CAN ISLAM SAVE THE ECONOMY?

Governments worldwide are struggling to manage the global financial crisis, with no end to the downturn in sight. But at least so far, one sector has been unscathed: the $1 trillion-and-growing business of Shariah-compliant banking.

That’s right, Shariah. The same combination of medieval Islamic law and modern post-colonialism that makes the terrorist clique supposedly so hateful of Western freedoms. Where finance is concerned, most muftis—Islamic religious scholars—agree that God prohibits charging any amount of interest on loans. Trading debt and risky speculation are off-limits too, as is investment in immoral enterprises like gambling, prostitution, and war profiteering. Transactions should be highly transparent and risk, as well as return, should be shared by all parties. You can’t trap people into owing more than they can pay. Basically, most everything that caused the current mess isn’t allowed. “Given their constraints, they actually don’t hold any conventional debt or conventional mortgages,” explains Samuel Hayes, emeritus professor of investment banking at Harvard. “They don’t have any of these derivatives or outright subprime loans. There’s no doubt that they have weathered this better than the conventional banks.”

From the view of Islamic law, writes Umar Chapra, a leading economist in Saudi Arabia, “while economic growth is essential, it is not sufficient for attaining real human well-being.” Rather, we depend on “spiritual health at the core of human consciousness, and justice and fair play at all levels of human interaction.” Much more than a business model for specialty banks, he and many others believe that Islamic economics offers a much wider vision. The conventional view of the homo economicus—super-rational, selfish utility maximizer—dehumanizes people, denying the divine stamp on our nature. A truly Islamic economic theory, they believe, should restructure consumer preferences, ensuring that basic necessities are plentiful and luxuries come only after everyone is provided for. People should feel motivated to work by knowing that they share equitably in the produce of their labors. Shariah guidelines for inheritance distribute wealth among families in ways that prevents too much accumulation. More than an economics in the usual “dismal science” sense, this is a comprehensive rulebook for playing well with others. It also claims its authority from God.

The theory has something in mind for governments as well. They are responsible for administering the zakat tax, one of the Five Pillars of Islam. Though often translated as “almsgiving,” it literally means “that which purifies.” These funds should be directed primarily toward redistributive purposes, to soften the market’s burden on the poor. However, they can also be used to fund religious causes, a fact which medieval regimes sometimes used to usurp zakat funds for expansionary warfare. But modern Islamic economists, by and large, discourage military spending wherever possible.

ISLAMIC FINANCE COULD HAVE SAVED THE WORLD

(Article was extracted from International Financial Law Review - author : Simon Crompton)

Lawyers in Islamic finance firmly believe that if company financing had been done entirely along shariah lines, this financial crisis would not have happened.

A session at the Middle East Financial Law Congress in Doha, Qatar on 17 - 18 February 2009 saw passionate disagreement on the subject.

Panelists from western banks argued that there was nothing wrong with the due diligence that went into local companies when they issued conventional debt. Islamic debt would not have fared any better.

The argument for shariah was put by one speaker particularly strongly, who said: "Islamic finance has been mixed and matched with conventional debt in companies’ financing, with the result that none of them are really Islamic. Even the Islamic parts of their debt have been watered down and adapted to conventional structures."

When asked whether he really thought that the world would not have had a financial collapse under Islamic financial law, he replied: "Yes, absolutely. Islamic debt is about investment; conventional debt is about trading money for its own sake. Islamic law would have prevented the kind of leverage ratios we saw in Dubai."

Dubai real estate company Nakheel became the focus for the discussion, as it had both Islamic and conventional funding and has seen its spreads widen dramatically as investors refuse to buy the debt for fear of it going bust.

A speaker from a western bank disagreed with the Islamic lawyers. "Let’s get this straight," he said. "Everyone that invested in Nakheel knew they were exposed to big real estate risk. They knew the projects that Nakheel had lined up. They knew how it was plowing the profits of one project into another; it was all over the papers.

"There was big real estate risk in a market obviously driven by expectations. But they did their due diligence and took the gamble. They weren’t stupid." He carried on the point out that given the growth predictions for Nakheel at the time it issued most of its debt, the leverage ratio was no higher than any other real estate company anywhere else in the world.

