Interest Rate vs. Fertility Rate

Solution for Countries to Boost Back Shrinking Populations

In the last few decades global fertility rates have, in general, been on the downward trend, affecting some countries more than others. Fertility rate refers to the average number of children that would be born to a woman if she were to live to the end of her childbearing years. This rate is of particular interest to those who study demographic trends in countries because it tells a lot about the future of the people in concern. For example if the rate is too low, then the population could face a rise in aging population which could find itself difficult to sustain economically. Also over long-periods of time sustained low rates could significantly reduce the size of the population, its culture and so forth. A high fertility rate could also be seen as potentially imposing problems to parents and governments since the young population needs to be nurtured, educated, provided with jobs etc. Hence some countries have imposed one-child or two-child policies at one time or another, for example China and Singapore. Now Singapore is among the countries that have very low fertility rate. Low fertility does not necessarily imply infertility, i.e. the inability to produce offsprings, because it could be due to even fertile people choosing to have few or no children at all. Singapore’s founding premier Mr. Lee Kuan Yew in his book One Man’s View of the World remarked,

“…Is there a country in this world that prospers on a declining population? If I had to identify one issue that threatens Singapore’s survival the most, it would be this one. I cannot solve the problem and I have given up. I have given up the job to another generation of leaders. Hopefully, they or their successors will eventually find a way out.” (p222).

Interest vs Fertility Table cover

Also that if he were to become the premier again, that he would give mothers a baby bonus equivalent to two years of average Singapore salary, just to prove a point that the population would still continue to shrink simply because there has been a mindset change among the people, particularly the young generation.

Indeed, most developed nations are also faced with similar problem and other less developed nations are slowly following suit. It is said that for a society to sustain itself, the fertility rate should be at least 2.11, also known as the replacement rate. We need two children to simply replace the parents and the extra 0.11 to cater for things like infertility, late marriage, postponing childbearing, early deaths, choosing to remain single and so forth. Fertility rates below 2.11 would cause the population size to fall. Table 1 below provides the 2012 fertility rate for some selected countries. Only India and New Zealand seem to have at least the replacement rate.

Interest vs Fertility Table 1

Rates below 1.3 are, apparently, impossible to be reversed back to the replacement level because it would take many decades to do so, and there is no way a population could be economically sustained for that long of period, before it corrects itself. Many advanced and developed nations – including the US, Europe, Britain, Scandinavian countries, Japan, Australia and New Zealand – indeed have fertility rates below 2.11, indicating as though there is a negative relationship between economic advancement and fertility rate. Continued at this rate, these countries could face serious problems in the future from from labour shortages and aging population. Some less-developed countries, including many Muslim countries, have fertility rates much higher than 2.11 prompting migrations from these countries to the developed nations that face population shrinks and thereby labour shortages. Indeed, some quarters have exploited this fact to put fear into the hearts of people, scaring them with things like “Islamic immigration”, “Arabization of Europe” which they term as Eurabia and so forth; that prompted author Daug Saunders to write the book “The Myth of the Muslim Tide” (Vintage 2012) in which he quells such fears.

But what are the factors causing the fertility rates in most countries to dwindle? Indeed even in developing countries where the rates have generally been higher than 2.11, are also falling. Studies have shown many factors as being responsible for the falling fertility rates, including lifestyle changes and government policies. Women with higher education and paid jobs tend to postpone childbearing and have fewer children. Career ambitions could be partly the reason too. Policies like tax credits, cash benefits and childcare supports all help reduce childcare costs. Nonetheless the problem of falling fertility rates seems to persist in most countries. The acceptance of lesbian, gay and transsexual lifestyles in society surely would contribute further to this problem.

This article argues that the globally-prevalent interest-based fiat money system of today is a significant determinant of fertility rate. The reason is as follows. Money in the present monetary system is fiat in nature, i.e. not backed by anything real like gold etc. and comes in the form of paper notes, coins, accounting numbers and electronic records. The accounting numbers including the electronic ones are generally created as money by the commercial banks in the form of loans that carry interest charges. Compound interest, mathematically, is an exponential function that causes money in the economy to grow exponentially. However, since the real sector cannot match this exponential growth of money, it brings about inflation and disparity in income and wealth distribution; which, therefore, can be seen as inbuilt features of the present monetary system.

