Mohamad
Ammar Atan & Ganeshwaran Kana
Faculty
of Economics and Administration,
University
of Malaya
2014
Abstract
Throughout history, economics has played
its significance in alignment to the rise of human civilisation. Like the
Darwin’s theory of evolution, the economy has progressed from a simple system
to a model shrouded in complexity. In this modern world of financial structure,
the fundamentals are relatively more Western-oriented. Conventional economic
system, as it is named, are shaped according to many school of thoughts derived
from profound pundits of economics like J.M. Keynes and Hayek. It is this
conventional economic system, albeit the fact that even this experts have
conflicting ideas, which is now predominant and is now manifested, worldwide.
With the “endorsement” of this system, many international conglomerates have
made their bucks and even leaders have brought many tangible developments to
their sovereign states. Looking into the past, however, this much-celebrated
conventional economic system has delivered failures and is increasingly
subjected to scepticism, in recent times. The Great Depression 1929, the Asian
Financial Crisis, 2008 Wall Street-induced Crisis, numerous market crashes and
bubble bursts stand as testaments to indicate the intangible loopholes of the
economic system that is failed to be resolved completely by anyone, so far
creating distrust on the economic model that is in execution. However, a new
dawn to the economic system is inevitable. With Islamic economy stamping its
“footprint” in our modern history, despite the fact that it has been around
since the period of Prophet Muhammad, the reception is seem to be gradually
inundating. Gone are the days where Islamic economy was not given due
attention. Now, the Islamic economic model is seen as a promising alternative
internationally. More and more financial intermediaries are adopting the values
of Islamic economy and have even established a branch for Islamic finance under
their business structures. Islamic economy which nurtures the virtue of just
and moderation could be a great response to regional and international crisis
like in the Eurozone and the States. Ultimately, this emerging wave of Islamic
economy could mark its presence and deliver benefits to resolve existing
economic problems.
Keywords;
Great Depression, Riba’, Uncertainty, Gambling, Islamic Economy, Conventional Economy,
Debt, Interest.
Introduction
The Great Recession of 2007 has sparked
more disputes and arguments among global economists and financial pundits on
the loopholes in the conventional economic system that has paved the way for severe
economic meltdowns ever since the Great Depression. In late 2007, in which due
to financial mishandling and lackadaisical regulation from the relevant
authority, the United States’ financial street, Wall Street trading plunged
dramatically leading to a “domino effect” globally, especially in the
developing worlds.
While there are many reasons quoted for
this downturn (short-selling, housing bubble burst and debt), an analysis done
by unfolding the history tells us that many recessions that have shattered the
global and regional economies in the past, originate from the very similar
reasons.
Taking a look at the devastating 1930
Great Depression, it is noteworthy to say that it was caused by failure of the
US government efforts to regulate interest rates, curtail widespread bank
failures, and control the money supply. This recession alone took some 10-15
years to recover. Fast forward to 1987 when another downturn took place due to
financial mismanagement. Whilst the popular theory relating to this crash is
connected with program trading, many other economists have also highlighted few
other reasons that led to the market crash. As New York University's Richard
Sylla puts it, elements i.e. foreign exchange and interest rates have actually
forced the market to plunge.
In 1997, economies in the East Asian
region were heavily affected as speculative forex trading resulted in severe
drop in regional currencies’ values. Initiating from Thailand, the effect
spread into other countries, mostly affecting nations such as Malaysia,
Indonesia and South Korea. These economies were heavily affected and ended up
in huge debt due to extensive borrowing for the sake of bolstering the economy.
To resolve the recession, international body such as International Monetary
Fund (IMF) stepped in to offer financial aid in the form of “structural
adjustments package” to rescue the economies from further deterioration.
However, the initiative taken by IMF was met by scepticism as many argue
against the pitfalls within the IMF “rescue mission”.
And six years back, the entire globe
witnessed another recession, nicknamed the Great Recession causing countless
economies to suffer from economic maelstrom. As identified by experts, rising
debt, speculation and housing bubble burst in the United States and few other
developed economies, have led to the recession.
