What are the key measures the Khilafah state will implement to solve the crippling economic problems?

The key measures the Khilafah state will implement to solve the crippling economic problems are:

I.                   Freeing wealth by eliminating Interest (RIBA) 

Islam categorically prohibits riba at any interest rate in all its forms. And when one looks at the impact of interest based loans on the economy (as we do in the following subsections) then one can immediately see the damage it causes and the relief to the economy of removing it. 

A.                 Ceasing all outstanding interest based loans subject to Investigation 

The Egyptian government for example spends 63% of its revenue in debt repayments most of which is payment of interest on the underlying loans. 20% of this debt is owed to foreign institutions and 80% to domestic institutions.

Payments will be ceased on all outstanding interest based loans subject to investigation. The original loan agreements will be reviewed to determine their legitimacy based on principles such as whether they were undertaken in a responsible manner or whether the funds were siphoned to personal accounts. Those loans considered for repayment where the interest paid to date exceeds the capital, will be deemed repaid and no further payments will be made. For those where this is not the case then only the remaining principal amount will be paid on a timescale suitable to the strategic interests of the State.

B.                 Preventing the one way money flow to lenders

In an interest based debt economy the lender is not taking any substantial risk as the law guarantees his return. The borrower may be a start‐up company that is taking all the risk in a business venture. The venture may succeed or fail but the lender will still get his money. This violates a clear principle of economic morality in the Shari'ah: the principle being that commercial transactions must couple the opportunity to make profit with the risk of making a loss. An interest based lender receives his profit on the loan without taking a real commercial risk, as secular law guarantees he gets his money back and the law reduces the risk of default. The dangerous consequence is that over time all the wealth in society flows to the interest based lenders. This fact is painfully apparent when looking at the most advanced Western economies, where wealth is continually being concentrated in the hands of the banking sector and multinationals.

Another consequence of interest based lending is that it incentivizes lending more than you actually have to lend, this is in itself regarded by the Shari'ah as fraudulent (even if the loan wasn't based on interest). With a currency that is not backed by any asset like gold or silver, banks and government are literally able to create money out of thin air when making loans. This expands and destabilizes the money supply, constantly devaluing the currency and consistently reducing the value of savings and salaries. The banks again make risk free profits while the rest of society has its wealth eroded. Additionally debt based growth results in the destructive boom‐bust cycle that causes untold misery and is characteristic of the capitalist macroeconomic model.

II.               Stabilizing money supply and prices

Historically the banks of nations that had paper currency fully backed by gold/silver were tempted to print more paper currency than they actually had assets to back, so that they could spend and lend this money out at interest.  This resulted in more paper money in circulation than assets to back it. Thus they moved to currencies unlinked from assets and an era of unstable prices along with currencies that could be easily destabilized and manipulated by both governments and speculators.

The Shari'ah mandates a currency that is fully backed by gold and silver. The state currency would be reverted immediately to gold and silver standard by either issuing new paper currency or backing the existing paper currency with gold/silver at a rate determined by the government and taking into account factors such as the country's gold/silver reserves. The money supply would consequently be stabilized with a knock on stabilization effect on prices of goods in the domestic market.

III.            Promoting enterprise and wealth generation by ensuring low taxation

The Shari'ah philosophy on taxation is that the government should be prevented from imposing taxes on citizens and businesses in arbitrary manner. Consequently all forms of indirect taxation such as sales tax etc are illegitimate.

The main form of taxation is a wealth tax that is taken solely on the surplus, unused wealth of citizens. This creates an incentive to spend or invest this surplus wealth which has a positive effect on the economy, reducing the burden on government finances.

Thus citizens including business owners are encouraged to earn and spend their wealth rather than have the drive for work and enterprise crushed by a heavy tax burden.

Again the wisdom of the Shari'ah is apparent when one notes that most current government taxes are used to fund debt repayments and inefficient or corrupt administrations.

IV.             Guaranteeing basic needs

The Shari'ah guarantees basic needs for every citizen by obliging every able bodied person to work to earn a living wage for themselves and their dependents. The Shari'ah obliges children or other heirs to support parents if they are unable to work. It also encourages neighbours and community to support each other. Finally for those who are genuinely unable to obtain support through the means above, the government steps in with funds from the State Treasury.

V.                Enabling the constructive pursuit of wealth

Neither relentless consumerism nor an extreme ascetic lifestyle are endorsed by Islam. The Shari'ah holds no principled objection to the individual pursuing as many of the luxuries of life as he is able and creates the economic environment to facilitate this. Intervention is only from the perspective of preventing the pursuit and acquisition of commodities that Islam defines as harmful for society such as alcohol or usury. In doing so the Shari'ah rules ensure that society is protected.

VI.             Ensuring the circulation and distribution of wealth

Shari'ah has a variety of means to guarantee the circulation and distribution of wealth, ranging from taxation of excess wealth, to incentivizing spending, through to preventing hoarding of wealth and preventing risk free commercial transactions like interest based lending.  These and other measures ensure that wealth does not end up in the hands of the few as is the case in Egypt and indeed all Muslim and non‐Muslim countries of the world.