This ‘inbuilt’ inflation, of course, increases both the cost of child-rearing and also the cost of retirement. Accordingly, living costs, education and healthcare costs are rising fast. A recent article in the Star daily (19 April 2015) reported that Malaysians in general must save 20% more of their income over and above their EPF savings in order to retire comfortably or otherwise risk of not having enough for retirement. Hence, having children can be seen as an opportunity cost of retiring comfortably. These factors, therefore, prompt people to have fewer children or even choose not to have any children at all. In many circumstances this also prompts the women folk to go to work to supplement family income. Hench, double income and multiple jobs are now necessities for many families. Their ‘over-working’ culture leaves less time for family togetherness and hence them having less children.

Generally, financial inclusion of all people is an important factor for broad-based economic development. Financial inclusion refers to the state where individuals and firms have easy access to basic financial services. Nonetheless, interest-based financial inclusion could prove ‘deadly’ for economies because most people are likely to become net borrowers and faced with the tradeoff choice between children and retirement. Of this, Mr. Lee Kuan Yew said that Singapore will ‘fold up’ if its citizens do not procreate. In 2012 Singapore and Malaysia had fertility rates of 1.3 and 2.0 respectively (Table 1). Table 2 below provides the Fertility Rate and Financial Inclusion Index for 35 countries. These countries comprised the sample in an IMF working paper study mentioned below.

Interest vs Fertility Table 2 part 1

Interest vs Fertility Table 2 part 2

The correlation coefficient between the financial inclusion index and the fertility rate is a negative 0.53, which is statistically significant.

Accordingly, I contend here that interest rates do negatively affect fertility rates, which if go unchecked can have disastrous effects on nations and the culture of their peoples in the long run. Accordingly, it may be beneficial for nations to consider interest-free financing modes. It is my strong view that nations that aspire to solve their shrinking population problem must first abolish their interest-based monetary and financial system and replace it with systems that are based on risk-sharing principles. I hope Europe, the US, Japan, Singapore and others that are faced with shrinking population problem would replace their interest-based monetary system with interest-free systems to ‘save’ their populations and unique cultures. In this regard, Islamic finance comes to mind and indeed is something all nations can consider. This article, however, provides just a preliminary suggestion to the possible link between interest-rates and fertility rates. Further research into this would surely shed more light.

Prof Dato’ Dr Ahamed Kameel Mydin Meera
Managing Director
Z Consulting Group

Response to Dr. Shaykh Abdalqadir as-Sufi’s article “The Islamic Dinar – A Way-Stage Passed”

By the Dinar and Dirham Technical Group

The above article appeared in the Shaykh’s website, posted February 14, 2014, in which the Shaykh declared, near the end of the article, that he now is dis-associating himself from all activities involving the Islamic gold dinar and silver dirham (hereinafter DnD).

His disappointment seemed rooted in the fact that after decades of hard work and planting the ‘tree’ to push the DnD as an instrument of Taken Zakat had not come to fruition.  In his words, a Taken Zakat must fulfill the following:

  1. An appointed Amir
  2. That Amir’s appointment of Zakat Collectors
  3. This resulting in a collected and assessed amount of Zakat
  4. The gathering of the Zakat in a Bayt al-Maal
  5. The immediate distribution of the Zakat to the legally worthy recipients

And that the DnD initiatives so far did not achieve these.  Hence the Shaykh writes:

“a newer and wider method must be adopted on a global scale PRIOR to the return of a local Halal functioning community which restores Islam by the door of Zakat….I call on an end to its [DnD] new institutions and productivity. The defence mechanisms of today’s late capitalism and its crisis management surrounding the buying, moving and minting of gold have surrounded it with prohibitive pricing and taxation. It is time to move beyond it. This is capitalism’s pyrrhic victory. Ahead lies vast expansion for the post-terrorist and post-political stage of Muslim growth.”

The Dinar and Dirham Technical Group (DDTG) is not a part of the Shaykh’s Murabbitun sufi order.  Nonetheless, we viewed ourselves as part of a larger group that strives to bring back the DnD as part of the Islamic socio-economic order.  This because we have reasoned and determined that the present fiat money system is nothing but embodies profound riba and prevents the attainment of a true Islamic socio-economic order, i.e. the maqasid al-Sharia are not attainable in this present system.

