Presentation on theme: "1 GLOBAL CRISIS: ISLAMIC FINANCE CAN LEAD TO BETTERMENT By Muhammad Ayub Director Research and Training, Riphah center of Islamic Business Riphah University,"— Presentation transcript:
1 GLOBAL CRISIS: ISLAMIC FINANCE CAN LEAD TO BETTERMENT By Muhammad Ayub Director Research and Training, Riphah center of Islamic Business Riphah University, Islamabad Riphah University, Islamabad
2 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
3 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. 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 Sovereign Debt problem – Europe, poor indebted countries
C AUSES OF THE C RISIS 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, warrants and options on futures contracts. 4
5 Implications Increasing poverty and hunger for billions of human beings 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. 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. Risk of currency war – collapse of the global payments system.
An ethical requirement– not only Shariah injunction; comprehensive reforms to help prevent chaos and spread of financial crises N EED FOR N EW F. A RCHITECTURE An ethical requirement– not only Shariah injunction; comprehensive reforms to help prevent chaos and spread of financial crises 6
7 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.
8 I SLAMIC B ANKING G ROWING Even during the crisis; double digit growth last 20 years in terms of: 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 end of 2010.
In Pakistan Covering 6 % of the banks market; expected to rise to 12 % by 2012; Covering 6 % of the banks market; expected to rise to 12 % by 2012; Islamic banks Islamic banks IBBs IBBs About 600 branches in all major towns of the country MFIs MFIs Islamic Funds Islamic Funds 9
10 Crisis Impact on IFIs IFIs escaped due to general prohibition of Gharar, Riba and risk-free return on investments. 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.
11 P RINCIPLES TO BE F OLLOWED 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
12 P RINCIPLES 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
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
15 W HY IFI S FAILED TO AVAIL OF THE O PPORTUNITY 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 Wad Separating risk from real economic activities and making it traded separately;
16 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.
Can Islamic banking in present structure lead to betterment? 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: 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 larger scale. 18
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
C HALLENGES 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
C HALLENGES Supply of trained human resources having Shariah inspiration and confidence to operate the system ; Standardization: Standardization: risk management, regulatory, accounting and market standards - based on AAOIFI Shariah Standards; Many practitioners -using the dubious structures like that of Bai 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 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; AAOIFIs Standards must be applied for all banks and areas. 22