Fractional reserve banking is a modern form of riba

A monetary reset, three or four years out

Muzamil Hasan opens by placing this conversation inside a bigger frame he has returned to across the show: three forces converging over the next three to four years, AI-driven shifts in how work gets done, a move from a unipolar to a multipolar geopolitical order, and what he calls an 80-to-100-year cycle of monetary reset. He traces the last reset to 1971-73, when the dollar came off the gold standard and free-floating, printable currency became the global default. A year earlier, Faisal Aftab had discussed this cycle on the show. This episode picks it up through a narrower, more technical door: a new book called “Breaking the Trap: Debt, Inflation, Interest and Poverty, Replacing Fractional Reserve Banking with Full Reserve Money.”

The book’s co-author, Qanit Khalilullah, a chartered accountant who trained at A.F. Ferguson and later ran internal audit at Unilever Pakistan, joins to explain both the diagnosis and the proposed fix. He frames the stakes immediately: “if you look at where the world’s problems begin, even the wars, ultimately they trace back to economic issues, and those economic issues have a root: the monetary system.” His argument is that two levers, taxation and money creation, quietly tax everyone, including someone who cannot guarantee their next three meals but still pays 18 percent tax on every purchase.

Every economic problem traces back to money creation

Khalilullah’s opening case is specific to Pakistan’s federal budget. On the first day any fiscal year starts, roughly 60 percent of federal revenue is constitutionally owed to the provinces, and half of what remains goes straight to interest payments. That interest bill, he says, is two and a half times the defense budget, seven to eight times government’s own operating expenditure, and twenty times what gets spent on the roughly 100 million Pakistanis living below the poverty line. Most people assume this money is flowing to the IMF or foreign creditors. It isn’t: “close to 90 percent of that interest cost is on domestic debt, it isn’t going abroad at all.” Citizens deposit savings in banks, banks lend nearly all of it back to the government, and the government pays interest on that debt out of tax revenue extracted from the same citizens. Pakistan’s domestic debt has grown from 5 trillion rupees in 2010 to roughly 50 trillion today.

He’s careful to frame this as a choice rather than a law of nature: “these are our policy choices, and it’s because of these policy choices that these problems exist.” Citing Milton Friedman, he notes there are two reasons reform proposals like this rarely get implemented: ordinary people don’t understand who benefits, and the people who do benefit have a vested interest in the status quo.

Muzamil brings in a second reference point here, Ray Dalio’s newer book “Principles for Navigating the Next Big Debt Crisis,” which argues that sovereign debt cycles eventually outpace productivity growth and end in a breakdown of monetary order. Muzamil treats Dalio’s framing as corroboration: this isn’t a Pakistan-specific complaint, it’s a description of where most sovereign borrowers currently sit.

How a goldsmith’s receipt became the global banking system

Asked to explain the historical origin of the system, Khalilullah walks through roughly five thousand years of monetary history compressed into a few minutes. For most of that history, money was commodity-backed, gold and silver coins, sometimes state-stamped paper (China issued paper currency a thousand years ago). In 16th and 17th century Europe, people began depositing gold with goldsmiths and carrying the goldsmith’s receipt instead of the coin itself, since the receipt was easier to transact with. Some goldsmiths noticed depositors rarely came back for their actual gold, and started issuing more receipts than they had gold to back. When this was discovered, depositors ran on the goldsmiths, which is where the term “bank run” originates. England responded in 1840 by making note issuance an exclusive government prerogative, and most of the world followed.

What Khalilullah stresses is that this didn’t end private money creation, it relocated it. Over the following 200 years, transactions shifted from coins to paper receipts to bank ledger entries. Today, he says, roughly 95 percent of transaction value in the world happens as numbers in bank accounts, not physical currency. And banks today can expand those numbers the same way the dishonest goldsmiths once did: by issuing loans as fresh entries rather than transfers of existing deposits.

