Date post: | 01-Apr-2015 |
Category: |
Documents |
Upload: | leilani-romer |
View: | 217 times |
Download: | 2 times |
GOLOBAL FINANCIAL
CRISISREASONS AND ISLAMIC SOLUTIONS
WHEN DID IT BEGIN? Early signs appeared in 2007 Very reason was funding of external
wars Bush administration spent >$ 5 trillion
in 7 years of military expeditions It lead to increase in public debt of >
$4.5 trillion between FY 2002-2008 This is a crisis of accumulated debts
beyond the capacity of US financial system
STEPS WHICH LED TO THIS CRISISCOLLAPSE OF REAL ESTATE MARKET
Undue burden of real estate funding contracts
Loan guarantee contracts Securitization Debt securities trading Credit derivatives Credit default swaps
COLLAPSE OF SEMI-WHOLESALE FINANCE INSTITUTIONS Mortgage corporations like Fannie Mae &
Freddie Mae Collapse of other banks Confidence upon financial institutions
deteriorated Banks ceased to give short term loans
to companies and institutions
CRISIS IN SERVICES AND PRODUCTION SECTORS Down sizing and closure of businesses Reducing employment and laying off
workers Decline in demand for consumer goods More decrease in employment
STRUCTURAL CAUSES THAT AGGRAVATED THE CRISIS 1-Large expansion in speculation
transactions in financial markets Including conducted through internet They overshadowed the real
transactions Real transactions affect the fluidity of
capital and moving investments Speculation transactions are
unproductive since they merely move capital from the losers to the winners.
2-EMERGENCE OF MANY TRANSACTIONS MERELY FOR SPECULATIONS ON PRICES These transactions do not produce any
added value to the market Huge amount of money and great
human capacities are invested in them
3- CULTURE OF QUICK PROFITS Without consideration to the long term
results of the transactions Deficiency of laws, regulations and
administrative oversight on the methods of creating new forms of transactions
When there are no laws or regulations to control people’s behavior then why would they not extract maximum profits
4-SHIFT OF CAPITAL FROM SERVICE AND PRODUCTION TO FINANCIAL INSTITUTIONS There was inflation of financial sector
profits It led investors to believe that this is the
way to make quick gain of wealth Layers of mere financial transactions
accumulated and ballooned moving capital away from production sector
This brought the theory of upside down pyramid- which is very unstable
UPSIDE DOWN PYRAMID
5-DEPENDENCE ON INTEREST BASED LOANS This has been the foundation of funding
in capitalist system It does not produce any added value by
itself
6-SECURITIZATION There was prevalence of securitization It led to culture of “strike and place the
burden upon others” It created interconnection among the
financial institutions. So all the institutions fell with the fall of first piece of domino
7- EXCHANGE AND TRADE OF DEBTS Enormous investments were attracted to
such transactions It does not result in any real increase in
productions These are often quickly influenced by
the media and political events These would not happen if interest was
not adopted as the part of finance and re finance
8-INVESTORS TREND TOWARDS BEING MORE CAUTIOUS This led to increase in the processes of
derivatives It inflated the size of mere financial
swaps There was more interconnection among
institutions Hence the retrogressive impact spread
from one institution to the other
9-DEPENDENCE UPON PUBLIC DEBT RATHER THAN TAXES This led to inflation in the process of
financial exchange at both levels: 1- Local 2- International
10- EXORBITANT RISE IN US MILITARY SPENDING No doubt it increases labor and
employment in defense sector However, it does not tend to improve
the productive capacity of the economy Competitive capacity of US products in
foreign markets diminished Deficit in the balance of trade
accumulated This undermined the confidence in US
economy
SHORT TERM SOLUTIONS(USURIOUS) BY EXPERTS IN CAPITALIST MILIEU
1-Rescuing the failing banks, specially retail banks.
