Islamic finance can restore confidence during crisis

COMMERCIAL trade exchanges can facilitate both domestic and international trade. A trade exchange stimulates trade by brokering the members' merchandise, keeping account of members' transactions and trade balances and acting as a clearing house.

Similarly, central banks can use multilateral payment arrangements (MPA) to spur trade among member countries while significantly reducing the need for foreign exchange reserves. It would be even better if the MPA is gold-based, since central banks can leverage on their gold reserve holdings.

 The need for cash (or gold) for settlement can  be reduced by increasing the membership size and lengthening the settlement period.

 Malaysia has bilateral payment arrangements with about 20 countries. Now is an opportune time to implement the gold-based MPA as proposed by former prime minister Tun Dr Mahathir Mohamad as a response to the 1997 East Asian economic crisis.

 As for long-term solutions, one important thing that governments need to do is establish a global currency that is anchored to some "money" commodities like gold.

 This would effectively be a fixed-exchange-rate regime that would bring about monetary stability and hence encourage international trade.

 Such a currency can play the role of international reserve currency that is not under the control of any one nation. Recently, the governor of China's Central Bank, Zhou Xiaochuan, made a proposal for the adoption of such an international reserve currency, that is, global money to be managed by the International Monetary Fund.

 The 2009 G-20 Summit agreed to support a Special Drawing Rights (SDR) allocation which will inject some US$250 billion (RM800 billion) into the world economy. It's this SDR, an instrument created by the IMF to replace gold as an international reserve asset, that is the most likely candidate for a global currency.

 To make it truly political-free and stable, the SDR has to be made redeemable for some real commodities like gold.

 From an Islamic perspective, the gold dinar and silver dirham were the monetary units of the Islamic caliphate from the dawn of Islam until the collapse of the caliphate in 1924.

 The world has to be careful not to allow money or SDRs to be created out of thin air and thereafter, lent out on interest.  Money and SDRs should be made redeemable for gold or other commodities, even oil, in order to prevent abuse and the repeat of monetary crises in the proportions of recent times.

In order to stimulate economic activity, particularly in the current recessionary environment, governments should keep taxes as low as possible. Low rates encourage business activities and do not encourage tax evasion whereas high tax rates discourage business activities while increasing the probability of tax evasion.

 For sustainable economic development, governments should move towards imposing negative interest rates.  Experts have shown that sustainable economic development requires negative interest rates.

 Unlike in the current system, annual savings should be "taxed" rather than rewarded through interest. A negative interest rate is also consistent with the natural order of entropy and is also a characteristic embedded in the Islamic principle of zakat.

 And as learned from the current crisis, the banking sector, rating agencies and hedge funds must be monitored carefully with more regulations and transparency.

 Speculative gambling in the derivative markets must also be checked. The derivatives market has grown into a huge bubble, estimated to be in the vicinity of US$1 quadrillion (a thousand trillion).

 Derivatives markets are accelerating the current monetary meltdown, particularly the credit default swaps  that failed during the subprime mortgage crisis in 2008.

 There is a likelihood of huge sums of money leaving that market into the commodities markets, thereby sparking the rise of commodity prices to unprecedented levels.

 From an Islamic perspective, the measures outlined above contribute to the attainment of the maqasid al-shariah or the objectives of the syariah, by inculcating values like compassion, justice, avoidance of greed and protection of rights back into the socio-economic dimensions.

 The 1990s saw the collapse of socialism; now clearly, capitalism is on a downward trend. Perhaps the world could now give Islam a chance to show the good things it has to offer mankind.

 The Vatican remarked that banks should look at the rules of Islamic finance to restore confidence among their clients at a time of global economic crisis

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(News Straits Times /  14 June 2012)

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Islamic Investment Malaysia:
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Global crisis boosting sukuk growth, says S&P

LONDON: Sukuk provides Middle Eastern issuers with a useful tool to tap local liquidity as an alternative to constrained international bank lending, Standard & Poor’s Ratings Services said in a new report.

The report examines why sukuk issuance is gaining acceptance in markets beyond its established strongholds in Malaysia, Indonesia and the Gulf Cooperation Council (GCC) region.