No one disagreed that Islamic finance has become disconnected from its foundations. Rather than being involved from the very start of a deal, it is sometimes brought in at the last minute for a rubber stamp. One straightforward Islamic structure is not picked at the beginning – instead the company’s needs are shoehorned into a tweaked or adjusted structure.

One speaker referred to it as Islamic beer. "You go to the imam and get ask him whether it is compliant with shariah to tie a rope to a door handle. Then you ask him whether it is compliant to lie on the floor. Then to tie a beer bottle to the rope. When someone walks in, the bottle tips over and you happen to be lying there with your mouth open. That is Islamic beer."

He continued: "We must give Islamic finance a chance. We must keep it pure and start over again with companies, making sure all financing is compliant. The rest of the world has a lot to learn from shariah, but only if it remains consistent."

A speaker from the floor agreed. He argued that local investors in the Gulf had just become capitalistic, picking whichever type of financing happened to give greater returns. There was no concern over shariah compliance.

With the number of companies in trouble in the Gulf, particularly in Dubai, this could be the perfect opportunity for Islamic lawyers to get their way and restructure corporate debt along entirely Islamic lines.

My comment :

Islamic finance despite having its origins 1,400 years ago, was only commercially practiced in the last 3-4 decades ago. Yes, we must give it a chance - to purify and start again, while ensuring its compliance to shariah rom the very beginning and safeguarding it against manipulation and intervention from its conventional counterparts. This time around, there should be control and standardization - after all, Islam is one religion and there should only be one shariah guide (that should be obtained by consensus by all jurists) for the interest of the ummah.

GOLD DINAR

The idea of using Islamic gold dinar was first mooted in 2001 by Malaysia's ex-premier (Tun Dr Mahathir Mohammed). He proposed a new currency that would be used initially for international trade between Muslim nations, i.e., the islamic gold dinar and it was defined as 4.25 grams of 24 carat (100%) gold. He promoted the concept on the basis of its economic merits as a stable unit of account and also as a political symbol to create greater unity between Islamic nations. The purported purpose of this move would be to reduce dependence on the United States dollar as a reserve currency, and to establish a non-debt-backed currency in accord with Islamic law against the charging of interest.

The return to the gold standard is supported by many followers of the Austrian School of Economics, Objectivists and libertarians largely because they object to the role of the government in issuing fiat currency through central banks.

Few lawmakers today advocate a return to the gold standard, other than adherents of the Austrian school and some supply-siders. However, many prominent economists have expressed sympathy with a hard currency basis, and have argued against fiat money, including former US Federal Reserve Chairman Alan Greenspan (himself a former Objectivist). Greenspan famously argued the case for returning to a gold standard in his 1966 paper "Gold and Economic Freedom", in which he described supporters of fiat currencies as "welfare statists" hell-bent on using monetary printing presses to finance deficit spending. He has argued that the fiat money system of today has retained the favorable properties of the gold standard because central bankers have pursued monetary policy as if a gold standard were still in place.
The current global monetary system relies on the US dollar as a reserve currency by which major transactions, such as the price of gold itself, are measured. Currency instabilities, inconvertibility and credit access restriction are a few reasons why the current system has been criticized.

Taking the 1997 Malaysian economic and financial crisis as an example, it shows that the fundamental cause of business cycles, unemployment and inflation is rooted in some of the features of the present day financial system, namely fiat money, fractional reserve requirements and interests rates. It then shows how these features also indirectly bring about many social problems to such an extent that they threaten the culture and sovereignty of nations. Even Islamic banks cannot truly operate on Islamic principles in the present system.

Most Islamic financial products are tied to the market interest rate - the very thing they are supposed to avoid. A return to a gold payment system - like the Islamic dinar - could solve many of the woes of today's economic system. The return is not only desirable from the economic, political, social and religious perspectives, but also urgent in the present era of globalization and existing world recession, besides providing a conducive environment for Islamic economics, banking and finance to flourish.


The following articles are important to strengthen our understanding on the issues at hand :

1) Seriousness of Gold Dinar

2) Gold, Paper..Or Is There A Better Money?