Ever since the question of developing an Islamic economic system was raised, the problem of evolving a system of banking based on Islamic principles has remained an important issue. 
One of the major problems in developing an Islamic economic system is that of finding an interest-free alternative to our present system of banking. The interest-free alternatives suggested to date either lack viability or fail to eliminate Riba (interest). The late Shaikh Mahmud Ahmad, a meritorious scholar of our country, presented a model of banking, which, in his opinion, gives a viable basis for truly eliminating Riba. He called his concept Time Multiple Counter Loan (TMCL). In this article we shall attempt to present the basic concept of this model and some of the objections raised against it. 
    However, before we discuss the model let us see what the basic functions of a bank in an economic system are: 
    1. Banks keep the deposits of people secure. They return money out of these deposits on demand, and remit the money from one place to another as and when required by a depositor. 
    2. Banks provide credit for private or business use. 
    The first service is genuinely required by almost everyone, and there seems to be nothing wrong with it or with any reasonable service charge for such services. But since the second service is based on interest, it is criticised for being un-Islamic. The TMCL model proposes to solve this problem by introducing the concept of ‘credit value’. To understand this concept, credit must be seen not merely as an advancement of money but also as the advancement of an amount of money for a period of time. Credit value, then, can be defined as follows: 
 
 

Credit Value =

Amount borrowed  which it is borrowed

X  Time period for

     Now the TMCL model suggests that for every loan given by the bank, the borrower should return the bank an equivalent loan value, which would be a fraction of the amount of loan received, the difference being covered by a multiple of time. This procedure is based on the concept of Equivalent Credit Value. For example, all the following amounts of loan have Equivalent Credit/Loan Values: 
 

Rs 1000	borrowed for	1 year
Rs 500	borrowed for	2 years
Rs 250	borrowed for	4 years
Rs 100	borrowed for	10 years

    Now supposing Mr A goes to the bank for a loan of Rs 1000 for one year and the bank asked him for equivalent loan value (as determined by the banking policy of the country), which came to Rs 200 for five years, then the interest free basis for credit under TMCL would be as follows: Mr A would return Rs 1000 after one year to the bank without any increment thereon. Similarly, the bank would return Rs 200 to Mr A after five years without any increment on the original amount lent. 
The amount borrowed by Mr A would be invested in a business and the profits earned on it would entirely be his own. Similarly, the profits earned by the bank on Rs 200 would be kept by the bank itself. In case Mr A did not have Rs 200 to give against Rs 1000, the bank could open an account for Mr A of Rs 1200 and advance him Rs 1000 out of it. The remaining Rs 200 would be accepted as equivalent loan value from Mr A. After one year, Mr A would return Rs 1200 to the bank and the bank would return Rs 200 to him or to his heirs after the time period determined for Rs 200 was over. Whether or not this special arrangement would be made is a question that would be part of the credit control policy of the government. However, if the basic principle of exchanging equivalent loan values is accepted, then all the functions of banking can be performed. 
    An interest free alternative to banking is confronted with at least nine major problems. Following are the solutions to these problems that the TMCL model offers: 
    1. The first problem is whether a viable alternative basis of credit will be available. We have understood the concept of ‘credit value’. Shaikh Mahmud Ahmad believes that the TMCL model offers a feasible basis for extending credit because equivalent credit values can be exchanged easily. 
    2. If it is accepted that a feasible basis for credit will be available, the next question is whether or not the society will continue to save at zero rate of interest. Classical economists regarded savings as a function of interest and considered savings as directly proportional to the interest rate prevailing in the economy. Keynes refuted this belief and revealed that savings are not a function of interest but of income. This is because lower interest rate results in higher investment, which, being conducive to employment, increases the income of the people. Higher income, in turn, leads to greater savings. 
    In fact, savings seem to be inversely proportional to the rate of interest. Empirical data seems to corroborate this observation. For example, in the following table, real interest rate (interest rate after taking inflation into consideration) was negative in certain countries, yet the level of savings continued to increase. 
 