They can resume short term loans to companies
This will alleviate the financial crisis in the production sector
2-INCOME INCREASING PROGRAM SPECIALLY FOR MIDDLE CLASS Enable the debtors to overcome the
housing crisis Ease the problem of diminishing
demand for consumer goods This will send signal to the factories not
to cut productivity or to lay off workers Increase spending on service sector
( education and healthcare) which has large workforce
3-FREEZE INSTALLMENTS AND INTEREST RATES FOR BUYERS OF HOUSES
Interest be frozen, decreased or cancelled for a short period of time
Give respite to debtors who took house loans
Real Estate pricing will regain stability Real estate construction will resume
4-DECREASE THE PUBLIC DEBT Avoid increase in public debt
Measures be taken to decrease public debt
Taxes be imposed upon wealthy
5- DEALING IN DERIVATIVES Dealing in derivatives be immediately
stopped
Their remnants must be gradually dissolved, specially the credit derivatives
LONG TERM SOLUTIONS1- NEW LEGISLATIONS AND OVERSIGHT 1-New legislation to curb expansion of
financing beyond the capacity of the debtor
2- This is specially needed in real estate and credit card market
3- Retail banks and finance companies must be forced to abide by strict standards
4- These institutions should be under strict Government oversight and be held accountable for any attempt to lure customers into contracts beyond their capacity
2-TURNING THE FINANCIAL MARKETS TO SUPPORT GOODS PRODUCTION AND SERVICES
Ban or minimize the deals based on mere speculations:
. Index related deals Contracts on differences Credit derivatives Short term deals Future deals Restricting choices as means of caution,
in a way that is based or linked to an existing situation in assets or liabilities
TURNING THE FINANCIAL MARKETS Limiting or banning the currency trade
on the internet and cancelling licenses for platform of currency speculations on the internet
Platforms of goods and stock speculations on the internet should also be banned
Generally, the financial markets be turned back to support services and goods production and not at investments and profits involving speculations
3- LIMITING SECURITIZATION Securitization of debts be banned Only taskik ( financial documentation)
be used. In taskik, the financial documents represent real assets excepting debts and money.
4- LEGISLATION TO BAN CIRCULATION AND TRADE IN DEBTS
These processes do not create any added value.
Strict restrictions be placed for discounting and rediscounting of debts
5-DEVELOPING INSTITUTIONAL FUNDING FROM BANKS AND NON INSTITUTIONAL FUNDING FROM THE MARKETS
This is to be bound by 2 main constraints:1. Establishing a direct connection with the
real market of services and goods. This way the funding in the society does not go down the drain or transform into financial accumulations that turns away from the real market
2. Giving preference to moral criteria in funding over the criteria for mere profit gains. It means funding be withheld from goods and services which are harmful to the society and environment.
6-INDIVIDUAL’S RIGHT OF OWNERSHIP IS A FUNDAMENTAL RIGHT
It is improper for an individual to cede this right or right to freely benefit from it.
Only exception to this rule is if individual wants to give it up voluntarily
Contractual increase in debts and loans for deferred payment is unjust. It is not compatible with the requirement of rights to property and entitlement.
Debts should not be susceptible to increase. No added value is generated from them.
ISLAMIC BANKS AND CURRENT CRISIS OF DEBTSIslamic banks were less affected because: They do not buy financial papers based
on debts They do not deal with usurious debts
SETBACKS FOR ISLAMIC BANKS IN THIS CRISIS Islamic banks which dealt with traditional
banks through goods Murabihah have billions of dollars to be paid by the latter
Banks that dealt in Tawarruq (securitization) with their clients and holders of credit cards also have lot of inflated debts to be paid by ailing clients
Banks that invested in global stock markets are also affected
Islamic banks are affected by the financial difficulties of their clients (falling income etc)
LESSONS FOR ISLAMIC FINANCE 1- There is deep seated confidence in
the correctness of Islamic finance because:
Its adherence to funding by sales leases and partnership
Avoidance of usurious loans Avoidance of loans that takes away
finance from real market of production and exchange
Its rejection of circulation and securitization of debts
2-STOP IMITATION OF FINANCIAL PRACTICES DEVOID OF REALITY OF GOODS Avoid contracts that produce no added
value but only shift wealth from one hand to other
Funds of Islamic caution Contracts of compound promises Imaginary contracts of investment Other practices founded upon no real
production or exchange
3-RE EVALUATE CERTAIN FINANCIAL DEALINGS ADOPTED BY SOME ISLAMIC BANKS Dealings which separate finance from
real market and avoid relying on the production of an added value
Avoid dealings which rely on accumulation of debts not accompanied by movement in services or goods
These dealings widen the gap between the real market and the financial market. This leads to financial instability.