This paper will further elaborate on the
loopholes in the conventional economy worldwide, concepts of Islamic economy
relating to the loopholes and challenges that can be faced in emphasising Islamic
economy as an alternative to the status quo.
Loopholes in the
Conventional Economy
Debt
Islamic economy propagates on the
negativity of debt, even more if it includes trading of debt. Under the
conventional-style economy, debt has gripped a major role in the name of
generating profit for those with capital and in the name of “helping” those in
need. The Great Recession which emerged in late 2007 has shown many failed
financial intermediaries’ profit and revenue heading south. Coupled with the
housing bubble burst that hit many developed economies including the United
States, many institutions that were once flying high in Wall Street like the
Lehman Brothers, to name, had to file bankruptcy.
What had caused this financial system
meltdown which later on, translates into devastating economic recession that
pulled almost the rest of the world into crisis had been very inevitable for
few years even before the Great Recession. Economic pundits such as
RaghuramRajan and NourielRoubini, to name a few, have well predicted the major
cause that shall raze the world economy and yet, no concerted actions were
taken to counter the looming threat. Yes, these economists have guessed it
precisely; DEBT.
After financial institutions entered the
age of prosperity for financial services, competition amongst the players has
become more pressing and undeniably tangible. New financial products were
introduced to attract increasing number of clients. However, at the same time,
the ultimate aim of maximising profit was never forgone. Products such as collateralised
debt obligation (CDO), sub-prime mortgage and credit-default swaps (CDS) were
introduced to attain the goal.
However, as profit-maximising takes
centre-stage, these risky products are bound by loose regulations and requirements.
Despite the clear indication of the threats posed by these products with fewer
regulations, financial intermediaries continued to dish out more loans to the
sub-prime groups and further securitized CDOs. As predicted, the market crash
came in 2007 and shattered the entire economic activities, leaving many
financial conglomerates and institution on the verge of bankruptcy.
This paradoxically, has prompted the
aggressive advocate of “free-market enterprise” of the world, the United States
of America to bail-out these troubled financial providers at a whopping USD 9.7
trillion of the taxpayers’ money. In spite of severe backlash from the masses
due to the usage of public funds in the “rescue mission” of the ailing
financial institutions, financial behemoths such as the Citigroup, Goldman
Sachs and American International Group (AIG) were bailed out by the Obama
administration.
Looking at the case of CDOs, there are
stark disparities between conventional and Islamic economy. Conventional
economy allows the trading of debt while it is strictly prohibited in Islamic
economy. Islamic economy provides clarity on the need of transactions based on
the basis of “real economy” and prohibits nominal transactions with no real
value such as debt-trading.
Such activities have caused the
accumulation of debt and has finally resulted bankruptcy and loss of share
value as the market performance slides down.
Interest
In the conventional market, interest is
one of very imperative feature in the process of business. The proscription of
interest on loan repayments it can be proven by quotation from Quran in Surah
Ar-Rum Verse 39. The prohibition applies to any advantage or benefits that the
lender might sheltered of out the loan such as riding the borrower’s mule, eating
at his table, or event taking advantage of the shade of his wall” (Kettell 5).
This citation can be interpreted as the reimbursement the lender cannot receive
benefits for the services they provide because it is an lopsided allocation of
exertion between both parties.
The
interest or known as usury are one very decisive conception in economy, where
it’s dealing the large fragment of modern-day economy, it’s also the reason
that lies behind the severe crisis that pedals the global financial system as
it is considered the sole drive of the economy, and the perfect mechanism
through which resources are allocated and wealth is distributed. It is the
heart of the capitalist idea since ancient times, the idea that criticisms and
the series of financial crises failed to review or dispose and find alternative
mechanisms.