What the DDTG strives for is not so much bringing back physical gold dinars and silver dirhams into society as medium of exchange, even though this is a desirable event.  But rather its true struggle is to bring back gold and silver as measure of value in economic exchanges and transactions.  These are very much two different things.  Trade and commerce ultimately involves the exchange of goods and services.  What is missing in the present global monetary system is a real measure of value that can promote exchange justice, stability and sustainability.  Fiat money is a virtual measure of value and carries with it the Ribawi gene.  On the other hand, gold and silver is in line with what great scholars of past like al-Ghazzali and ibn Khaldun remarked in their works, i.e. God created the two precious metals as measure of value, i.e. against which the value of all other goods and services are measured.  The Holy Qur’an describes these two metals as of having precious value not only in this world but also in the Hereafter, i.e. Jannah.

While the DDTG recognizes the DnD as the ultimate measures of value, it also recognizes that other measures of value are also possible.  They simply need to have the characteristics needed to play the role of measure of value.  The following hadith of the prophet (saw) itself gives four other such items.

Abu Said al-Khudri reported Allah’s Messenger (s.a.w.) as saying:  Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates and salt by salt, like for like, payment being made on the spot.  If anyone gives more or asks more he has dealt in riba.  The receiver and giver are equally guilty.Sahih Muslim

Hence what the DDTG strives for is to establish real measures of value.  These necessarily must be commodities or services having their own intrinsic value.  Symbolic money is acceptable so long it is redeemable for some real commodity or service.  The DDTG would like to see not only dinar and dirham instituted but also other real money concepts – like commercial barter exchanges, complementary currencies, etc. – to coexist so as to increase the strength and resilience of the whole monetary and economic system.

Hence the DDTG recognizes that the fact, Shari’a principles of muamalat, zakat, mahr, hudud etc. are based on gold and silver as monetary standard has hikmah behind it.

Nonetheless, in this regard the DDTG recognized that it is virtually impossible to revive back the gold dinar and silver dirham their monetary role so long the legal tender law is not ‘loosened’ a bit.  This is because, in the presence of legal tender law, Gresham’s Law would kick-in, i.e. inferior money would drive out good money.  Hence paper money and other fiat money would drive the gold dinar and silver dirham out of circulation.  This is exactly what happened in Kelantan.  Only in the absence of legal tender law or with some ‘loosening’ of the law that the dinar and dirham has some chance of succeeding.

When the gold dinar and silver dirham of Kelantan were first introduced in 20 September 2006 I was invited to give the keynote address.  At that time Umar Vadillo was not even in the picture yet, and I stressed the point that the DnD can be introduced mainly as an inflation hedge only and not as money, i.e. as means to protect one’s savings from being eroded by inflation.   Nonetheless, Kelantan later relaunched its ‘first’ dinar again on 12 August 2010 as though the 2006 event did not take place.  This time the launch was through a company, the Kelantan Gold Trade, led by Umar Vadillo.

As expected, the venture failed as per our discussion above.

But nonetheless, we at DDTG are confident of the true role of the Islamic gold dinar and silver dirham; and what is needed to achieve the objective.  The task ahead is not an easy one because money and financial systems are tricky and intertwined with global power play.  We are talking about complementing paradigms or even complete paradigm shifts.  Hence, this will take time.  But, we are confident that by the Grace of Allah SWT the gold dinar and silver dirham will ultimately resurface, and contribute to socio-economic justice, peace and abundant prosperity for all – Muslims and non-Muslims alike;   in the near future.  We just need to be focused, steadfast and patient.  Truth, honesty and willing to listen to other opinions are other quality traits one should develop in one’s self to contribute to this success.

The path to Glorious Islam again is not through fighting armies but rather through eradicating RIBA in all its forms in society.  We hope Shaykh Abdalqadir would reconsider his statement as gold, silver and commodities with intrinsic value are sunnah money.  The struggle against RIBA is a multifaceted one and the ummah’s strive to re-establish the gold dinar and silver dirham is warranted and a legitimate right action.

The Dinar and Dirham Technical Group

[1] The Dinar and Dirham Technical Group is an informal group of academicians, sharia scholars, lawyers, practitioners, businessmen, college students etc. from the Nusantara, led by Dr Ahamed Kameel Mydin Meera, a professor and Dean at the International Islamic University Malaysia.  The group occasionally meets basically to discuss the DnD intellectually, to determine the DnD standards and their historical role, to describe the true role of DnD in Islamic economics and discuss strategies to actualize the implementation of DnD given the current local and global socio-political and legal conditions.