4-TRANSACTIONS OF TAWARRUQ AND MURABAHA FOR LOCAL AND INTERNATIONAL COMMODITIES
These represent debts not based on real exchange of goods but on overlapping contracts
They result in illusory financial accumulations
They do not reflect the true identity and goal of Islamic finance
Islamic finance, hence, would fail to maintain its moral purity and fail to apply its moral standards to the measures it follows
5-FINANCIAL MARKETS IN MUSLIM COUNTRIES MUST BE REVIEWED Financial speculations should be limited
and restrictions should be laid down on their different types
Transactions that do not involve real investment should be banned
Systems in some Muslim markets do not allow many derivatives which is one of the most important causes of the crisis
6-VIEWS,OPINIONS AND SOME PRACTICES BE REVISED Short term sale Derivatives and dealings on the same
day Markets of caution Mudawalat (speculations) via the
internet using currency These practices create mentality of
quick profits with spirit of selfishness and speculations
7-PRINCIPLES OF ISLAMIC FINANCE SHOULD BE PRESENTED TO THE WORLD This is part and parcel of true image of
Islam This message is directed to all mankind This is a message of mercy to the world Implementation of these principles
guarantee elimination of oppression They guarantee justice and human
rights. These rights include reaping the fruits
of one’s property, protection against encroachment upon personal property.
8-RE EVALUATION OF FINANCIAL DOCUMENTS FROM SHARIA PERSPECTIVE IS NEEDED Attempts are to be made to perfect
their (documents) rules We need to lay down the organizational
and jurisprudential regulations These regulations should ensure that
they will not slip into forms of securitization that dominated the Western financial markets
9-FIRM STANCE AGAINST SELLING DEBTS There must not be any selling of debts There should be no discounting and
rescheduling the debts even under false names
ISLAM’S GUIDANCE
There hath come to you from Allah a (new) Light and a perspicuous Book. Wherewith Allah guides all who seek His good pleasure to ways of peace and safety and leads them out of darkness by His Will unto the light guides them to a Path that is Straight.Surah Al Maidah 5:15,16
CONTRAST OF FINANCIAL SYSTEMS
Conventional Finance Islamic Finance
Interest and interests based transactions
Deposits and loans
Banks create and destroy money
Interest is forbidden and so no interest based transactions
Equity shares and ownership of real assets in investment projects
Banks do not create or destroy money
CONTRAST OF FINANCIAL SYSTEMS
Conventional Finance Islamic Finance
Asset-liability mismatch, illiquid
Money multiplier depends on reserve ratio, very high; infinite with securitization
Speculation, a casino, debt trading
No asset-liability mismatch, liquid
Money multiplier depends on the savings ratio, very low
No speculation, no debt trading
CONTRAST OF FINANCIAL SYSTEMS
Conventional Finance Islamic Finance
Interest rate not related to real economy, high price distortion
Social inequality: inflation tax, redistributive issues, food riots
Highly cyclical: booms and busts, uncertainties, unpredictable growth
Profit rate determined by real economy, no price distortion
Social equality: no inflation tax, no redistribution
Stable economic growth, predictable
CONTRAST OF FINANCIAL SYSTEMS
Conventional Finance Islamic Finance
Massie bankruptcies, contagions, bailouts
Interest rate policy, highly destabilizing
No systemic bankruptcies, no bailouts
No interest policy, money aggregates are used, highly stable