The
history has verified to us that interest or usury play as a factor for the
recession or the crisis in 1930s, 1987s, 1998s, 2008s and the depression in the
conventional economy is never been done. In a recession, people stop buying
things as much as they used to. Many people are jobless and save their money to
use on naked necessities. The decision made history. On January 8th the Bank of
England cut the base rate from 2% to 1.5%, the lowest since the central bank
was founded in 1694. The Bank of England's mission then was to provide war
finance. Its task now is to fight a recession that looks increasingly likely to
be the worst since the Second World War. Seem like the crisis causing from
interest has global effect in various of scope in economy.
The
interest system has led to the wide broaden of usury, and produced a series of
crises and shocks such as the latest mortgage crisis which discovered openly to
the attention of the world the amount of greediness of the capitalist
speculators in the capital markets through the expansion of the usurious
lending and borrowing, aiming to achieve more profits regardless of the dangers
and consequences that may harm humanity. It is not of any apprehension of folks
speculators and bank managers, but on the contrary, this crisis and the Dot-com
bubble before it began due to the reckless behavior of the banks and the
American lending institutions that push the borrowers to purchase homes into
more consumer loans just because of an exceptional boom in real estate prices with
full prior knowledge that they are exposed to bankruptcy and failure to pay at
the first shake down of the financial sector.
Speculation
In the stock market, the processes are
mostly based on speculating prices. This speculation may lead to stock assessment
in the stock market worth more than its original value or a lot less. Gambling
is the doing that are forbidden in all religions, especially in Islamic finance
forbids financial speculation, or Qimar, but due to the capital system where
they put the priority of money as a God, thus the lotteries, competitions,
stock markets, etc is been permitted. It is not permissible to earn a profit
from speculation. Gambling is therefore not permitted under Shari'a. Any
contracts or arrangements which involve speculation are also not permitted.
That said, it is accepted under the Shari'a that there is an element of
speculation in most commercial arrangements and, unlike the absolute
prohibition of interest, it is a question of the degree of speculation involved
and whether the intention behind the transaction is to realise a gain from some
productive effort or purely speculation.
The
stock contracts do not impose the seller to present what he had sold, neither
the buyer to present what he had bought, but it is mere bets on the profit of
future contracts with no delivery or receipt, rather the settlements are made
depending on the differences in price. This creates an imaginary speculative
economy far from the real economy. Obviously the profit of young investors depends
on luck and lottery not on financial analysis and budget review of which
investor are not capable, even with the help of some analysts as the latter
have no responsibility, so they would cheat him. The depending on luckiness in
the work is the major problem when
dealing with this area. Major investors in the stock markets deceive the minor
ones, drain their savings, and lead them to bankruptcy. Hence, the stock market
involves religiously forbidden and unethical behaviors that must be disposed to
become a legal market that liquefies stocks and finances projects without
speculation, betting, gambling, risk, and deception. Such behaviors are all
non-productive, even harmful, and at their best what one makes another loses.
When
the usurious interest has dominate and its major growth in short period led to
selling loans progressively with any consideration to their actual value, this
resemble gambling which is mentioned in the Holy Quran which criticized and
forbade it Almayser(الميسر - gambling)
comes from the Arabic word al yusr (اليسر ) meaning ease, because it is money
that is earned easily with no effort or hard work creating an idle class of
gamblers in the community who seek easy money. This behavior is a negative
behavior that causes loss without compensation and illegally seizures the money
of people with no effort.
All
sorts of financial speculation activities that control the world capital
markets, excluding what were controlled by Islamic restrictions with no
gambling and illusory profits, it contributes in making people used to laziness
and expecting to make a living through deceptive ways. It also weakens the mind
by making people neglect the right ways in earning, and also neglect the
productive work such as agriculture, industry and trade which are the
cornerstone of human development that is broader than development. The loan
selling phenomenon that caused the mortgage crisis in the United States was a
mere modern gambling operation that was conducted through securitization of
those property loans through collecting and converting them into bonds and
marketing them in the global financial markets. The securitization operations
led to an increase in the amount of unpaid debts due to the doubtfulness of
many of these loans, which caused a decrease of more than 70% in the value of
the property bonds in the American market.