Country	Year	Real Interest Rate	Increase in Bank   Deposits
Japan	1974	-15.33	10.87%
UK	1974	-12.97%	5.72%
USA	1975	-9.86%	9.43%

    The following figures from the world Bank's report on Pakistan's economy also indicate the inverse relationship between interest and savings. 
 

Year	Level of Savings	Bank Rate
1965	13%	5%
1985	5%	10%

    Thus, it can be safely concluded that at zero rate of interest not only will the economy continue to save but the level of savings will, in fact, rise. 
    3. Even if people continue to save, why will they deposit their savings? Will they not invest in real assets as land and buildings to get rent and capital gains? 
    In Shaikh Mahmud Ahmad’s opinion, if there were a single banking system in the economy, then whatever were advanced or spent, for whatever period, would come back to the banking system. This is because a person is able to purchase something only if there is a seller. The seller deposits the money he receives with a bank, for the risk and time involved otherwise are too costly. 
    Therefore, depending on the velocity of money, the amount borrowed by a client under the TMCL system would return to the banking system even before he paid it back to the bank from which he borrowed it. This derivative flow of money is infinite unless it is artificially interrupted by the creation of bank reserves. Therefore, Shaikh Mahmud Ahmad contends that under the TMCL system, vast sums of money would always remain in the banking system. 
    4. Even if people deposited their savings with a bank, how will it meet the interminable demand for credit, which will emerge because of the zero rate of interest? 
    As already said, scarcity of capital is artificially created through bank reserves. Interest is actually charged for the use of scarce capital. In Shaikh Mahmud Ahmad’s opinion, this artificial hindrance cannot be justified. Elimination of reserves will not only let the derivative flow of money remain undisturbed but also allow infinite multiple expansion of credit. In Pakistan, the reserve ratio required is around 35%. This means that the banks can lend up to 2.85 multiples (100/35) of the initial deposits. If the reserves are lowered, the multiple expansion will increase. As an example consider the following: 
 

Reserves	Multiple Expansion
35%  20%  10%  5%  0	2.85  5.00  10.00  20.00  infinity

    In practice, reserves are not taken below 5%. However, Shaikh Mahmud Ahmad believes that a system, which could somehow allow the banks to acquire as much additional capital as is required for maintaining the reserves, it would be possible for the banks to do away with the reserves altogether. 
    In his opinion, the TMCL model offers one such system. If the ratio for a counter loan is set at a point where it is equal to the ratio required for maintaining a reasonable reserve, the capital needed for reserves can automatically be obtained from the counter loan received from every loan given. Therefore, the banking system will have infinite possibility of credit expansion. 
    5. The next problem pertains to liquidity. Without reserves, how will banks maintain liquidity? Supposing one fine day a large number of clients came to withdraw deposits, what would be done then? The answer that Shaikh Mahmud Ahmad gives is that the bank can extend the idea of counter loan and deposit some amount out of the counter loan it receives with the central bank of the country. For example, if the ratio for counter loans is fixed by the monetary authority at 12.5% (Rs 125 for 8 years = Rs 1000 for one year), out of the 12.5% received as counter loan every scheduled bank can deposit 2.5% for 8 multiples of time with the central bank on counter loan basis. Then the bank can borrow 20% for one year from the central bank. Moreover, a further 2% can be kept as till money in the bank's own deposits. Therefore, even without reserves 22% liquidity can be maintained. The ratio for counter loans can, of course, be adjusted according to the requirement of the bank. 
    6. Having answered the question pertaining to liquidity, we come to another problem -- inflation. Will not the infinite expansion of credit lead to inflation? To answer this question, it must be understood that price level is determined by the quantity of money and the quantity of goods available in the country. For example, if credit increases in a given year, the price level will increase only if an equivalent increase in productivity does not take place. If productivity also increases no inflation will result. So the TMCL model proposes that loans for only productive purposes be given (at least for six initial years) to tackle the problem of inflation. 
    7. After inflation the problem which deserves discussion is that of budgetary deficit. In Shaikh Mahmud Ahmad’s opinion fiscal deficit is actually a consequence of interest. Elimination of interest will abolish unemployment, except for a fractional unemployment (0.5% to 1%), and according to the Ocans law, an increase in the income of the economy by 3.2% will result with every 1% increase in the level of employment. This means that the income of the government will increase automatically without even changing the revenue or expenditure structure. Moreover, expenses related to domestic debt-servicing will also be eliminated. Therefore, in a single year or so the government will be in a position to meet the budgetary deficit and also overcome the unemployment crisis. 
    8. Perhaps the most important question that remains to be answered is regarding the profitability of the model itself. 
    Shaikh Mahmud Ahmad worked with the State Bank of Pakistan on a theoretical model of the TMCL system and compared its performance with that of a bank working under the conventional system of banking. The results are given below: 
    (It has been assumed that both the banks began working with initial deposits of Rs. 1000) 
 

