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An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
An Islamic Approach to Investment.
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An Islamic Approach to Investment.

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Dato' Mohamed Iqba, Trustee - Taqwa Foundation - Malaysia

Dato' Mohamed Iqba, Trustee - Taqwa Foundation - Malaysia

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  • 1. FAITH CONSISTENT INVESTING “Valuing Your Faith is Valuing Your Money” ~The Islamic Attitude and Approach to Investment~ Presentation Made By: DATO’ MOHAMED IQBAL RAWTHER Trustee, Taqwa Foundation, MALAYSIA And Trustee, Muslim Agency for Development and Enterprise in Europe [MADE in Europe] TBLI CONFERENCE ASIA 2009 Yokohama, Japan 28 May 2009
  • 2. <ul><li>ABSTRACT </li></ul><ul><li>AN ISLAMIC APPROACH TO INVESTMENT </li></ul><ul><li>The global economic crisis has revealed the inherent weakness and vulnerability of the financial systems. </li></ul><ul><li>Could the disaster been mitigated? </li></ul><ul><li>The Islamic approach – in which faith plays a dominant role – is a possible answer. </li></ul><ul><li>The presentation addresses the basic tenets of Islamic investment principles that have shyed away from disaster prone products of conventional banking. </li></ul>
  • 3. <ul><li>SUMMARY OF PRESENTATION </li></ul><ul><li>The conventional economic wisdom is that “the Invisible Hand” directs the market to perfection. The fundamental assumption was that there will be as a result, equity, fairness and consistency in the market place. </li></ul><ul><li>This notion has been dealt with a “death blow”. Markets have been wrecked, leading to the failure of financial and business entities. </li></ul><ul><li>The global banking system has served the rich. The creation of wealth has been lob-sided to begin with. The wreckage created by the failure and the collapse of financial institutions, have created a wider chasm. </li></ul><ul><li>There will be more poor people with less and less opportunities for earning a livelihood. </li></ul><ul><li>One root cause for the failure of institutions and together with it the markets, is human greed and the coercive power exercised by those in whom authority is vested. </li></ul>
  • 4. <ul><li>The absence of conscience, devoid of moral conduct and ethical behaviour, has been a contributory factor. </li></ul><ul><li>There is a role for faith in modern economy. In fact faith based economic behaviour is an important ingredient for sustainability. The use of natural resources and human capital and human-created assets should be for enrichment and not for impoverishment. </li></ul><ul><li>There is a dire need to restructure economic institutions, which will work for all. There should be a greater access to education, power and privileges on an equitable basis. </li></ul><ul><li>To achieve this objective, Islamic economic system and the related financial models rely on the “shariah” – God given laws – for their conduct. It is God’s Hand that direct a just and equitable system. </li></ul>
  • 5. <ul><li>GLOBAL ECONOMIC CRISIS </li></ul><ul><li>- individual, institutions, country </li></ul><ul><li>Iceland </li></ul><ul><li>Pakistan </li></ul><ul><li>Hungary IMF for short-term liquidity </li></ul><ul><li>Serbia </li></ul><ul><li>Ukraine </li></ul><ul><li>Turkey </li></ul><ul><li>South America </li></ul><ul><li>Eastern Europe lining-up </li></ul><ul><li>Africa </li></ul><ul><li>East-Asia </li></ul>PART I
  • 6. <ul><li>DIMENSIONS &amp; RESPONSES OF </li></ul><ul><li>THE GLOBAL FINANCIAL CRISIS </li></ul><ul><li>Asset Prices Fall </li></ul><ul><li>asset values – dropped – capital and wealth drop in value </li></ul><ul><li>US housing prices fall </li></ul><ul><li>Value of Asset Backed Instruments Fall </li></ul><ul><li>sub-prime </li></ul><ul><li>mortgage crisis </li></ul><ul><li>Financial Institutions Fall </li></ul><ul><li>Northern Rock – Large British Bank – 2008 </li></ul><ul><li>Federal Reserve – Bear Stearns </li></ul><ul><li>Countrywide Financial by Bank of America </li></ul><ul><li>Lehman Brothers PANIC </li></ul>COLLAPSE mortgage default, securities value – down, derivates Government Purchase Suspension of market – to market rules on investment Government equity and loans PART I
  • 7. <ul><li>Credit Curbs </li></ul><ul><li>financial institutions – unwilling to lend </li></ul><ul><li>(credit crunch) no capital - capital inadequacy </li></ul><ul><li> credit crunch </li></ul><ul><li>Dollar Shortage </li></ul><ul><li>industry economy shortage of US$ - world needs US$ </li></ul><ul><li>Reserve currency imports paid in US$ </li></ul><ul><li>Reduction in aggregate demand </li></ul><ul><li> collapse of aggregate demand </li></ul>REDUCE DEBT DELEVERAGING INCREASE CAPITAL Interest rate reductions Quantitive easing Dollar lending (swap lines) Government Package