Concepts
of Islamic Economy
Islamic economy elaborates few
fundamentals as basic concepts to uphold the virtue of Islam and nature of the
Islamic economy itself. These concepts are derived from the al-Quran, hadith
and al-Sunnah. Muslims scholars carve out the structure of Islamic economy or
even financial products by reference to these concepts. Those concepts
highlighted below bear relevance to the problems that have caused economic
recession in the past. To recapitulate, those problems in the current
conventional-style economy are debt-trading,
presence of interest and the
activity of speculation.
Gharar
Islamic economy touches on the concept
of “gharar” which refers to uncertainty. The presence of any element of
excessive uncertainty, in a contract is strictly prohibited. This includes trading
in derivatives, short selling and other speculative transactions like
day-treading. These activities involve risk-taking and may lead to unbearable
risk. As can be seen in speculation, the final result of speculation provokes
uncertainty and may cause an individual to suffer loss while others gain
greatly. In the 1997 Asian Financial Crisis, speculative buying and selling of
traded currency have resulted many economies to suffer downturn whilst the
speculators enjoyed a windfall. If “gharar” is eliminated from the
conventional-style economy, such problems could be ultimately averted.
Prohibition
of Riba
As discussed earlier, “riba” or interest
is strictly prohibited as riba enables the capital lender to earn more than
what he or she should have earned at the expense of the borrower. Ismail Ozsoy,
professor of economics in Fatih University, Istanbul argues that the main
characteristic of interest is that either the borrower or the lender would
absolutely and inevitably be subjected to a loss and an injustice in any case,
for its rate is fixed at the very beginning, but it is impossible to predict
the outcome of the business at which the loan is used, profit or loss, or how
much either would be. Thus, it can be identified with an absolute injustice for
either side of the transaction. It does not matter whether the interest rate is
high or low and whether it is called interest or usury because the different
kinds of interest or different rates change only the address, or the direction,
of the injustice; it is sometimes the payer and sometimes the receiver of
interest who is exposed to this injustice and/or financial loss. Thus, if riba
or interest is eliminated from the financial system, a more equally distributed
economy can be realised.
Islamic
Economy and Challenges
Islamic financial economic system is
based upon a system of values, ideals, and ethics, such as honesty,
credibility, transparency, evidence, facilitation, cooperation, integration and
solidarity. There is no Islamic economic system devoid of morality and values.
This system is painstaking a grantee that assures security, safety and
stability to all dealers. At the same time the Islamic shariah forbids
financial and economical transactions which are based on lies, gambling, fraud,
deceit, ignorance, monopolies, exploitation, greed, injustice, and the taking
of money of others wrongfully. In order to hold all the principles of Islamic
Economics, we will to dealing with such harder challenges when crisscross with
market demands, as a result the hilah (legal trick) have been using in this
market.
Islamic
economy since a long ago facing such lot of challenges, the prime challenges is
to go well with frame of mind of financers, economists throughout globally and
also to dealing with conventional market where vastly dealing with interest,
gambling, cheating, etc. Forthrightly, it is very contrary with Islamic way, it
can be saying that there are more differences rather than similarities,
particularly in aspect of principal for both of economics. Apart from being under
the sunshade of the conventional system, law and its framework, one of the
major challenges for Islamic economics, such as Islamic Finance Institution
(IFI) and Industry today is the enthusiasm of investors and customers
themselves. These peoples consist of those outside the Islamic financial
institutions such as corporate companies, high net worth individuals and
suburban customers whom are the predominant subscribers to the Islamic
Financial Institution's products. The other part of the investors is the
Islamic bank and the insiders of the Islamic financial institutions such as
their shareholders and the management squad.
In
order to gratify the financer and also to scuffle with the conventional
markets, the Islamic economics or finance need to come out with the products
indistinguishable to their conventional counterpart’s product features such as
a fixed return investment. These investors usually wanted the return and their
capital to be assured, but they just wanted it to be Islamic or halal. This kind
of demand creates bona fide challenges to the management of the Islamic banks
as there in no assured capital and return under the classical Islamic
investment contract such as Mudarabah and Musyarakah (except if it is coming
from the independent third party). There has a lot of Islamic product that been
creates in order to execute the demand of customers but it is still measured as
sharie product. The example of Islamic product is like Bai Al-Inah(Discounted
Debt Trading), TawarruqMunazzam (Organized Tawarruq), Financial Lease,
BaiBithmanAjil (BBA), Wakalah (Hire purchasing agency-i), Ijarah (Leasing-i)
etc, have been created to execute such flimsy market appetites.
