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Could Islamic finance save capitalism?


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Could Islamic finance save capitalism?

Islamic finance is widely misunderstood but its core principles could provide a blueprint for a sustainable global economy

The ideals of Islamic finance link money as a medium of exchange to hard assets in the real economy.

Thursday 4 December 2014 02.00 EST

Is there a place for ethics and morality in the global economy? Should we continue to rely on governments to tweak at the margins of financial regulation, or is there a credible argument that a root and branch reformation is required a revolution in capitalism?

Anthropologist and co-founder of the Occupy Wall Street movement David Graeber believes along with an increasing number of leading intellectuals that the worlds reliance on our current banking system has had a catastrophic impact on society, leading to an increasing divide between rich and poor, an increase in contemporary versions of debt bondage, and perpetuating the idea that credit creation is a mark of human progress.

Other academics support the notion that mainstream economists, bankers and politicians focus on symptoms without questioning the monetary system itself. If banks are given the power to create money and grant credit, then unfettered credit expansion can lead to bad investments, as the last few years have demonstrated. In addition, money creation by central banks to bail out the financial services industry only encourages those banks to take ever greater risks. This is the concept of moral hazard: profits are privatised but losses are socialised.

Even our measure of human progress seems fundamentally flawed. Gross domestic product the universal measure of economic output does not measure rates of literacy, divorce or suicide. GDP does not account for our impact on the environment. In short, it reflects the culture of the modern corporation: a vehicle designed to eliminate all moral imperatives except for profit.

Logically it is impossible to maintain an engine of perpetual motion on a planet with finite resources. Intellectuals such as Mufti Taqi Usmani, a renowned scholar of Islamic jurisprudence, contend that Islamic economic theory may have some answers to the thorny dilemma of balancing the free market with protection of the vulnerable. Indeed, the Prophet Muhammad in his last sermon before he died emphasised human and property rights to his followers, leaving them to codify the ethical principles he had bequeathed through the word of God and the documented precedent of his own life. This codified law is known as sharia and is perhaps more misunderstood today than at any time in its history.

Where once sharia was an organic and evolving body of law, emphasising mercy, tolerance and inclusiveness, it is now characterised as an instrument of control by post-colonial Muslim rulers searching for identity. When Europes barbarous principalities once slumbered through their Dark Ages, the Islamic world experienced an age of scientific, literary and philosophical enlightenment, borrowing whatever was good from the cultures around them and building on it. Islamic scholars in medieval Baghdad and Cordoba developed rules and mechanisms to encourage entrepreneurship, leading to the dissemination of financial innovations along the Silk Route and into southern Europe. These were the roots of modern capitalism, but somehow along the way the protection of the weak became forgotten.

Today, as the Islamic world experiences a crisis of identity, Islamic finance remains a rare bridge between two cultures. David Cameron announced last year that London would become one of the global capitals of Islamic finance and, soon after, a UK sovereign Islamic bond was issued in the capital markets. Mufti Taqi has spoken at Davos on reforming the worlds post-crisis financial landscape through the lens of faith.

Conventional commentators describe the industry as banking without interest but the fundamental differentiator is the nature of money itself: in Islamic economic theory, money is merely a medium of exchange, not a commodity to be traded. It has no intrinsic value. Financial transactions must have an underlying attachment to the real economy. Real assets must be bought and sold as opposed to the trading of intangible pieces of paper, like the infamous derivatives that brought down Northern Rock and Lehman Brothers. And (in theory at least) because money itself should have an asset backing, it cannot be created out of thin air. A blueprint for a stable global economy and one which can bring long-term societal benefits, according even to some non-Muslim academics.

But are the ideals of Islamic finance reflected in the industry? Not for me theyre not. An industry dominated by conventional bankers addicted to cheap credit and exotic derivatives has focused on reverse engineering of conventional financial products into their sharia-compliant counterparts. An emphasis on the letter of the law over the spirit of the law has left the layman confused. With a global Muslim population of 1.6 billion, much of it under penetrated by financial services, surely the time has come to emphasise broader ethical principles over adherence to arcane contractual mechanisms? Just as Christian financiers in the Middle Ages created elaborate contractual structures to circumvent the Churchs ban on usury, is Islamic finance not guilty of the very same today?

The industry balances on a turning point. The next few years will determine whether the history of Islamic finance blindly follows that of medieval European finance, or whether its revolutionary ideals can bring something of benefit to the whole world.

Harris Irfan is author of Heavens Bankers: Inside the Hidden World of Islamic Finance and managing director at EIIB-Rasmala, a boutique investment bank

http://www.theguardian.com/sustainable-business/2014/dec/04/could-islamic-finance-solution-capitalism

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There are only two central banks left in the world that are not tied into the BIS or Rothschild domination.

