An Islamic Approach to Investment.


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Dato' Mohamed Iqba, Trustee - Taqwa Foundation - Malaysia

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An Islamic Approach to Investment.

  1. 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. 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. 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. 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. 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. 6. <ul><li>DIMENSIONS & 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. 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. 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. 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”
  11. 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. 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. 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. 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. 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. 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. 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>