Interest-bearing financing problem in the government treasury and solution proposals

The government treasuries around the world give importance to the debt management in order to borrow under favorable conditions, to take precautions against possible debt crises and sustain debts. The debt management is to act strategically by taking risk and cost factors into account while borrowing. Although the government treasuries aim to borrow at the lowest interest rate and minimum risk level, interest-bearing financing negatively affects many macroeconomic variables in the economy at the stage of paying the principal and interest of the debt. Since the prohibition of interest in Islam is one of the basic elements of the economic system, Islamic economics does not approve of interest-bearing financing by the government treasuries. The economic order targeted by Islamic economics, since it is an approach centered on production and trade, based on partnership and risk sharing, based on sustainable growth and fairness in income distribution, the damage of interest-bearing financing to macroeconomic variables due to the interest burden is evaluated negatively from the perspective of Islamic economics. In addition, in Islamic economics, since there are prohibitions such as gambling, garar (extreme uncertanity) and speculation, Islamic economics approaches the operations such as swap, forward, futures and option which are carried out within the context of debt management by the government treasuries from a different perspective than conventional economics. In the literature, there has not been a study in this context that evaluated the debt management operations of the government treasuries from the perspective of Islamic economics. The main purpose of this study is to reveal the damage caused by the interest-bearing financing made by the government treasuries to the macroeconomy due to the interest burden, and to contribute to the development of interest-free financing methods in line with Islamic economics. For this purpose in the study, the debt management operations of the treasury have been evaluated from the perspective of Islamic economics and the long-term relationship between the debt interest payments and the macroeconomic variables has been analyzed econometrically. With this econometric study, the effect of the debt interest payments on the macroeconomic variables has been empirically revealed in the sample of Turkey. Within the context of the study, the effect of the debt interest payments on the macroeconomic variables in Turkey has been examined for the period 1989-2019. The long-term cointegration relationship between the debt interest payments and the macroeconomic variables has been estimated through the ARDL Bounds Testing approach. In this study, 3 different regression models have been established and as a result of the tests, the cointegration relationship in the long-term has been determined among the variables in the regression models. According to the model estimation results, the debt interest payments affect the income distribution negatively and the external debt interest payments affect the current account deficit negatively and the domestic debt interest payments affect the economic growth negatively. In other words, interest-bearing financing harms the Turkish economy due to the interest burden. Within the context of the study, interest-free financing methods compatible with Islamic economics have been included with the examples of the applications in the world (Malaysia, Bangladesh, Sudan, Bahrain and Maldives), and based on these methods, interest-free financing methods for the Turkish treasury have been suggested. Furthermore, in the study, the advantages of interest-free financing to the economy compared to interest-bearing financing have been revealed within the framework of the scientific studies. Within the context of the study, the effects of the interest-free financing instrument, Government Investment Issue (GII), and the interest-bearing debt instrument, Malaysian Government Securities (MGS), on the economy have been compared in the Malaysian sample for the period 2009 (2nd quarter) – 2016 (4th quarter) and the long-term cointegration relationship among the variables in the econometric analysis has been estimated through ARDL Bounds Testing approach. In this study, 4 different regression models have been established and as a result of the tests, the cointegration relationship in the long-term has been determined among the variables in the regression models. According to the model estimation results, it has been determined that the interest-free financing instrument (GII) contribute more to the Malaysian economy than the interest-bearing debt instrument (MGS) in terms of having a negative effect on the inflation and having a positive effect on the economic growth. There has been no study in the literature comparing government investment issue and government securities in the Malaysian sample as in this study. In addition to the model results, in the conclusion and recommendations section of the study, the detailed evaluations and suggestions regarding the borrowing, the debt management and Islamic economics perspective have been presented within the context of the integrity of the study.