Rupee: Place your Bets!!      March 30, 2000

The Pakistan Supreme Court has ruled that charging interest on 
loans is a violation of Islamic Law, and must stop.

The highest constitutional court in Pakistan, The Supreme Court, in a
recent landmark judgement has prohibited the charging of INTEREST on 
any financial transaction in the economy. This prohibition is based
upon the KORANIC injunction banning interest (Riba'  in Arabic) from 
the economy.

The text of the judgement is available at:

http://www.jamaat.org/news/SCRiba.html

where you will find thinking  like this:

QUOTE

"The Council of Islamic Ideology in its report on the Elimination 
of Interest had approved the use of the mark-up system, bai 
mu’ajjal, to a limited extent in unavoidable cases in the process 
of switching over to an interest-free system and warned against 
its wide or indiscriminate use in view of the danger attached to 
it viz of opening a backdoor for dealings on the basis of interest. 
It is unfortunate that this warning was not properly heeded and 
the system of mark up adopted in January, 1981 did not conform 
to the standard stipulations of bai mu’ajjal. .....

The whole of section 79 is there fore held to be repugnant to the 
Injunctions of Islam.

Section 80 

Section 80 of the ACT of 1881 is almost analogous to section 79 . 
The learned Federal Shariat court has, therefore, subjected it 
to the same findings as recorded by it about section 79"
.....

"Section 22(1) of the State Bank of Pakistan Act, 1956 has been 
scrutinized in paragraphs 325 to 328 of the impugned judgment 
and purchase of bills and other commercial instruments like 
Debentures, Bonds etc. on the basis of interest has been declared 
to be repugnant to the injunctions of Islam by the Federal Shariat 
Court."
.....

"Except as authorized under section 7, no banking company shall 
directly or indirectly deal in the buying or selling or bartering 
of goods or engage in any trade or buy, sell or barter goods for 
others, otherwise than in connection with bills of exchange 
received for collection or negotiation."

UNQUOTE


My question: what impact will this decision have on the economy of 
Pakistan, and specifically on the value of its currency?

Today the rupee is worth 1.9 cents on the international exchange. 
Make your guess as to what it will be worth in one year: say 
April 1, 2001 (what better date to check ;-)

Will freedom from interest spark an expansion that will raise the 
value?

Will the banking system stop making loans?  And if so, will that 
cause a depression that will increase the value of the currency 
(as happened during the US Great depression)?

Or will the result be a printing of much more currency to fund 
the increase in interest free loans?  And will that cause 
inflation that will lower the value of the currency?

Post your predicted value of the Pakistan rupee on April 1 2001 as 
listed in the Wall Street Journal for that date.  Lets see whose 
theories of economics best predict the consequences of this 
decision.


 
APRIL 8, 2001 UPDATE:

Well only one of you offered a guess as to the effect on the rupee.
David Cross said it would fall in value.  On April 8, 2001 the
rupee was listed as 1.63 cents, or a decline to 86% of its value
during the past year.  (or a 14% decline if you want to look at it
that way :-)

I confess that I expected a larger decline.   Of course, that is the
decline relative to the US dollar, which also declined in purchasing
power by about 3% during the year.


                     ,,,,,,,
_______________ooo___(_O O_)___ooo_______________
                       (_)
jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin
USA. This message was brought to you using biodegradable
binary bits, and 100% recycled bandwidth.