WORLD MARKETS FOR CONVENTIONAL LOANS
The total debt burden of societies in 2013 is US$52 trillion or US$8,500 per capita, which is 72 percent of the world's gross domestic product (GDP), according to the Economist. The G7 nations' debt burden is estimated to be 130 percent of its GDP. The World Bank's guidelines suggest that debt at 80 percent of the GDP is unsustainable. Should this splurging in debt be continued without a reform of the foundation of modern lending practices? A chorus of voices is suggesting key reforms to current lending practices to bring the worldwide debt burden to a sustainable level.
Since sukuk securities are becoming prevalent as a new source of debt capital only in a few minor economies, it is worth noting that the 57 members of the Organization of Islamic Countries (OIC) have a total debt of US$903 billion in the form of conventional debt capital against their total US$-based GDP of US$5,300 billion. The debt burden of the OIC members is therefore US$360 per capita, while the world's per capita debt is US$800. At the end of this chapter, we will examine how debt restructuring of conventional bonds could be done slowly to enable the OIC members to return to profit-shared and risk-shared sukuk debt.
How big is the conventional bond market? A reasonable estimate of the outstanding value of sukuk debt in the 12 markets was US$1,200 billion in 2013 (excluding the unknown over-the-counter market size). The worldwide conventional bond market assets, including short-term and long-term loans of financial corporations, added up to US$154,000 billion in 2011. However, the world's debt burden is even higher if we include short-term trade loans and loans of financial corporations, which are not for production activities alone.
Before the birth of fractional banking, one could observe a clear preference for the sharing of risk, profit, and loss in debt by firms while unfortunate rulers and those without assets preferred interest-rate borrowing. Fractional reserve banks, using the cheaper interest-based rate (devoid of risk), slowly encouraged producers to prefer interest-based debt. Institutional changes such as corporate tax law, accounting rules permitting interest tax deductions, and the legal registration of firms with limited liability all had the effect of introducing a favorable environment to make interest-based loans cheaper than the sharing of profit and loss in debt.
Obviously, the conventional bond-based market is too big to compare with the minuscule sukuk debt market. But compare we must, since the attractive feature of sukuk is its ability to link the entrepreneur with wealth-producing economic activities in a joint venture with the financier willing to share his or her capital to make the economic production process safer. Some statistics are given here on the conventional bond market before we discuss in the ensuing section how debt overload and seasonal wasting of assets at each business-cycle downturn could be avoided by the more balanced features of Islamic or participation debt contracting.
The total money lent by banks in 2013 was US$14 trillion, and the amount lent in local currency in local bond markets across the world was US$39 trillion. International loans made in six foreign currencies in 10 eurodollar centers amounted to US$8 trillion. Hence, the total loans in all forms used by both financial and nonfinancial entities were much higher than the sovereign private-sector debt of US$52 trillion. In fact, the total is US$61 trillion, which is nearly $10 trillion more.