The fourth group discussion in the 'International Symposium on Islamic Banks and Strategies of Economic Cooperation' focused on the Monetary Theory of Islamic economics. Islamic economists presented a formulation centred round profit-sharing which would replace interest in the depositor-bank and bank business transactions. Investible funds would be supplied to entrepreneurs promising to share their profits with the banks in an agreed ratio. Banks would be able to mobilise savings promising depositors an agreed percentage share of the profit accruing to banks as a result of the supply of investible funds to the entrepreneurs. The two ratios of profit-sharing, the one between banks and depositors and the other between banks and entrepreneurs will be by supply and demand. The equilibrium ratios of profit-sharing will be such as to ensure a supply of savings to bank deposits sufficient to sustain a supply of investible funds to business, commensurate with the business demand, and for investible funds which will be largely a function of the expected rate of pro it in productive enterprise. The expected rate of profit play the allocative role which is supposedly played by the rate of interest in modern economics. Capital, as a scarce factor of production, will have a price, not in the form of a predetermined rate of interest, but in the form of a Probable rate of return thrown up by the profit-sharing system. Savers will have the expected rate of returns to bank deposits as the incentive to save and deposit their savings in banks' investment accounts. Savings are largely a function of the level of income, however, and the rate of return on savings has little influence on its volume.

It was pointed out by the Islamic economists that the-profit sharing system was only feasible, it was also more efficient than the system based on interest. The interest-based system is inefficient insofar as productive enterprise is financed by interest-bearing credit where the suppliers of investible funds (the banks) are mainly concerned with the creditworthiness of the borrower. The prospective productivity of the venture for which the funds are intended is not their major concern. By contrast, in the projected interest-free system, the banks as suppliers of investible funds would be guided solely by the prospective profitability of the ventures since their returns, as well as repayment of capital, would depend on the productivity of the venture, the creditworthiness of the entrepreneur concerned not being at all directly relevant for this purpose. Since there is no reason why the ventures which carry the largest prospective profitability should be the ones sponsored by those with highest creditworthiness, the interest-based system of Financing production fails to allocate resources to the most productive uses (in the exante sense) which the profit-sharing system always does.

It was also pointed out that the profit- sharing, arrangement would result in a Just and equitable sharing of the social surplus, whereas the system based on interest is unjust for it guarantees a definite positive return to the financier whereas the value productivity of investment is uncertain. It transfers additional wealth to owners of capital even when no additional wealth has been created through the employment of capital in productive enterprise. The system results in a constant transfer of existing wealth from loss incurring entrepreneurs to wealth owners, which makes the distribution of wealth more inequitable with the passage of time. By contrast, profit-sharing, ensures justice both at the micro and macro level. When the returns to productive employment of capital are high, the entrepreneurs. the banks as intermediaries. and the savers, all get good returns as agreed shares out of the new wealth created. When the returns are low each one still receives a share. In the case of a loss the entrepreneur Roes unrewarded but does not lose his own assets. as happens in the interest-based system. The banks get back what remains of the capital supplied. A policy of pooling of deposits and diversification of investment can ensure that the banks do not sustain a loss on the totality of their investments and. hence, the depositors do not get a negative return, except in the case of a deep recession. In the profit-sharing system, wealth will bring more wealth to its owners only to the extent the employment of their wealth results in the creation of more wealth, in which case the entrepreneurs will also have received a share. Thus the profit-sharing arrangement results in a sharing of social surplus which is just and equitable. The arrangement harmonises the interest of the financiers with that of the entrepreneurs which contributes to the efficiency of the system.
Besides being superior to the interest-based system when judged on the criteria of justice and efficiency, the profit-sharing system has the unique advantage of not being prone to inflation. This characteristic follows from the way money capital is supplied for business. The banks as suppliers of investible funds examine the projects presented to them and supply investible funds only when they are fully satisfied that the project will result in the production of a value larger than that invested, since the banks' own returns depend on it. In a fractional reserve system supply of investible funds by banks involves creation of new money. This applies to the profit-sharing, system also. But the creation of new money in the profit-sharing system is effectively linked with genuine possibilities of creating additional value. It may not be so in the interest-based system where creditworthiness of the borrower is more important than the prospective productivity of the project. Furthermore, the system automatically curtails the money supply to the extent that investment of funds fails to be productive of value. This happens when, in the eventuality of a loss of productive enterprise, the banks receive back an amount less than they had supplied. This reduced amount of money capital corresponds to the value of the goods and services produced. The part of money capital that failed to result in production of goods and services is simply annihilated. There is no counterpart to this peculiar mechanism in the interest-based system which makes that system prone to inflation.

It was pointed out that once interest is allowed it permeates all sectors of the economy including those where no 'productivity' is involved. Two obvious examples are consumer loans and public debt for non-productive purposes, especially for national emergencies like famine or war. Interest in these sectors leads to suffering (in case of consumer loans) and inequity (in case of public expenditure). In a profit-sharing system the society can arrange supply of needed consumer loans on a service basis out of welfare funds. Non-productive public expenditure can be financed through taxation as well as, partly at least through interest-free loans some of which can be obtained from the banks which handle the public's demand deposits.