The
unhealthy appetites in the financial market or even in economic markets are one
of the biggest challenges for the Islamic to dealing with this comportment. In
order to execute the demand of the market IFI’s (Islamic Financial Institution)
will have to fracture their head in finding hilah (legal trick) or else their
product to be expected to be deemed
undoable, not sufficient, unmarketable and sooner or later will bring the
Islamic Financial Institution (IFIs) down to earth.
Additionally,
the dishonored moral of the capitalism is one of the challenges where this kind
of manner causes the plague. The economic and financial transaction in the
conventional (capitalist) thought are based on the principle of the end
justifies the means and the basis of laissaize fair, let him work. The
intrusion of the government in controlling the transaction is limited or
sometimes non-existent. If a group now seems to realize the inevitability of
the dedication to morals, the rationale in this case is that ethics sometimes
help in achieving more wealth, profits and growth. The real target is not that
ethics are values and ideals of humanity which must be abided by and are
rewarded by Allah. The corrupted morals or attitude will be pairing with the
effects, one of the effect is when small group of people who dominate the
country’s economy and spread corruption, at the expense of the poor, hungry and
ill. Some analysis that by Dr.AbdelhakHamiche as Associate Professor at Qatar
Faculty of Islamic Studies founded that the main causes of the financial crisis
are the spread of tyranny and corrupt morals, or at least the absence of
commitment to good morals. And this is the major of challenges when we try to
implement Islamic way in the economy.
Interest
rates in the conventional economy are largely dependent on economic condition.
Even the interest is one of the core values in conventional economy. During
periods of economic conditions, the increased demand for money places upward
pressure on interest rates. As far as we concerned that is Islamic economy is
prohibit the interest, the first ever verse revealed on interest also known as
riba was Surah Ar-Rum Verse 39 and the next occasion when interest is mentioned
is in Surah Nisa and others. Since interest rate is one of the fundamental in
Conventional economy, we very sure that it is most hardest way to erased it from
the economy, but we do believe that Islamic scholars or Islamic economists will
gained up together to solve the problem by prudent way as long as it is legal
in Islam.
Last
but not least, the challenges of implementation of Islamic economy will face
such impatience of markets that been controlled by those who are targeting
profit only. Thus this profit hunter
would instigate lot of difficulties to the shariah advisors as well as to the
industry. As a result the Islamic market or industry has to follow the
detrimental demand as attraction to them by creates products that can move
forward more than the conventional way. Any product which is beyond doubt
Islamic but non-saleable will not be introduced at all, even though it might be
marketable if there is somebody to begin the flicker. Yes we understand the
difficulties, but such appetite if followed persistently, it could potentially
intimidate to weaken Islamic brand names and minimize their margins of respect.
We don’ want to Islamic economy especially in Islamic financial industry to
blindly imitating conventional products or method because such stratagem would
deprive them of their special status as Islamic banks which enormously operate
in non-riba based transaction and could be the main magnetism to a large
population of Muslim
Conclusion
To sum up, the status quo has inevitably
indicated many pitfalls exist in the widely-utilised conventional-style
economy. However, Islamic economy offers solutions through its unique concepts
and ways of implementation to resolve the predominant problems of the
conventional-style economy. If Islamic economy is widely accepted as a new
financial system on its own rather than as a complement to the existing system,
many problems could be fixed.
This, however, is not easy as said.
Firstly, the structure of Islamic economy has to be further strengthened to
pre-empt any reoccurrence of problems that existed in conventional economy.
With the strengthening of its fundamentals and services that caters to people
beyond boundaries, acceptance to this religious ethical economy will be seen
increasing.
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