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    Golobalfinancialcrisis 090703155108-phpapp01 Golobalfinancialcrisis 090703155108-phpapp01 Presentation Transcript

    • REASONS AND ISLAMIC SOLUTIONS
    •  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
    •  Undue burden of real estate funding contracts  Loan guarantee contracts  Securitization  Debt securities trading  Credit derivatives  Credit default swaps
    •  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
    •  Down sizing and closure of businesses  Reducing employment and laying off workers  Decline in demand for consumer goods  More decrease in employment
    • 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.
    •  These transactions do not produce any added value to the market  Huge amount of money and great human capacities are invested in them
    •  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
    •  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
    •  This has been the foundation of funding in capitalist system  It does not produce any added value by itself
    •  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
    •  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
    •  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
    •  This led to inflation in the process of financial exchange at both levels: 1- Local 2- International
    •  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
    • 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
    •  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
    •  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
    •  Avoid increase in public debt  Measures  Taxes be taken to decrease public debt be imposed upon wealthy
    •  Dealing in derivatives be immediately stopped  Their remnants must be gradually dissolved, specially the credit derivatives
    •  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
    • 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
    •  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
    •  Securitization of debts be banned  Only taskik ( financial documentation) be used. In taskik, the financial documents represent real assets excepting debts and money.
    •  These processes do not create any added value.  Strict restrictions be placed for discounting and rediscounting of debts
    • 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.
    •  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 were less affected because:  They do not buy financial papers based on debts  They do not deal with usurious debts
    •  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)
    • 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
    •  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
    •  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.
    •  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
    •  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
    •  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
    •  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.
    •  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
    •  There must not be any selling of debts  There should be no discounting and rescheduling the debts even under false names
    • 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
    •  Interest and interests based transactions  Deposits and loans  Banks create and destroy money Conventional Finance 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 Islamic Finance
    • Asset-liability mismatch, illiquid  Money multiplier depends on reserve ratio, very high; infinite with securitization  Speculation, a casino, debt trading  Conventional Finance No asset-liability mismatch, liquid  Money multiplier depends on the savings ratio, very low   No speculation, no debt trading 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, un predictable growth Conventional Finance Profit rate determined by real economy, no price distortion  Social equality: no inflation tax, no redistribution  Stable economic growth, predictable  Islamic Finance
    •  Massie bankruptcies, contagi ons, bailouts  Interest rate policy, highly destabilizing Conventional Finance No systemic bankruptcies, no bailouts  No interest policy, money aggregates are used, highly stable  Islamic Finance