  • 8. <ul><li>Bank moving to the wrong end of the spectrum </li></ul><ul><li>banks – utility - deposits – make loans </li></ul><ul><li> wholesale money market </li></ul><ul><li>– some were better at taking deposits </li></ul><ul><li> others better in giving loans </li></ul><ul><li>wholesale grew - and grew </li></ul><ul><li>1980 securitisation – </li></ul><ul><li>package of mortgages – to other financial </li></ul><ul><li>repackage – complex financial instruments </li></ul><ul><li>underlying risk – NOT known </li></ul><ul><li>2007 lenders - ? The underlying security value </li></ul><ul><li>untradable </li></ul><ul><li>toxic </li></ul><ul><li>credit crunch </li></ul><ul><li>utility casino </li></ul><ul><li> </li></ul>Regulate the casino or separate utility from the casino
  • 9. <ul><li>THE ISLAMIC PERSPECTIVE </li></ul><ul><li>Human Being </li></ul><ul><ul><li>True identity </li></ul></ul><ul><ul><li>Purpose on Earth </li></ul></ul><ul><ul><li>Destiny </li></ul></ul><ul><li>ISLAM TEACHES </li></ul><ul><ul><li>Man </li></ul></ul><ul><ul><ul><li>Has innate nobility </li></ul></ul></ul><ul><ul><ul><li>Has Allah – God given strengths </li></ul></ul></ul><ul><ul><ul><li>Has many weaknesses </li></ul></ul></ul><ul><ul><ul><li>(by the freedom of choice given) </li></ul></ul></ul><ul><ul><ul><li>Guided to fulfill </li></ul></ul></ul><ul><ul><ul><li>TRUE HUMAN NATURE </li></ul></ul></ul><ul><ul><ul><li>Commanded by Qur’an modeled by the Prophet </li></ul></ul></ul>PART II “ the mission”
  • 10. MAN’S DUAL NATURE PHYSICAL similar to other creatures INTELECT Unique to only humans RESPONSIBILITY PERSONAL COMMUNAL ISLAMIC MODEL OF HUMAN ENSURES MAXIMUM BENEFIT FOR ALL INDIVIDUALS AND FOR THE COMMUNITY AS A WHOLE
  • 11. <ul><li>ISLAM – a way of life. All embracing, comprehensive. “From Womb to Tomb” [in fact beyond the tomb to the “hereafter” ] </li></ul><ul><ul><li>The rational being is replaced by the “faithful” being bound by society and communal interest. </li></ul></ul><ul><ul><li>A branch of knowledge that aims, at analysing, interpreting and resolving economic problems with reference to the methodology of Islam </li></ul></ul><ul><ul><li>Islamic economics broadens conventional economic analysis by exploring religious and moral aspects of economic life. </li></ul></ul><ul><ul><li>Conventional economics is a predominantly secular discipline maintaining difference between the positive and normative </li></ul></ul><ul><ul><li>Resources </li></ul></ul><ul><ul><li>All resources are God – given </li></ul></ul><ul><ul><li>ownership – all belongs to God </li></ul></ul><ul><ul><li>individual – only a Trustee – is accountable to God for His actions </li></ul></ul><ul><ul><li>Islam widens the concept of utility in 3 ways : </li></ul></ul><ul><ul><ul><li>- Utility encompasses the spiritual as well as the material </li></ul></ul></ul><ul><ul><ul><li>- Utility is extended from this life to the next life </li></ul></ul></ul><ul><ul><ul><li>- Well being requires a concern for the welfare of others </li></ul></ul></ul><ul><li>QURAN : human beings – khalifa – vicegerents must voluntarily obey and observe “ SHARIA ”- which regulates life. </li></ul><ul><li> “ We sent aforetime our messengers with clear Signs and sent down with them the </li></ul><ul><li>Book and the Balance, that men may stand forth for justice” (Surah Al-A’raf : 25) </li></ul>ISLAMIC ECONOMIC SYSTEM - JUSTICE personal (individual enterprise) social individually self destructive collectively
  • 12. <ul><li>CREATOR – CREATION </li></ul><ul><ul><li>TRUST POSITION </li></ul></ul><ul><li>– Khalifa – Vicegerent </li></ul><ul><li>Allah is the owner </li></ul><ul><li>Man is an agent/Representative </li></ul><ul><li>Responsibility to look after (eco systems) </li></ul><ul><li>Manage in the ways prescribed </li></ul><ul><li>Bestowed with – intelligence, intuitive moral sense (inborn ability) </li></ul><ul><ul><ul><li>A Muslim accepts revelation as the basis of ethics and justice </li></ul></ul></ul><ul><ul><ul><li>Natural Preference for </li></ul></ul></ul><ul><ul><ul><li>- what is good/desirable </li></ul></ul></ul><ul><ul><ul><li>- Rejection of evil/undesirable </li></ul></ul></ul><ul><ul><li>Embedded in the notion of trusteeship is a call for conduct based on a code of personal ethics and a blueprint for justice. </li></ul></ul><ul><li>“ Allah doth command you to render back your Trust to those to whom they </li></ul><ul><li>are due, and when ye judge between man and man, that ye judge with justice : </li></ul><ul><li>verily how excellent is the teaching which He gives you! </li></ul><ul><li>For Allah is HE who hearts and sees all things” </li></ul><ul><li>(Surah An-Nisa’ : 58) </li></ul>
