Thursday, June 7, 2012

Getting Rich Through Borrowing

There are two terms my parents used to advise me not to be involved in, ie "getting rich through borrowing" or "rich in debts". I guess they amount to the same thing although the word "rich" in the second term is an euphemism. But modern financing has it that in order to get rich in business one must borrow from the bank and invest the money in some highly profitable projects and projects with a very high rate of return.
Can that principle be also applied in running the business of a nation? There are many forms of borrowing though. Borrowing from the local or World Bank is one way.From rich countries on a G-t0-G basis is another. Selling bonds with a future date of maturity, is also a form of borrowing to be paid later when the bond matures. And there are so many types of business that a country can enter into with another country or countries. Import-export agreements achieved through Memorandum of Understanding, multilateral or bilateral help and assistance, counter-trading etc.etc.
One other form of business promotion is to open up the country to foreign investment with several forms of tax incentives and liberalization of trading laws and regulations.Any businessman from any country with money to invest can come in and be provided with the land and infrastructural facilities, also the protections to ensure that his business venture will prosper, even at the expense of protection to the local business and industrial activities and initiatives.
Two considerations, therefore become very crucial. One is how much of borrowing can a country make including selling bonds which must be redeemed over a period of time? Two, to what extend can inducement and protection be give to a foreign business venture before they begin to hurt the local initiatives? In conducting the business of the nation in Malaysia, I'm sure our experts have considered these matters very thoroughly in order to protect the interest of the nation first, and making "profits" as a second priority.
However, in some cases we begin to feel that "profits" and the availability of cash or credits for development in order to achieve the status of a high-income nation, are given first priority. Extensive borrowing reaching to more than 50% of the GDP is a case in point. Some development experts say that above 24% is already bad. But, of course, some developed countries like Japan also has a high rate of foreign borrowing while Greece overshot the 100% mark. The spread of foreign-owned super- and hypermarkets can definitely affect the business of local traders and shopkeepers, although they rehoused in shopping complexes open local traders.

To what extent do the various supermarkets or supermarts affect the business of local businessmen, we don't really know. No studies have been done. But we know that the loans and bonds sold outside the country must be redeemed one day by the young people of today. So, should a nation stretch its economic capacity and future potentials to afford a higher standard of living for the current generation than the standard that it can actually afford now, by borrowing and selling bonds as much as possible? Is it ethical or desirable to raise the income of the nation by other than actual productivity increase ( call it superficial increases) in order to achieve the status of a developed nation? To me it's like getting rich by borrowing, which must be paid for by the future generation.


abdulhalimshah said...

I did not know what happened to my earlier comment. It just disappeared into thin air. To be rich by borrowing is against Islam. We have to work hard for it and only then the riches have barakah. We have been taught the virtues of thrift and hard work. All the wealth obtained from the system which practise riba is haram. In the hereafter Allah S.W.T. will ask one to account for the wealth that one has. It is better for one to be grateful for the bounty which is given by Allah through our own effort and not by using other people's money.

norzah said...

Sorry about the earlier comment - i often experienced the same. The comment just disappeared when i hit the 'publish' button. I totally agree with your comment on borrowing from the Islamic point of view. We should only spend of what we earned through had work and thrift.
Shouldn't this principle applicable on individual be also applied in terms of the nation? Is it wise for a nation to enter into so much debt making the future generation pay for what had already been spent by their forebears? When the national debt rises to above 56-60% of the GDP should we start being more cautious about national spending?