The Story of the Sukus and the Tukus

There were once two neighbouring islands far away in the oceans. One was called Aya and the other Baya. A certain people called the Sukus lived on the island of Aya . It was a fertile island with lush vegetation and tropical fruits. There were numerous waterfalls and rivers that provided the people with clean water and places for family retreats and recreation. The surrounding seas were unpolluted, with abundant fish and other seafood. The island also had gold and the Sukus, particularly the womenfolk, loved gold, They used pieces of gold as money since everyone treasured gold. Their tribal leadership led by a man named Saka, minted the gold coins. They lived a simple cooperative life and there were no interest charges for lending and borrowings among themselves. Occasionally, some tidal waves and strong winds destroy some property, particularly homes, but the community would immediately help themselves to rebuild or repair the damaged property. Other than that, it was a peaceful community of people who went about their life gracefully.

The Story of Sukus and Tukus

The Story of Sukus and Tukus

The island of Baya , on the other hand, was inhabited by a people called the Tukus. Their leader was an elderly man named Taka. The island of Baya was fertile too and the Tukus were mostly farmers who worked rice fields or kept cows, sheep and poultry. Some of them were good at handiwork and produced a variety of household items. They too lived a very peaceful and cooperative life, mutually helping each other for survival. The Tukus were, however, not so sophisticated as the Sukus, in that they merely did barter trade. The Tukus realized that the Sukus were much wealthier, healthier and had towns that were much more sophisticated than their own. They had always thought that the Sukus were more gifted and superior beings than themselves. Even though they barter traded their goods occasionally with the Sukus they never got the idea of money. However, their women-folk too loved gold, particularly the gold jewellery that the Sukus made.

One day, two smartly dressed men arrived in a ship on the shores of the island of Aya . Their names were Gago and Sago. The Sukus being a very hospitable people welcomed their new guests. Gago and Sago impressed the Sukus with the stories of their extensive traveling. They showed them some gold coins from other parts of the world and also some printed papers that were apparently used by some far-away people as money.

The Sukus had never seen paper before. The paper money even had pictures of bananas on it – their favourite fruit. The two strangers also showed them a machine that prints such money. Wow! That got the Sukus’ attention. There were awed because they had never seen anything like that before. The islanders loved Gago and Sago and invited both to live with them on the island.

Gago and Sago convinced the people that an institution called a bank would benefit the people immensely. They explained that a bank would provide a place for keeping their gold money safe while uplifting their economic conditions by making the savings available to others for productive use, which otherwise would remain idle. The Sukus, being a people who loved to help others, thought that was a great idea. Gago and Sago then built a small building structure with a vault in it and started operating the first bank on the island of Aya .

They celebrated the occasion by giving the islanders a great feast along with a colourful festival of events. The people thronged to deposit their gold coins with the bank. Depositors were given a piece of printed paper for every gold coin they deposited, with the assurance that they could redeem a gold coin for every paper they turned in. The people were excited with the paper “money” they got because it even had a picture of their leader Saka beside a banana tree. No doubt Saka was very pleased too!

The people deposited all their gold coins, a total of 100,000 pieces and hence an equivalent number of pieces of paper were given out. Now the people used the paper as money and found that it was much more convenient than the heavier gold coins that they used before. The paper money printed by Gago and Sago, therefore, became the dominant currency of the island. Nobody used the fold coins anymore. The people were pleased with the ease with which they were able go about doing their businesses. They trusted Gago and Sago very much because each time they brought in a piece of paper for redemption their request was indeed honoured. Gago and Sago became very respected and honoured in their society.

The Tukus who heard about the whole thing became excited and pleaded with Gago and Sago to help them out too. Gago and Sago smile to each other and told the Tukus that they would indeed be very pleased to do so. They then set up a similar building in Baya, and Sago was placed there as the manager. The difference between Aya and Baya was that in Baya the Tukus had no gold coins to deposit. Sago told them that was alright. He would however, give 1,000 paper notes to each family to use as money. Since they were a hundred families in Baya, so 100,000 paper notes were given out. However, Sago reminded them that at the end of the year each family must return 1,100 paper notes, the 10 per cent extra being a charge for the services he was providing. The Tukus found the paper money truly to be like magic. It made their business dealings so much easier compared to their previous barter trade. People spent much less time looking for counter parties to trade with. Now they were able to specialize in jobs they were good at. Their economy began to grow rapidly. Now Gago and Sago decided that the time was ripe for them to do their “trick”.