The multiplier: how 100,000 rupees becomes 1,900,000

Khalilullah gives a concrete mechanical walkthrough of fractional reserve banking. A depositor puts 100,000 rupees in a bank. The bank keeps a small reserve, say 5,000 rupees, deposits 5 percent of the total with the central bank, and lends out the remaining roughly 90,000 as brand-new money, not a transfer of the original deposit. That 90,000 gets spent, redeposited elsewhere, and the next bank repeats the process, keeping 5 percent and lending the rest again. Compounded across the system, a 5 percent reserve ratio allows total money supply to expand to roughly 20 times the original deposit. He’s careful to note this isn’t a fringe claim: “this isn’t something unusual, you can read it in any economics textbook, it’s the multiplier effect, and every central bank, the Bank of England, the European Central Bank, the Fed, all say the same thing: the money that’s 95 percent electronic, we aren’t creating it, commercial banks are.”

The consequence, in his telling, is that central banks only indirectly manage this expansion, mainly through the policy interest rate. Raise rates and lending slows, which cools inflation but also slows employment and industry. Lower rates and lending picks back up, feeding the next inflationary cycle. He describes this as a forced choice between two bad outcomes, not a stable equilibrium.

The real riba isn’t the interest rate, it’s the printing press

Muzamil pushes the conversation toward Islamic finance’s founding objection to interest, and reframes it in his own terms: “I think the reason why humanity keeps going back to this is because a riba-based system always gives you an immediate, short-term boost, which is very alluring, and everybody gets to jump into it.” He argues that the interest paid on a personal loan is a small, visible cost compared to the much larger, invisible cost of money creation itself: “the real riba isn’t even the interest, that’s a small face of it, the real riba is what money printing does to you, and that’s where the value quietly moves out of your pocket.”

Khalilullah agrees and extends the point into a chapter of the book that treats inflation as a wealth transfer with clear winners and losers. Asset owners, people holding stocks or real estate, benefit when inflation hits because their asset prices rise. Savers and fixed-income retirees lose, because their purchasing power quietly erodes. He cites the UK as an example: from 1970 to roughly 2020, the money supply grew 7 to 10 percent a year against roughly 2 percent GDP growth, and most of that gap showed up in house prices, not general goods, meaning people who once lived in owned homes ended up renting instead.

Splitting the bank in two: deposits that store, investments that risk

The book’s proposed alternative, full-reserve banking, requires commercial banks to hold 100 percent of deposit money at the central bank rather than lending most of it out. Under this model, Khalilullah explains, banks split into two functionally separate businesses: a deposit and payments section that simply stores and moves money (no interest, no risk, and structurally immune to bank runs), and an investment section that channels only genuine savings people have voluntarily committed into productive lending, on a profit-and-loss basis rather than fixed interest. “This isn’t us saying credit or lending disappears,” he says, “we’re saying it has to be backed by real savings,” rather than by numbers a bank conjures on its own balance sheet.

He argues this arrangement is actually closer to Islamic finance’s original intent than current Islamic banking practice. Current Islamic bank contracts, he says, whether ijara or murabaha, still peg their profit rate to the central bank’s policy rate and still function as debt, because banks holding short-term, risk-free deposits structurally cannot take on genuine profit-and-loss risk. Full reserve banking, in his framing, is what would actually let banks do mudaraba and musharaka properly, since the money going into the investment section would be long-term and risk-bearing by design.

Cancelling the debt by moving it onto the central bank’s balance sheet

The mechanism for eliminating Pakistan’s domestic debt is, in Khalilullah’s description, almost accounting sleight of hand made real. Roughly 70 percent of what commercial banks currently hold as assets is government securities, treasury bills, and sukuk. If the reserve requirement is raised from 5 percent toward 100 percent, banks have to move an equivalent volume of assets to the central bank to satisfy that requirement, and since those assets are government paper, the central bank, effectively an arm of the government, can cancel the debt outstanding to itself. “The government’s domestic debt, where a huge share of your interest is going, roughly 50 percent, you eliminate it,” he says.

The second constraint in the proposal is that new money creation is capped at the rate of real GDP growth, which he argues prevents both inflation and deflation. He estimates that even a modest 4 to 5 percent annual money creation under this cap could fund a transfer of roughly 20,000 rupees a month to Pakistan’s poorest families, without the debt burden that currently accompanies government spending, since the money isn’t created against a loan that has to be repaid by future taxpayers.

