Eliminating Interest Costs in Financing Trade Deficits by Pursuing and Maintaining Fully Convertible Domestic Currency

Abstract

Trade deficits are usually financed by incurring heavy interest cost burden year after year. In Islamic principle, paying interest, devouring, inscribing and being witness in such interest contracts -all are prohibited. Therefore, it is important to find an acceptable solution where all financial transactions including financing trade deficits should be conducted by eliminating interest component into it. As trade deficits continue to climb, the interest costs for financing huge growing deficits also continue to grow at a compounding rate. This paper investigates how to eliminate such interest component in ever increasing trade deficits, and therefore, to avoid interest costs burden altogether by pursuing and maintaining fully convertible domestic currency with its k-1 trading partners where k is 57 OIC member countries, who will be willing to recognize one another☂s currencies for trade deficit financing, and agree on fully convertible domestic currencies without any spread. Such guarantee of full convertibility will be the cornerstone in paying for trade deficits by their own domestic currencies and therefore, it will eliminate interest costs burden. It will also increase the volume of trade, output, employment and prosperity for all k member countries involved in the group. JEL Classification: E52, F31, F33, F42, P45.