lies at a place where the world treads with caution and ignorance in equal measures – the Sharia Islam tenets of Islamic Banking.
I know nothing about Sharia Islam and I am happy to be ignorant about it. However, I am fascinated and convinced by the Islamic Banking principle of interest free money lending. Interest on loaned money is the single biggest driver of inequality in our world.
There! I said it! The reason. You would be thinking at this stage that I am naive and idealistic. So now let me tell you my logic for saying this.
(Islamic Banking says that money is a medium of exchange and hence there should be no returns allowed from it. I differ slightly with that reasoning here)
Let’s think of money as a product. Banks trade this product just like another shop trades raw materials, commodities etc. It buys this product at rate PC and sells it for PS (‘P’ being interest per annum; ‘C’ denoting cost of funds from the central bank or savings account depositors and ‘S’ denoting interest charged to the customer.) It earns on ‘x’ units of the product a profit of (PS – PC) *x. As it sells more of the product (money), it can buy more of the product (money) and as it buys more products (money) ‘x’ becomes bigger. This is pretty much the mechanism of any trade business. I guess I haven’t told the readers anything new up till now.
However, let’s pause and spot the difference. This is a product for which you don’t really need to sweat too much to sell. In fact, you’ll almost always have buyers for it, if you’re even mildly efficient in the way you conduct your business. So, if you are a seller of money, you have with you the perfect product. Now you just need to be wise in choosing the ones whom you sell it to. And once ‘x’ has become big enough for you, you could very well stop bothering a lot about whom you’re selling it to, since you can always re-sell your sold product to a new seller like you! After all, that’s exactly how American investment banks crippled faraway banks in Scandinavia in 2008! I think it’s a pretty easy and unfair scheme of things.
I can almost hear all the banks asking me now – do you think it’s so easy to run a bank? Obviously, it’s not! We have all heard about the growing NPAs in the Indian Banking System. We all remember how Americans defaulted on their mortgages in 2008. It’s definitely not easy. And the reason it’s not easy is because it’s flawed. Fundamentally flawed!
The point is that if we encourage the practice of an assured payment of interest on money, then the ones who have it in plenty really don’t have to work much to ensure that they have enough of it in future too. Because they already happen to own the best product in the world, which will sell by itself and earn them some income! Moreover, the ones who don’t have enough of this awesome product will have to borrow it from the ones who have it, use it to sell less awesome products and irrespective of whether those less awesome products sell or not, they just must return within a specified time, the awesome products with interest, to the original owner. In fact, the burden of returning the ‘awesome’ (with interest) is so high that even if they manage to do a decent job at selling their ‘less-awesomes’, they can hardly expect ‘x’ to grow for years before the original ‘awesomes’ haven’t been returned. As a result, they can’t even afford to pay much to those who work with them to make and sell those ‘less awesomes’, since serving the ‘awesomes’ back is of primary importance.
The obvious question in your mind now is – are you asking the ‘awesomes’ to be given for free? No, definitely not. The ‘awesomes’ just need a different kind of trade. This different kind of trade already exists in the form of equity investing.
Now you’ll ask me – so you are saying banks should be allowed to own equity in every business and in every person (what?) to whom they lend. I say yes! So, won’t then they be like mutual funds? No, they won’t. A mutual fund won’t invest in a middle-income family’s equity. But a bank can and it should.
So, should people depositing their money in banks not expect to earn an interest either? No, they should not, since they too, by lending their money to banks would be investing a tiny portion in the bank’s equity. The banks can then go ahead and charge them for additional services like cheque payments, online payments, debit cards etc.
And how do I suggest countries to borrow from each other? I say they should also follow the exact same process. Don’t issue coupon bonds. Issue sovereign shares. Let’s see how that affects the stock of US government bonds in the treasuries of countries around the world! In fact, India could actually fund a Universal Basic Income Scheme for its population by selling 5% of its sovereign shares (If India’s sovereign value is simply taken as 2 trillion $ i.e. its GDP, then 5% could fetch 100 billion $ i.e. 6.7 lac crores – enough to fund UBI!)
The point is that money would then flow to the right places. And it would flow there with the understanding that it’ll be obligated to flow back only after it has caused enough good in the place to where it was sent.
And my hope in the world is that, if the above happens, the ‘awesomes’ would actually do some real good – to the place it flows to and to the place where it is returned. The world might then see students returning their college loans after they have increased their own equity value so much that they pay back not PS but (PS + k*). The middle-income family selling the ‘less awesomes’ could then afford to grow ‘x’ and up-skill their workers by paying them that essential extra money, thereby making their trade so awesome that paying an additional return of k* or even k**to the bank would be easy. If we’re concerned about whether banks can wait so long for such returns to accrue, let’s look at the billions which are flowing today from venture capitalists to new economy start-ups, well aware that the returns will take time. Or if they’re not prepared to wait for so long, they could easily search for someone like them and trade that equity for a profit. There is, after all, enough wealth lying accumulated in different parts of the world, which could be channelled towards equity creation.
And this is exactly how inequality can be solved. We need to use the ‘awesomes’ to not earn more ‘awesomes’, but to do something awesome, which is to create new value.
I have put it very simply and I am sure only someone who’s naive like me can hope that it’ll be as simple as it seems in order to be implemented. In fact, it would require massive restructuring – banks selling ‘awesomes’ would need to be much more localized so that they can truly invest themselves into families and businesses; there would have to be proper definitions of equity, rules for extent of equity dilution, contingencies in case of a sustained fall in equity value, demarcations and distinctions between equity held by banks and those owned by the owners themselves. Businesses and individuals would have to be much more truthful, transparent and honest about how well or how badly they’re doing. This will also generate debates on privacy and independence. However, the idealist in me says that all this can be addressed and solved, if we genuinely want to implement this. It is only actions inspired by our idealism, which can provide hope to that 5-year-old African girl, who has been hungry, naked and homeless for days – hope, that someday someone would invest in increasing her equity and let her become the awesome person she can be.