Twelve people, half the world’s wealth

The wealth-concentration argument surfaces the political stakes of the debate most sharply. One of the guest’s turns lands on a stark image: “today there are twelve people in the world who hold half of it’s wealth, roughly enough to fit in a single large van.” He connects this directly to interest income: large corporations and governments borrow at low rates in developed economies (2 percent in the US and Europe) and redeploy that capital at higher returns, while savers holding deposits absorb the inflation those same institutions help generate. Even Islamic banks are implicated in his account, since they too push depositors toward non-interest-bearing current accounts while continuing to profit from lending out those deposits.

The credit line problem: what happens the morning after

This is where Muzamil spends the bulk of his airtime, and where the conversation earns its length. He grants the philosophy without reservation, “I won’t argue with you on the theory, I can very clearly see the utility,” but presses hard on sequencing. His example is a working exporter who nightly draws a large credit line to fund operations and repays it days later as cash flow comes in. If reserve requirements jump overnight, he asks, where does that liquidity go?

He also points to real precedents of partial reserve tightening gone wrong: Turkey raising reserve requirements on certain accounts to 40 percent, and China pushing requirements to roughly 21.5 percent to cool a real-estate bubble in the 2010s. In both cases, he notes, unregulated shadow lending and loan sharks emerged to fill the gap once formal credit dried up, interest rates on informal lending spiked, and GDP growth slowed in the short run. His challenge to Khalilullah is direct: is there an actual mitigation plan for that transition pain, or is the answer simply that short-term pain is the price of long-term gain?

Khalilullah’s response leans on sequencing rather than denial. Government debt, he argues, can be cancelled essentially immediately because it’s a bookkeeping cancellation between the central bank and the treasury. Private-sector debt is different: existing contracts, whether interest-based or Islamic-mode financing, would continue to be honored on their original terms and phased out gradually rather than voided overnight. He projects that once depositors stop earning any return on simple checking-style deposits, a meaningful share, his estimate is around 25 percent of depositors holding roughly 7 to 8 trillion rupees, would move that money into investment accounts seeking a return, which he expects to expand private-sector lending capacity from roughly 12-13 trillion rupees to around 20 trillion, a roughly 60 percent increase. Muzamil pushes back that this still assumes a multi-year unwind, not the overnight process Khalilullah initially described, and Khalilullah partially concedes the point while maintaining the transition would be faster than critics assume, citing detailed balance-sheet modeling done for Pakistan specifically with his co-author Sohaib Umar, a Bahrain-based bank advisor.

Genius Act, stablecoins, and the CBDC surveillance trap

Near the end, Muzamil asks Khalilullah to weigh full-reserve banking against two current alternatives: the US GENIUS Act, which requires stablecoin issuers to back tokens one-to-one (originally with treasuries), and central bank digital currencies. Khalilullah treats both as partial, technologically-driven echoes of the same underlying principle rather than genuine substitutes. A CBDC, he argues, could deliver the reserve discipline of full-reserve banking, but at the cost of killing bank-level innovation and enabling direct state surveillance of every transaction, a concern he says is loud in Western debates over civil liberties. Stablecoins, in his reading, aren’t really a monetary reform at all, they’re payment-rail competition aimed at cryptocurrency, and even the GENIUS Act’s backing requirement, he notes, is treasuries rather than a truly reserved, debt-free asset.

His preferred version keeps commercial banks doing everything they currently do, transactions, storage, innovation, except creating money, a power he argues belongs exclusively to the state as a public good, bounded by GDP growth. “This way you get the benefit of central bank digital money,” he says, “but you’re not banning private banking, you’re only taking away money creation.”

Closing: the case for staying critical

Muzamil closes by separating philosophical agreement from implementation skepticism, telling Khalilullah plainly that he does not believe any single person or book can resolve every second-order effect of a national monetary transition, and that this is a strength of the critique rather than an insult to it: “being critical for the sake of being critical doesn’t help anyone. Being critical in search of a solution is an excellent thing, and I’d urge more people to do that.” He credits Khalilullah with doing “an incredible service, not just to your profession but to the industry, to the economy,” and urges viewers to read the book directly, noting its free digital availability, before forming a view. Khalilullah, addressed throughout the close as Khan sahab, thanks Muzamil for the platform: “thank you for the opportunity to bring this to your audience, right now what we want most is for this discourse to reach more people and for the conversation to actually start.” Muzamil signs off inviting viewer questions for a follow-up conversation, framing financial literacy itself as the point: “if you don’t understand how your system works, then fooling you becomes just as easy.”