Year of Working	Income of the Conv. Bank	Income of the TMCL Bank
1	64.48	39.96
2	172.43	242.36
3	484.00	1317.80

    Shaikh Mahmud Ahmad explains that the reason for this profitability amazing profits lies in the nature of the TMCL system of banking. In the discussion on liquidity, an example was given in which out of 12.5% received as counter loan by a bank 2.5% was deposited with the central bank and another 2% kept as till money. The remaining 8% can be invested by the bank in some business.  Moreover, since it is assumed that the loan given by the bank will return even before the depositor pays it back, there will be so many funds available to invest that in the third year of its working the profits of the TMCL bank will even be higher than its initial deposits. 
    9. One last question about credit control policy remains to be answered. How will the monetary authority manage credit without its conventional tools of interest and reserves? Reserves, Shaikh Mahmud Ahmad believes, are more theory than reality. The artificial scarcity of capital created through reserves is always harmful in the long run. The monetary authority can control credit simply by raising or lowering the ratio for counter loans. 
    Finally, it must also be noted that Shaikh Mahmud Ahmad suggests a 110% security requirement for each loan given. So the loans will not be freely available to everyone. The credit facility will therefore not be given in a way which makes its management impossible for the monetary authority. 
    Many objections have also been raised against the TMCL model. Of these, two very important ones from the religious point of view are given below: 
    1. Riba refers to any benefit which the lender makes a condition for the loan that he gives.¹ The benefit may be measurable or it may be in spirit. In both the cases, if any benefit is a condition for the loan, it is Riba (unless of course the benefit sought is the reward in the Hereafter). It seems therefore that in TMCL, both parties extend loans to each other which are equivalent in value, but do so on the basis of a benefit -- a counter loan -- which each makes a necessary condition for the loan. 
    Seen from this angle, both parties extend loans to each other on the basis of equivalent Riba. Although, the rate is zero, the spirit of Riba is there. Therefore, it can be expected that the results of adopting this model in the economy will not be quite different from the economic ills which Shaikh Mahmud Ahmad himself pointed out as consequences of the pervasion of Riba.²
    In an Islamic society, Infaq (spending in the way of Allah) is one of the most essential values. In the basic concept of capitalism, the destitute are not the direct responsibility of the society unless, of course, the two or three percent needy always found even in the affluent countries start becoming ten or fifteen percent and pose such danger to the affluent as cannot be averted merely by the logic of the laisser-faire concept. In an Islamic society, the destitute are the direct responsibility of the society and cannot be ignored by saying that the ‘natural’ adjustments of demand and supply will take care of things. 
    Riba, in essence, is totally against the spirit of Infaq. The ideal behaviour in accordance with this spirit is that a Muslim should simply spend whatever he can spare on a fellow Muslim’s need. However, if he finds himself unable to give away his spare funds, he can, as a lesser ideal, extend a loan -- but, obviously, without the condition of a counter loan. 
    Another objection, though not related directly to the basis of credit creation in TMCL, is that the model suggests 110% collateral security requirement for the loan, whereas it is evident from Surah Baqarah (verses: 282 and 283) that the Qur’an does not want the pledging of collateral security against loans except when it is not possible for the parties to write down a legal document for the transaction, for example during a journey.