Presentation on theme: "The growth of Islamic finance is a remarkable story in the history of global financial systems Islamic banking, starting in Dubai in the early 1970s now."— Presentation transcript:
The growth of Islamic finance is a remarkable story in the history of global financial systems Islamic banking, starting in Dubai in the early 1970s now commands an estimated $400 billion dollars in assets Operates in 70 countries Western Finance is spurring growth by establishing IF divisions Poised to expand geometrically
As a transnational movement - Islamic Finance can be a global force of peace, prosperity and cooperation
Financial systems are more than economic institutions – they are powerful societal and cultural mechanisms They are organic - changing over time sometimes gradually – sometimes abruptly
19 th & 20 th C review shows the relationship between monetary systems and world stability While the 20 th C saw two devastating wars and brutal dictatorships – the 19 th C was an era of peace After the Napoleonic Wars ended in 1815 – nations formed the Concert of Europe Except for brief localized struggles, peace lasted 100 years on European Continent Elsewhere Europeans were carving up whole continents as part of colonial expansion
Mercantilism to laissez-faire Mercantilism - a joint venture formed between the state and its chartered monopolies to gain riches thru trade, exploitation and plunder –ceded to a balance of power, the liberal state, a self regulating market and the gold standard
Gold standard Gold standard was a fixed currency rate system – all currencies were convertible to gold As a supranational mechanism, the gold standard gave reins to commerce resulting in unprecedented prosperity for Europe Transnational projects such as railways and canals and capital markets integration kept nations out of war To the East – the gold dinar had flourished as a trade facilitator since the 7 th C
War brewing In the end - competition for resources and shifts in the balance of power set war in motion in early 1900s Reaching into the Mid East for more colonial possessions, Britain and Germany signed an agreement over the Baghdad railway in 1914 – too late to avert war
World War I proved cataclysmic Battle and famine claimed 15 million lives 4 Empires collapsed – German, Russian, Austro-Hungarian, Ottoman Ruling dynasties imploded into a dozens of states in central Europe A pact between Britain and France carved up the Ottoman Empire into the mandates of Iraq, Syria, Lebanon and Palestine State drawn boundaries in the 1920s produced a lasting legacy - causing constant tension for over 80 years
The gold standard collapsed with the war. The gold dinar that had operated in the Muslim world for 13 centuries - longer than anywhere else- did not survive Gold convertibility gone - hyperinflation, unknown in the preceding century, ravaged the economies of Germany, Russia, Austria, Poland, Hungary and Bulgaria.
Depression followed inflation Inflation of the 1920s ended abruptly in the 1930s with the complete collapse of the global economy. The U.S. and France held 63% of the worlds monetary gold but halted credit to Europes new nations Nations turned inward and embraced the state as the savior from the great depression.
Fascism emerged as a response to a failed monetary system From Tokyo to Madrid Buenos Aires to Caracas Helsinki to Belgrade Without a monetary system, Germany turned to barter and by 1932, Mussolini declared capitalism dead. Territorial expansion by Italy, Germany and Japan seen as a means of solving goods shortage It took another war to revitalize the gold standard system - under Bretton Woods in 1945
From fixed to floating In 1971, Vietnam War caused U.S. to leave the BW gold exchange standard For last 35 years currencies are paper fiat issued by sovereign nations The spread of capitalism and the inflation of dollars has filled the worlds banks with greenbacks U.S. dollar rules as the global reserve currency because of Americas post WWII economic position and its ability to shape global monetary system
Birth of petrodollars – how fiat systems produce imbalances After Arab oil embargo in 1973, dollars flooded into Mid East oil producers coffers Fearing a glut of inaccessible dollars, International Monetary Fund set up a dollar recycling facility Arguably dollar based loans to South America led to its debt crisis in the 1980s Recent fast rise of petrodollars helped create Mid East stock market bubble and correction
Since the fall of communism developed world is giving way to emerging countries Islamic Finance mirrors emerging market growth
Sea change in productivity and consumption Emerging markets now make up over half worlds GDP (purchasing parity basis) U.S. in 1945 was 40% of worlds GDP and is now 20% Emerging markets consume over half worlds energy
U.S. Trade deficit has caused huge dollar reserve build-up in China, India and Mid East Oil exporters dollar reserves rising faster than Asias – estimated at $600 bn Contrary to standard theory – capital runs uphill – emerging countries finance developed ones
According to Nobel Prize winner Robert Mundel The present international monetary system neither manages the interdependence of currencies nor stabilizes prices. Instead of relying on the equilibrium produced by [golds] automaticity, the superpower has to resort to "bashing" its trading partners which it treats as enemies.