“In our view, European banks are reducing their overseas exposure as their capital requirements have increased and their domestic economies faltered. Governments in the Middle East and Asia have therefore turned instead to local investors to back their infrastructure projects. Banks in the Middle East and Asia that comply with Shariah law have also demonstrated a strong appetite for new assets that meet their requirements,” the report states.

Infrastructure projects in the Middle East and Asia continue to require funding, but will not receive all necessary support from European banks as these institutions reduce their expenditure to deal with higher capital requirements and weakening in their own economies, says S&P.

It highlights the fact that sukuk was more commonly used by corporate issuers before the 2008 crisis, but is now more frequently issued by governments and their related entities, as a response to the global slowdown.

Appetite for sukuk is anchored among Islamic investors who are restricted to buying Shariah-compliant instruments, and the asset class will not become “mainstream” and attract broader international demand until issues surrounding defaults and pricing transparency are resolved, S&P finds.

Unti the global credit crisis of 2008, most sukuk issuances came from corporate issuers; now, most comes from governments and GREs.

“In our view, many sovereign issuers hope that Islamic finance will provide them with an alternative means of supporting their economies by tapping into the excess liquidity available in regions that were less hard hit by the economic downturn, such as the GCC region and Asia. Given the slowdown in global economic growth, we expect this trend to continue in the short term,” the report adds..

“Until the Islamic finance industry overcomes its long-term problems, we do not expect sukuk to become a mainstream asset class. The huge variety of sukuk structures continues to deter some investors, in our view. The process for resolving defaults and restructuring sukuk also remains uncertain; although an increase in the number of issues that have been listed has increased pricing transparency. Sukuk instruments are, however, increasingly attracting attention as a source of funding and diversification.”


(ARAB NEWS, 16 Feb 2012)
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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

Global financial crisis can be resolved by adopting Islamic principles: Scholar

Dubai: People’s greed to amass wealth and resorting to Riba (transactions with usury/interest) are the root causes of the current global credit crunch, according an eminent Muslim scholar and community leader from India. 

Referring to the second world financial crisis, All India Sunni Jam’iathul Ulama General Secretary, Sheikh Aboobacker Ahmed says the crisis can be resolved by implementing Islamic finance principles.

He also points out that the non-distribution of wealth for social welfare is the spark that has caused waves of violence, political unrest, riots and racist movements across Western countries.

Sheikh Aboobacker, who led India’s contemporary Muslim multitude from a chaotic and apprehensive stage to one with confidence and hope, is currently in town as the guest of Dubai Islamic Affairs Department during the Holy Month of Ramadan. 

“We should take efforts to bring followers of different cultures and religions together, and alleviate the suffering of the people around the world,” he said, noting that the “fiscal firestorm” that the world has been witnessing is something that has already been mentioned in religious texts, including the Holy Quran.

 “The main cause of this global financial crisis has been usury or interest. The Holy Quran guided us to stay away from Riba (interest), a curse that is enough to jeopardise domestic, national and international peace and financial stability.”

“Living beyond our means, taking loans on interest, and excessive or irresponsible expansion of credit over a long period as well as gambling are the significant causes of this crisis, according to Islamic perspectives. Islam discourages living beyond means that leads to excessive borrowing,” he explained. 

“Islam promotes loans and other banking tools, but without any interest. Selling or buying goods and services based on a mechanism that is supported by interest is not permitted in Islam. Islamic finance concepts, however, still have less presence in the global scenario.”

He also noted, “Islamic banking and insurance are still in their infancy and command a very small proportion of international finance, albeit many international banks have launched Islamic banking sections.”

“The Islamic banking system should be genuine, reflecting the ethics of Islamic teachings for welfare of the society. The Islamic banking system should focus on productive investment, not for speculation and gambling.”

“The Islamic financial system is gradually gaining momentum in Muslim countries, as visionary leaders initiate solid programmes to realise Islamic principles in the new world and enable stability of the global system,” Sheikh Abooobacker added. 

According to him, society has progressed in every walk of life, as much as the religious values that are practiced. “Allah will destroy Riba (usury) and will give increase for Sadaqat (deeds of charity and social welfare),” he said, citing the Quran. 

Islamic principles are against unnecessary and wasteful spending to increase saving and investment. The Prophet (peace be upon him) discouraged borrowing as it can be a cause of concern for individuals throughout their lives. 

(Gulf Today, 13 Aug 2011)

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