Budget Deficits and Public Borrowing Instruments in an Islamic Economic System

Abstract

In this rapidly changing world, several countries and political movements,
especially in the Middle East, are calling for the establishment of
an Islamic economic system. This paper seeks to explain the area of public
borrowing in such a system and to explore its use in today’s world
In the literatwe, the term “budget deficit” denotes the gap between
public revenue and expenditures. Revenues normally come from taxation
and public property, while expenditures may cover development projects
and cumnt governmental expenses. In general, such a deficit is bridged
by increasing revenues, reducing expenditures, internal borrowing (i.e.,
from the public commercial banks or the central bank), and by external
borrowing. In the past, governments used to borrow from their rich
citizens only to meet the financial needs associated with wars and natural
calamities. Today, however, public bornwing has become a major feature
of contemporary economies in both developed and developing countries.
This paper cosists of four sections: the principles of financing in
Islam, the Islamic point of view on the provision of public goods, various
instruments for public resource mobilization that can be developed on the
basis of Islamic principles of financing, and a conclusion.
The Principles of Financing
There are several recorded cases of public borrowing during the time
of the ptophet, as well as othets by the ‘AbWd and the Ottoman governments
(Siddiqui 1992). This practice has petsisted into the modem era,
as evidenced by Egypt and the Ottoman Empire during the middle of the ...