WHISK

At a recent rally in Rawalpindi, President Musharraf spoke of increased standards of living among urban centers, where banking policies have opened up new vistas for public spending. Personal loans, car loans, home loans, credit cards, debit cards, atm cards, saving accounts… banks are churning out more products on a daily basis, encouraging customers to give them their money, whether as depositors or as loan recipients. And the people are lapping it up.

It’s interesting to note that the interest rates on deposits are far lower than the interest a bank collects on its loans. In essence, banks are earning far more than they offer their customers. The highest rate of return I would receive from any bank or government institution in the country would be around 9% a year on any amount I deposit, and this only if I am a senior citizen.

In contrast, I can take out a personal loan at 17% a year, calculated every year on the principal owed. Understand this, they will recalculate the interest every year, based on how much of the principal is due. And the loans are structured in such a way that the initial payments are almost always more interest and less principal. My husband and I, sick of throwing away money on rented homes, thought we might take out a loan and buy ourselves a little apartment. Over a 20 year period, with interest rates as little as 12% (still higher than the return on our investments, note), we would essentially be paying almost 140% of the actual value of the loan back to the bank. Considering the ridiculous price of land these days, its inevitable that, 20 years later, when the home is actually ours, it may be worth a lot less than we paid for it. In case either of us are unable to pay off the debt, we can either transfer it to our children, or forfeit our home.

Unfortunately, no one seems to be taking this into account. Every bank in the country now has numerous loan packages, and small banks are popping up everyday, since banking has become the most lucrative business in the country. Our citizens are hungry for the standards they see on TV, held by the 0.5% of the population – the elite. It seems that our TV programs and our advertising have one goal in mind, to create a hungry populace, aspiring to live what they believe is the ‘successful’ life. In order to do this, middle class people and young people starting out their professional lives rush to the bank for a car loan, or a personal loan without actually considering the extent of the debt they are putting themselves into.

People are paying upto 30% interest on ‘small’ loans, which they use to buy big screen TVs, air conditioners, or just to have some spending money. Apparently the need to have it NOW is too great, and the concept of ‘saving up to buy’ has been tossed out the window.

On the flip side are the new ‘Islamic” banking lures – banks which offer loans under Islamic rules, which apparently, are preferable to the interest earned by non-Islamic banks. Now, I’m not an expert on finance, but I do recall my Islamic history and I remember that the Prophet expressly forbade the Jewish tradition of making money on the business of lending money. Paper money represents a value based on goods and services we hold or sell, not any inherent value, which is why interest earned on money alone was deemed unIslamic. More importantly, however, the exorbitant interest rates charged by money-lenders in the day of the Prophet were forbidden, because the burden placed on the recipient was often so great that families were left penniless just paying off the interest, never mind the actual loan itself. Islam expects any businessman to take his or her rightful profit on services and products (remember, the Prophet himself managed Hazrat Khadija’s business, and was highly successful at it). The emphasis is on ‘rightful’. Islam’s rules on finance are meant to be fair and just, and were evolved specifically to reduce the burden of debt on the needy. What we have in today’s ‘Islamic’ banking is clever semantics and nothing else.

On no account is an interest rate of 30% ‘rightful’ for any amount of money. Islamic banking conveniently replaces the term ‘interest’ with ‘rent’ (for homes, for example). Apparently, taking a home loan means that the bank will buy the property and then ‘rent’ it to you for 20 years, on the promise that you will receive full ownership once the price of the home (paid by the bank – not including the 20% down payment that you will have made beforehand) AND the ‘rent’ on the home is paid off. The rent is calculated every year. For a loan of Rs. 5,000,0000 (which you will need for a decent apartment these days), you will pay at least Rs. 35,000 a month for the next 20 years. How exactly is this different from conventional banking, given the high ‘rent’ rates - and how does a bank calculate the ‘rent’ on property that it only partially owns (since banks will normally give you a loan of up to 80% of the value of the property)?

Best of all, a mid-level employee drawing a minimum of Rs. 15,000 a month is eligible for these loans (HOW? At Rs. 15,000 a month, even with a small loan that takes half of that, how is one to live in today’s climate?). If the recipient should miss a payment at any time, he or she loses the property, the down payment (which is the 20% of the property owned by the recipient) and the payments made up to that point. Homeless and bankrupt in one fell swoop.

Perhaps the consumer needs to work the same deal with a bank when we give them our money: for every penny I deposit in your bank, I will charge you for the use of my money for investments the same way you charge me for your loans.

Since that won’t be happening anytime soon, and with loans and the rapidly growing credit card culture, I fully expect Pakistan to become the next America – living beyond one’s means, and constantly grabbing for the bigger, higher-paying job to pay off mounting bills. In another 20 years, this nation will be living from month to month. There is no way income and savings will match spending and loan repayments.

This is our legacy to our grandchildren: debt and despair. Welcome to Progress!