International financial transactions. especially aid for development is better organised on the basis of participation and partnership in progress. The aid givers will receive a share-out of the actual fruits of the productive employment of their funds, which they will be keen to ensure. The experiment with interest as the basis of economic aid in the last few decades has been quite frustrating, resulting, in inefficient use of funds increasing burden of debt, and increasing dependency of the aid recipients on the aid givers.

Lastly, it was pointed out that a switchover from interest to profit-sharing will encourage enter-prise leading to an increase in the volume of investment and the level of employment. The entrepreneur's willingness to take risk will increase as the obligation to repay the borrowed capital as well as to pay a predetermined rate of interest to the banks is replaced by an obligation to share the profits and/or return the capital (or whatever remains out of it in the eventuality of a loss). Depending on the availability of funds. projects with expected yields not high enough to cover the risk premium, and the rate of interest, and entrepreneurial reward equal to possible alternative earnings, but sufficient to cover the entrepreneurs' possible alternative earnings in view of the expected rate of profit and the ratio of these profits to be retained by the entrepreneurs, will now fully qualify for entrepreneurial efforts.

The German economists participating in the group discussion appreciated the above points but expressed reservations on several counts. One of the important points made by them related to the higher cost of information in the Islamic system in which the banks must examine the Final accounts of every enter-prise financed by them (in order to ensure their due share in profits), besides evaluating each project before funds are committed to them. The Islamic scholars responded by admitting that the cost of information in the Islamic system would indeed be higher than in the interest-based system where banks have no reason to look into the relevant accounts as their own returns are predetermined. They pointed out, however, that the costs involved may not be as high as visualised by their German colleagues since the scrutiny of accounts can be done through some specialised agency for a fee. The higher costs have to be considered in the context of the corresponding benefits to the society in terms of more efficient allocation and more equitable distribution of the social surplus accruing as profits. Both sides agreed that the issue required analytical as well as empirical research. The German scholars were referred to some recent papers by Islamic economists which may further enlighten them on some issues which they regarded to be unclear, e.g. the opportunity cost of capital, mobilisation of savings. and profitability of the Islamic banks.

Some German economists pointed out the significance of the rate of interest as the price of capital acting as a clear market signal as any other price does. Islamic economists responded by asking what it was a price of, money capital or capital in the sense of capital goods- Economic literature was confused on this issue. and it also stressed that the rate of interest in a competitive equilibrium with perfect knowledge was identical with the rate of profit. The expected rate of profit was a sufficient market signal for allocative purposes and the system hardly needed anything beyond that. Both sides agreed that the subject needed research and the distinct roles of money capital and physical capital in production need to be clearly ascertained. The German scholars requested the Islamic economists and bankers to arrange easy availability of literature on Islamic economics and data relating to the Islamic banks which was at present very difficult to acquire. They complained of the high cost of information' in this reward. It was agreed to make a joint recommendation in this connection.

One German economist expressed serious doubts on the advisability of shifting the liability to losses from the entrepreneur (as it is in the interest-based system) to the supplier of capital (as it is in the profit- sharing arrangement). He pointed out the economic role of the penalty losses imposed on the inefficient, entrepreneur. One more reason for making the entrepreneur liable to losses of enterprise is to deter him from dabbling with objectives other than profit maximisation, especially those relating to the public good, which is better taken care of by the public authority. Islamic economists pointed out that the penalty is unjustified as losses are not always caused by the inefficiency of the entrepreneur. In so far as entrepreneur's inefficiency is involved, the Islamic system does penalise the entrepreneur as he has to go unrewarded for his entrepreneurial services. He is also penalised by having a poor chance of getting funds from banks in future. The idea of preventing the entrepreneur from serving the public good at the cost of some profit cannot be acceptable, unless one believes in the 'invisible hand' and the myth that the public good is best served when every individual is serving his own interests. Dissemination of all available information relating to social objectives, and the attempt on the part of every individual to serve these objectives, decreased the burden on social authority and reduced the need for social intervention.

It was agreed that the issues of creation of money and inflation, as well as that of cost of information required in-depth research. It was also necessary to work out the functioning of the Islamic monetary system in greater detail. This should be done both under the assumption of a wholly Islamic world, where every economic agent behaves according to Islamic teachings, and the assumption of a mixed world where non-Islamic behaviour coexisted with weak Islamic motives as at present. These studies may be done for a closed system as well as for an open system in which the Islamic world interacts with the non-Islamic world.

It was agreed that research relating to the Islamic monetary system, free of interest and based on profit-sharing, was of great contemporary relevance in view of the severe crisis facing the present economic and monetary order. The German scholars expressed the hope that the Islamic approach might lead to an alternative worthy of utilisation by the western economics as well as the developing countries.