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					  GLOBAL CRISIS:

ISLAMIC FINANCE CAN
LEAD TO BETTERMENT
                 By

          Muhammad Ayub
   Director Research and Training,
  Riphah center of Islamic Business
    Riphah University, Islamabad
                                      1
     In the Grip of Crises-
         2008 onward
 The most severe since 1930s‟ great
  depression;
 Alan Greenspan: „great tsunami‟
 Started from the US - other parts of the
  world - US Dollar and the huge size of
  the American economy - also owing to
  the „mighty‟ US Dollar.
 Over $3 trillion of bailouts and liquidity
  injections to abate the intensity
                                               2
  More Advanced: More in grip

 100s of institutions in USA, UK and
  Other developed world closed – not even
  single in countries like Pakistan – had
  crossed all ethical and shariah based
  limits.
 Sovereign Debt problem – Europe, poor
  indebted countries

                                        3
       CAUSES OF THE CRISIS
 Excessive ability to create money and credit
 ..carrying fixed charge; creating billions of
  dollars by simply shuffling the papers and
  transferring risk;
 Adding to wealth of already rich without creating
  anything of value for use by the mankind.
 A large number of investment products, without
  any underlying real assets by way of selling of
  accounts receivable and derivatives.
 CDOs, interest rate swaps, interest rate futures,
  forward rates agreement, Forex trade options,
                                                  4
  warrants and options on futures contracts.
           Implications

 Increasing poverty and hunger for
  billions of human beings
 World Bank report, January 2010: 64
  million more people living in extreme
  poverty by the end of 2010 than would
  have been the case without the crisis.
 Risk of “currency war” – collapse of
  the global payments system.

                                       5
NEED FOR NEW F. ARCHITECTURE
An ethical requirement– not only
Shariah injunction;

comprehensive reforms to help
prevent chaos and spread of
financial crises



                                   6
    I. F. Principles can help


 Strict moral guidelines for dealing with
  money, prohibition of debt trading and
  speculation;
 To provide checks for the factors that
  distorted the system

 So, better ability to sustain in the hard
  times.

                                              7
       ISLAMIC BANKING GROWING
 Even during the crisis; double digit growth
  last 20 years in terms of:
    Volume
    Scope and Assets
    Spreading worldwide
 Assets held by IFIs worldwide are estimated to
  be over $1000 billion - figure may vary due to the
  coverage of institutions;
 While the prospective market according to
  Standard & Poor's is that of $4 trillion, the global
  assets are expected to hit $1033 billion by the
                                                       8
  end of 2010.
           In Pakistan

 Covering 6 % of the banks‟ market;
  expected to rise to 12 % by 2012;
 Islamic banks
 IBBs
 About 600 branches in all major towns of
  the country
 MFIs
 Islamic Funds
                                             9
      Crisis Impact on IFIs

 IFIs escaped due to general prohibition of
  Gharar, Riba and risk-free return on
  investments.
 Dubai debt crisis of 2009 exposed the
  weaknesses of „Islamic banking‟ due to a
  number of objectionable products adopted
  by the IFIs.
 Derivatives – “Islamic” options and swaps.
                                           10
PRINCIPLES TO BE FOLLOWED
 Avoiding:
 Riba: earning any return from loan and
 debt contracts or selling debt contracts at
 discount;
 Gharar – absolute risk / uncertainty about
 the subject matter or the price in sales and
 financial transactions;
 Gambling and chance-based games);
 Observing: General Prohibitions /unethical
  practices
                                                11
            PRINCIPLES
 Risk & Reward - Owner of an asset has
 both risk and reward;
 Forward trading with strict conditions of
  delivery and settlement
 Possession / delivery - ensuring that
  risks and liabilities pertaining to an asset
  are properly taken by the owner;
 Public financing: disciplining the fiscal
  behavior of the governments

                                              12
   Possibility of getting real
  benchmarks for pricing of
 goods, their usufruct and the
 services, both in cash /credit
   markets, - reflecting real
demand/supply scenario and the
   strength of the economy


                              13
  IFIs not allowed exposure to
 CDOs, derivative products and
intra-financial counterparty risk
 that crippled the conventional
              system;




                                14
WHY IFIS FAILED TO AVAIL OF THE
         OPPORTUNITY

Financial engineering to mimic the
 conventional product – derivatives and
 swaps that crippled the conventional
 system – beneficial for IFIs?
Permitting the haram contracts by use of
 Wa‟d
Separating risk from real economic
 activities and making it traded
 separately;
                                       15
General Concerns about I. B.
 Does not reflect the ethos of Islamic
  teachings - ; „Structured products‟
 Strayed from the theoretical
  foundation;
 Tawarruq - the predominant
  instrument;
 LIBOR - benchmarks used as a
  determinant of interest on non-
  Shariah compliant assets, not only as
  a pricing tool.                       16
Can Islamic banking in present
structure lead to betterment?

  Not capable to play a significant
role in ensuring health and stability
of the national and global financial
              systems

PROBLEM OF OPERATION – NOT OF
        THE SYSTEM

                                    17
         Solution lies in:
 Observing Shariah and Ethics:
 Disciplining the creation of money;
 Limiting the self-interest with social
  interest and the business ethics, and
 Transforming the corrupt financial system
  to make it free of exploitation and games
  of chance
 Thus enabling the mankind to optimally
  use the resources for benefits at the
                                           18
  larger scale.
To Avoid Convergence
with Conventional System:
  Islamic finance must avoid imitating
   the practices of conventional
   banking
                To avoid
  The same fate as faced by the
   capitalistic system.

                                          19
            CHALLENGES
 Ensuring the real difference between the
  two systems - the main key to the stable
  and long-term growth;
 Changing approach of the practitioners
  that all conventional products should
  have alternatives;
 Developing benchmark based on real
  performance of the economy- by linking
  the money and credit expansion to the
  growth of the real economy               20
             CHALLENGES
 Supply of trained human resources having
  Shariah inspiration and confidence to operate
  the system ;
 Standardization: risk management, regulatory,
  accounting and market standards - based on
  AAOIFI Shariah Standards;
 Many practitioners -using the dubious
  structures like that of Ba„i al Inah and Tawarruq
  - operating „Islamic‟ hedge funds based on
  options and derivatives do not really feel any
  need for standardization                        21
           To Conclude
 Islamic banking is in position to play crucial
  role interrelating finance, economy,
  community and society enabling the world
  to avoid crises in future;
 To carry out operations according to the
  fundamental principles of Islamic
  economics and finance;
 To expand their role in the real sector;
 AAOIFI‟s Standards must be applied for all
  banks and areas.                           22
Thanks

         23

				
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posted:8/23/2011
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