  • 13. <ul><li>BASIC ISLAMIC PRINCIPLES </li></ul><ul><ul><li>Islam had to deal with monetized free market exchanges from its inception. </li></ul></ul><ul><ul><li>Trading was extolled. Needed to determine what particular forms of trade and exchange were unjust. </li></ul></ul><ul><ul><li>A detailed framework prohibits usury, gambling , gharar , extravagance, hoarding, fraud and corruption, and encourages benevolence and mutual cooperation. </li></ul></ul><ul><ul><li>While the market is retained, the aim is to reform it ‘internally’ and on an ethical footing – ‘justice in exchange’. </li></ul></ul>
  • 14. <ul><li>CAUSES FOR FAILURE FROM AN ANALYTICAL POINT OF VIEW </li></ul><ul><ul><li>lax lending standards </li></ul></ul><ul><ul><li>Weaknesses in the credit transfer process </li></ul></ul><ul><ul><li>Overly optimistic assessments of structured securities </li></ul></ul><ul><li>FROM AN ISLAMIC PERSPECTIVE THE CAUSES ARE MORE FUNDAMENTAL </li></ul><ul><ul><li>greed </li></ul></ul><ul><ul><li>gharar – signifies ambiguity, uncertainty or lack of specificity in contracts. Islam insists information be easily accessible to all. </li></ul></ul><ul><ul><li>Speculation – speculation and gambling prohibited in Islam because it destroys the moral, economic and social fabric of society. </li></ul></ul><ul><ul><li>Governance – in the Islamic system discipline is provided by religious auditing. </li></ul></ul><ul><ul><li>Fixed interest debt (usury) – Islam prohibits riba (usury) and interest debt. </li></ul></ul><ul><ul><li>financialization </li></ul></ul>
  • 15. <ul><li>THE WESTERN RESPONSE </li></ul><ul><ul><li>Greed treated as fact of life, endemic and incurable </li></ul></ul><ul><ul><li>Countered by ‘external’ constraints through regulation </li></ul></ul><ul><li>THE ISLAMIC BASE </li></ul><ul><ul><li>The holy Qur’an accepts people as greedy and possessive </li></ul></ul><ul><ul><ul><li>“ Truly Man is, To His Lord, Ungrateful; </li></ul></ul></ul><ul><ul><ul><li>And to that (fact) He bears witness (By his deeds); </li></ul></ul></ul><ul><ul><ul><li>And violent is he In his love of wealth” </li></ul></ul></ul><ul><ul><ul><li>(Al Adiyat 100:6-8) </li></ul></ul></ul><ul><ul><li>the faithful person relies on altruism, co-operation, brotherhood, fraternity, affection and mutual respect to rein in selfishness and lust for riches </li></ul></ul><ul><ul><li>Self-restraint a discipline in areas that regulation cannot reach </li></ul></ul>
  • 16. <ul><li>FINANCIALIZATION </li></ul><ul><ul><li>Islam rejects debt and prefers PLS financing </li></ul></ul><ul><ul><ul><li>Position undermined by use of murahaba, bai’muajjal, istisnaa, ijara, sukuk </li></ul></ul></ul><ul><ul><ul><li>the ‘ijtihadi’ instruments). </li></ul></ul></ul><ul><ul><ul><li>These look like interest, but differ from conventional finance. </li></ul></ul></ul><ul><ul><li>In the West with growth of ‘financialization’ </li></ul></ul><ul><ul><ul><li>The value of financial assets greatly exceeds that of tangible assets </li></ul></ul></ul><ul><ul><ul><li>In some European countries financial claims are multiples of GDP </li></ul></ul></ul><ul><ul><ul><li>(in the UK four times and Iceland eight times) </li></ul></ul></ul><ul><ul><li>In the Islamic system financing is based on real goods. </li></ul></ul><ul><ul><ul><li>- Financing expands with the growth of the real economy, constraining excessive debt and unchecked credit creation. </li></ul></ul></ul><ul><ul><li>No decoupling of financial activity from tangible asset investment as in the West. </li></ul></ul>
  • 17. <ul><li>CRISIS COULD HAVE BEEN MITIGATED FROM AN ISLAMIC ECONOMIC PERPECTIVE </li></ul><ul><ul><li>If greed can be tempered internally by self-restraint </li></ul></ul><ul><ul><li>If mortgage borrowers had been fully informed </li></ul></ul><ul><ul><li>If speculation and risky trading is forbidden </li></ul></ul><ul><ul><li>If religious principles are written into bank governance </li></ul></ul><ul><ul><li>If usury is banned and financing based on concrete assets </li></ul></ul><ul><ul><li>If the financial sector does not outstrip real activity then the conditions that arose might have been avoided and the crisis mitigated. </li></ul></ul>

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