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How to save the economy

Covid-19 has forced the world to learn several lessons it should have learnt long ago. The world now realizes that the financial economy cannot support the real economy in a period of calamity such as the current coronavirus pandemic.

The world has also realized that the mere growth of the economy does not make people prosper, rather growth with shared prosperity is required for fighting against such a crisis (see also, Jackson, 2009). However, the response from economic forums such as banks for international settlement (BIS), which act as a bank for central banks and supervise practices of the worldwide banking system, is not per such realization. The global setting standard committee of BIS thinks that some extra support in terms of government guarantees and payment moratoria can mitigate the financial and economic impact of Covid-19 (BIS press release, April 3, 2020).

[The Basel Committee is the primary global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. The committee reports to the Group of Central Bank Governors and Heads of Supervision and seeks its endorsement for major decisions. The Committee does not possess any formal supranational authority, and its decisions do not have legal force. Rather, the Committee relies on its members' commitments to achieve its mandate. The Basel Committee is chaired by Pablo Hernández de Cos, Governor of the Bank of Spain (taken from https://www.bis.org/press/p200403.htm)].

Pakistan has a lesson to learn for alleviating the economic impact of Covid-19. This is due to the faith-based philanthropic behaviour of people in the country, which is playing an effective role in protecting the economy from falling down in the period of lock down and closure of businesses. Faith-based charities are circulating wealth in this period of stagnancy and also saving the poor from hunger. Hence, it is time for the government of Pakistan to learn that, at this crucial time, only faith-based spending can take the risk of saving the economy from the financial impact of Covid-19.

The business model of conventional banks will rarely lend to businesses and households in this time. It is worth mentioning that per SBP quarterly reports credit to the private sector, both for working capital and fixed investment, has declined relative to last year, which shows that banking money will rarely come to rescue the economy. (SPB, 2nd Quarterly report 2019-20). And the government has no resources to guarantee the banks to lend to households and businesses.

Realizing the importance of faith-based charities for fueling economic activities is very crucial for the government of Pakistan. In particular, when Pakistan was already in the midst of an economic crisis before the pandemic hit our economy (see for example, UN Trade and Development Report 2019). Therefore, the government of Pakistan needs to institutionalize faith-based behaviour of the people in Pakistan for supporting the efforts to save the economy from falling down.

It is worth mentioning that the people of Pakistan spend billions of dollars annually in charities. However, most of the funds flow from undocumented hands for undocumented purposes. Mostly, it is used in unplanned activities in non-banked ways. The maximum amount of such donations, no matter how small, or big (whether zakat, Infaq, Khairat, Qurbani, etc) normally goes to street beggars, relatives, friends and unidentified charity organizations etc.

The potential of faith-based resources in Pakistan is more than $6 billion per annum. This estimate is based on the population of Pakistan, which is about 220 million. The total number of families, while assuming the family size of six, is about 36.66 million. Moreover, per the Economic Survey of Pakistan (2019-20) 25 percent of its population is living below poverty. This means that about 10 million families are poor and the rest 26 million are non-poor.

Assuming a very small amount of Rs10 donation per day, each non-poor family gives in charities about Rs3600 per year. This becomes 936 billion or about $6 billion for 26 million families (this amount does not include zakat/fatrana/ ushar/ qurbani/skins, etc,). This amount will also multiply if we add the charities of Islamic banks. These available funds of charities is equal to the package of the IMF, which we will receive in three years, and is more than the total amount dispersed in 10 years under BISP since 2008 (Rs762.73 in 10 years and Rs91 billion in 2018-19).

This amount is available for projects of removing hunger and poverty, which are the two top level targets of SDGS. In addition, ten percent of the profit earned by the banks on credit creation (about $10 billion) can also be available for the projects of SDGs. These funds if properly regulated and institutionalized can be used for interest-free loans or simply grants to the poor for their business proposals if approved by the various programmes of the government such as Kamyab Naujawan etc.

The institutionalization of these faith-based charities, in terms of proper collection and distribution, will also help us meet the long-run 17 target of SDGs. These funds can also help the government of Pakistan make the 45 percent human resource, sitting idle, into an economically active force and divert their focus on fixing the issues of the economy at the macro level. This will enable us to achieve economic growth with shared prosperity (World Bank Results Brief, October 2019) without depending on foreign aid from the IMF/World Bank. However, the achievement of long-run 17 SDGs will require modification in our macroeconomic framework, which currently follows the IMF standardized framework, aiming only for timely repayment of IMF loans.

In the current framework, societal issues including public health go to the bottom of development expenditures as the IMF requires the government to increase revenue, not expenditure, on such public needs. Hence, in the modified macroeconomic framework, we will be able to raise faith-based resources from home and abroad for the government plans and achieve all 17 SDG targets by the target date of 2030 and the first two targets of making the country free of hunger and poverty much before 2030.

How to institutionalize faith-based charities? That requires Islamic banks to collect and distribute charitable donations using blockchain technology by linking donors with the needy in a reliable way. At a basic level, the blockchain is just like a written record. However, it has chapters or blocks of data and information. Each block is added serially and consecutively over time. However, there are a few distinct features of block chain.

First, the blockchain is a shared and distributed record. It exists in perfectly replicated form in a multitude of locations. It exists in the server of each participant unlike manual or digital records, which are centrally controlled and updated by a centralized authority. Here, no single participant can bring alterations and any update requires a consensus amongst all participants or actors.

Second, the blockchain record cannot be tampered with as it stores a history of itself back to the first entry. Each new entry has a new identity, in part, from the identity of the previous entry. Thus every individual block is linked to all preceding records and any unilateral attempt to change its content or identity (without consensus of all actors) is not possible. These features of block chain make it a fully secure, transparent and trustable engine. These features will enhance the trust of the donors, leading to increase in the number of donors as well as the amount of donations.

The required agents for the institutionalization of faith-based charities, apart from Islamic banks, are donors, the needy, volunteers, suppliers and government. It is the responsibility of the government to ask Islamic banks to immediately develop an IT-based platform which we can call EASY DONATIONS. Islamic banks will receive donations of any amount as small/large as possible. The app will allow every donor to know that their deposited amount was used for the purpose the donor gave the money for such as giving the needy food, medicine, health services, skill development, small capital, purchase of basic instruments for earning etc. Through this process, we will allow the available faith-based donation to help us in achieving various objectives of SDGs well before 2030 in a transparent way.

Dr Muhammad Fahim Khan is from the International Centre for Research in Islamic Economics, MUL.

Dr Anwar Shah is from the School of Economics, QAU.