Faith in Britain

based competitors. Often, though, interest rates have merely been concealed under the guise of arrangement fees and transaction costs.

We would need to start with an interest-free bank. If such a bank operated on the basis of moral law it could neither lend nor borrow with returns unrelated to the profitability of the use to which such funds were put or which did not constitute a hire charge for the use of property. The working principle of such a bank is partnership. When money capital is provided for commercial investment, any profit or loss is shared on a pre-specified proportionate basis. In addition, the bank can also engage in commodity and share trading, it can finance real estate purchases or engage in leasing equipment or property. When a depositor designates his deposit for investment purposes, it is added to the bank's overall portfolio and allocated a share of any profit or loss that the bank makes on its investments.

Essentially this is the unit trust principle, with the non-interest bank diversifying and distributing its investments so as to minimise the potential for loss.

The bank could use a proportion of its demand deposits for investment purposes and so be able to make current accounts available to its customers with few charges. If this practice became widespread the central bank would need to specify reserve requirements and provide a 'lender of last resort' facility to maintain public confidence - and to prevent any losses within the bank's portfolio from affecting its ability to honour current-account liabilities. The alternative model would involve the bank holding transaction deposits in cash and highly liquid assets, or using a proportion to provide interest-free short-term overdrafts to its profit-share borrowers.

The interest-free banking arrangements would be undergirded by parallel forms of finance. For instance, retailers' interest-free credit offers could be financed by banks who took a share of the retailers' extra profit arising from the additional custom generated. These forms of consumption finance would need to be complemented by interest-free loan funds provided for poverty relief and financed by local taxation or a proportion of bank current accounts.

The housing market would operate on the basis of the bank purchasing the property, letting it to residents who pay in excess of the market rent whenever they wish to or on a contractual basis. Gradually they then acquire an ownership share in the property, or they can finance intermediaries to do this on a profit-share basis.

Millions of home owners caught up in crippling mortgage repayments, influenced more by the international money market than by the housing market, would find this alternative extremely attractive.

In the public sector finance would be available on a profit-share basis or the State could float marketable shares. Projects with no financial viability and those geared to current expenditure would have to be financed through taxation. The discipline