Since the collapse of Bretton Woods – U.S. trade deficit has ballooned Flip side to C/A surpluses elsewhere in millions of dollars
Current Account positions in emerging regions
Current accounts in emerging regions
Next stage of emerging market development Fewer dollars will be recycled into American debt markets – reversing U.S. credit cycle Money will be used to facilitate banking and credit institutions to promote growth and consumption in emerging markets Clout of IMF to dictate terms to other countries (such as it tried in Malaysia in 1997) further diminished
Islamic Finance can build a more equitable and balanced financial system in rapidly changing world
Islamic Finance putting money to work is profoundly different from Western Finance Dollarized world has left Western Finance awash in liquidity WF increasingly involved with speculative ventures such as hedge funds Hedge fund activity is becoming cannibalistic – extracting money from money Derivatives trading now tops a $ quadrillion in notional amount in US Capital raised by sukuks can be put to work for infrastructure or transportation for real use and revenue streams Oil development projects often structured like commodity bonds that pay back in kind – i.e. – Iranian Oil Bourse – in which investors and state predetermine tonnage receivable based on capital investment
Investment in IF harmonious with peaceful co-existence WF places top priority on profits Ignores any social, moral or religious component Joins the state and corporation in military enterprises like 18 th mercantilism IF defines permissible investments Forbids investment in weapons/defense Harmonizes financial activities with social and religious life
Concept of risk sharing has powerful implications WF increasingly focused on risk transfer - creates wall between lender and borrower – i.e. - housing bubble affects owner not lender Creates constant conflict between workers/shareholders and lenders/borrowers Average citizens in developed world are losing out in globalizations spoils – wages declining CEOs now make 300 times average wage earner IF - Risk sharing decreases bubble likelihood Mortgages share home value risk Labor and capital providers more equitable in profit and loss sharing partnerships Micro-finance is proving to be highly successful in alleviating poverty
IF is similar to gold standard era of 100 years peace Like gold standard, IF is transnational – aids state to state cooperation Promotes non-adversarial relationships Views conflicts as destructive to society
Gold dinar? In 2002 Malaysia and Iran tried to revive the dinar – did not succeed Mistake may have been to believe all paper currency needs gold backing – it does not A gold signal system can work as well If gold price increases – money supply needs decreasing and vice versa This system was used by the U.S. in 1800 when the new country had no gold at all.
Gold dinar? A gold signal system would be a powerful new financial system Historically gold creates price stability, high employment and balanced trade High theological appeal
Is it possible? Monetary systems change with every war The past century has seen no less than 5: gold standard interwar dirty floats, pound sterling (ended 50 years ago over Suez canal crisis) Bretton Woods Dollar-centric fiat floats and pegs
The world is changing at an unprecedented pace Russia, which suffered an economic meltdown in 1997 is now a trade surplus nation and the worlds largest energy supplier Triple alliance of Russia, China and Iran are forming a counterweight to U.S. hegemony China is now the largest consumer of tin, steel, copper and the 2 nd largest importer of oil The U.S. is becoming increasingly protectionist as shown by its rejection of the DPW in Jan Creation of the Euro in 1999, a peacetime event, has shown benefits of fixed rate system
History suggests change is coming U.S. can no longer use emerging market financing to fund its debt burdens Median wage stagnation and asset depreciation may put America into sharp recession Emerging markets have tremendous opportunity to refashion global monetary system
IF has rare window To create a sound hard money system To form a more distributive system across society To integrate the financial system with society – making a cohesive whole To promote global peace and prosperity