Transcript M Ayub - AlHuda Centre of Islamic Banking & Economics

GLOBAL CRISIS:
ISLAMIC FINANCE CAN
LEAD TO BETTERMENT
By
Muhammad Ayub
Director Research and Training,
Riphah center of Islamic Business
Riphah University, Islamabad
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In the Grip of Crises2008 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
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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
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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,
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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.
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NEED FOR NEW F. ARCHITECTURE
An ethical requirement– not only
Shariah injunction;
comprehensive reforms to help
prevent chaos and spread of
financial crises
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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.
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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
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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
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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.
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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
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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
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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
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IFIs not allowed exposure to
CDOs, derivative products and
intra-financial counterparty risk
that crippled the conventional
system;
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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;
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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 nonShariah compliant assets, not only as
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a pricing tool.
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
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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
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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.
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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
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growth of the real economy
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
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need for standardization
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.
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Thanks
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