Gago noticed that in Aya, on average only 10 per cent of the fold deposits were redeemed by the Sukus at any particular time. The other 90 per cent remained in the vaults. Noticing that their printed papers were circulating as money, Gago printed an extra 900,000 certificates to be circulated as money too! Gago had calculated that with the extra papers, a total of 1,000,000 pieces of paper would be outstanding and if the people came to redeem their normal 10 per cent, then the 100,000 original deposit of gold coins would be readily available for redemption.[1] Gago loaned out this extra 900,000 paper money to some “needy” Sukus at an interest charge of 15 per cent.

The Sukus suddenly found that the prices of things were rising. This baffled them and no one could figure out why.[2] Some of them who had borrowed money form Gago were not able to pay back their debt even though they worked very hard trying to earn that extra money.[3] Business became increasingly competitive and the society became less compassionate and less caring towards others than previously.[4]

The Tukus too found similar things happening to them. Initially, they did not notice any price increase but they noticed some behavioural change in their people. They became very competitive in their attitude and less caring towards their fellows. Even with hard work and such competitive behaviour, some of the Tukus still defaulted on their loans. They were not able to acquire enough money to pay back their total debt.[5] Now Sago began to confiscate real wealth from the loan defaulters –like land, cows, sheep, etc. Their elderly leader Taka was among those who defaulted. But Sago gave him and some other Tukus additional paper notes as a rescheduling of their loans. This increased further their indebtedness. Later Taka defaulted again and had his loan rescheduled again. Now Taka began to avoid meetings with Sago. He felt ashamed and found his former power, pride, courage and dignity falling.[6]

On the contrary, he found that Sago was slowly becoming very wealthy by acquiring the people’s assets. In fact, he found that the power, pride, courage and dignity that he lost were now enthroned on Sago.

After a number of years, Gago and Sago who once arrived on the shores of the island of Aya with only a printing machine, were now the owners of most of the land and property in both Aya and Baya. The people were reduced to mere workers, some of them now living in poverty. Many worked long hours just to make ends meet. They now had less time for family, friends or for religious activities. Social problems were widespread.

People cared less for other. It goes without saying that with poverty, other social ills like crime, prostitution, etc. began to thrive. Their cultures were gradually replaced because Gago and Sago introduce a new “superior” culture of a “superior” people to which they belonged. This was the end of the caring and loving people of the two islands Aya and Baya, who had earlier lived a peaceful yet graceful life before Gago and Sago arrived with a printing machine.

Gago and Sago did not stop there. They continued to spread their wings to other peoples and societies. Their ultimate dream is to become the Global Supreme Rulers by establishing a single global bank with single global money.

We postulate here that in the current global monetary system, developing nations would go through somewhat similar events as pictured above.


[1] This is how money is created in the current banking system in aggregate. If the reserve requirements is 10 per cent, then for a deposit of 100,000 a total loan that can be created is given by 100,000/0.10 = 1,000,000

[2] This is easy to see with the help of the equation of exchange, MV = PY. In this example, with the sudden increase in the money supply M, without a corresponding increase in real output of goods and services Y, the prices levels, i.e. P thus tend to increase ( the velocity of circulation, V, is assumed unchanged and constant).

[3] The loan (principle plus interest) is not repayable in aggregate because the interest portion does not exist in the form of money. Notice that the interest of 15% on the 900,000 principal equals 135,000. Therefore the total amount repayable is 1,035,000 but nonetheless, only 1,000,000 exist in total as money in the whole system. Accordingly, some defaults on the loans are sure to take place.

[4] Since interest charge do not exist in the form of money, competition for money therefore ensues, reflected in increase business competition.

[5] Again, this is because there is not enough money in the system as a whole such that debt is not repayable in aggregate.

[6] Imagine that you borrowed RM10,000 from a friend. Do you think your behaviour toward the friend would change, say when you meet the friend in the street? Particularly when the stipulated time for the return of the loan had expired?

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