In The Year 2000 There Were 7 Countries Without A Rothschild-Owned Central Bank: They were Afghanistan, Iraq, Sudan, Libya, Cuba, North Korea and Iran.

http://politicalvelcraft.org/2012/06/03/in-the-year-2000-there-were-seven-countries-without-a-rothschild-owned-central-bank-they-were-afghanistan-iraq-sudan-libya-cuba-north-korea-and-iran/

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There are only two central banks left in the world that are not tied into the BIS or Rothschild domination.

In The Year 2000 There Were 7 Countries Without A Rothschild-Owned Central Bank: They were Afghanistan, Iraq, Sudan, Libya, Cuba, North Korea and Iran.

http://politicalvelcraft.org/2012/06/03/in-the-year-2000-there-were-seven-countries-without-a-rothschild-owned-central-bank-they-were-afghanistan-iraq-sudan-libya-cuba-north-korea-and-iran/

Yeah that site seems credible.

You do realize the Bank of Canada is a crown corporation and it's not possible for a private citizen to own any part of it. All shares are technically owned by the Queen but controlled entirely by the minister of finance.

Back on topic, this idea that ancient Islamic countries were bastions of equality is BS. They like most other countries at the time had a slavery based economy.

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There are only two central banks left in the world that are not tied into the BIS or Rothschild domination.

In The Year 2000 There Were 7 Countries Without A Rothschild-Owned Central Bank: They were Afghanistan, Iraq, Sudan, Libya, Cuba, North Korea and Iran.

http://politicalvelcraft.org/2012/06/03/in-the-year-2000-there-were-seven-countries-without-a-rothschild-owned-central-bank-they-were-afghanistan-iraq-sudan-libya-cuba-north-korea-and-iran/

Hmmmm.

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Back on topic, this idea that ancient Islamic countries were bastions of equality is BS. They like most other countries at the time had a slavery based economy.

Yep. They were not an interfaith utopia either. However, they generally tended to treat minorities much better than the Latin Christian empire (the other big power during the middle ages).

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There is no Capitalism...there is no Communism. Both terms very out of date and both rely on suppressed human nature. That article is absolute sensationalized garbage, and has no basis in reality. Money and power know no religion...in fact, in a way it is a religion. Sorry to burst the Sharia bubble, but it is rooted in discrimination and would be corrupted as fast as Capitalism and Socialism were...by human nature.

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Basing currency on tangible assets is a terrible idea especially in an information age. There are many ways to add value to the world that do not have tangible components. If you base currency on tangible assets you will have a money shortage when the economy starts to expand.

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Even if it was a good idea the fact the word "Islamic" is mentioned automatically makes it evil, oppressive and bad in the eyes of west lol..

the fact that "the west" is mentioned makes members of Islam think that "the west" has a collective estimation and fear of everything that falls under "islamic," further endorsing binary oppositions

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I question Ethics mixed with Economics.

In my first economics class in College my instructor was trying to say that Minimum wage hurts the economy.

That's when I knew it was all b.s.

Economics is not a science that is dictated by numbers, it is dictated by human nature. You can have all the money in the world. If you're found with terminal cancer, all that money can't save you. Most crashes are people being fearful, and pulling out of investment before they lose too much, then it escalates.

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I question Ethics mixed with Economics.

In my first economics class in College my instructor was trying to say that Minimum wage hurts the economy.

That's when I knew it was all b.s.

Economics is not a science that is dictated by numbers, it is dictated by human nature. You can have all the money in the world. If you're found with terminal cancer, all that money can't save you. Most crashes are people being fearful, and pulling out of investment before they lose too much, then it escalates.

Excellent post.. this true for many instances.

Look at the former dictators of the world all perished, but their money lives on in the hands of the others..

I have taken some economics courses as well and have noticed how much human nature comes into play, especially in markets.

Things like forecasting all depend on human nature and bit of luck.

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I question Ethics mixed with Economics.

In my first economics class in College my instructor was trying to say that Minimum wage hurts the economy.

That's when I knew it was all b.s.

Economics is not a science that is dictated by numbers, it is dictated by human nature. You can have all the money in the world. If you're found with terminal cancer, all that money can't save you. Most crashes are people being fearful, and pulling out of investment before they lose too much, then it escalates.

There is a level of minimum wage that will hurt the economy; just like there is a level of tax that will hurt the economy. There are very few absolutes in economics; most things are a matter of degree. Eg) A minimum wage of $50 per hour in our current economy will have a notable detrimental effect on the economy.

And yes, there is a level of human nature involved, but economics works on the assumption that we are all rational beings. That is false, since most people are risk averse. But if you look at a country like Zimbabwe, you'll understand what a total lack of grasp of economics can lead to.

The economic class that you are describing that you were in is microeconomics. But there is also macroeconomics, which will describe what you are talking about regarding human nature. Economics is not b.s.

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I question Ethics mixed with Economics.

In my first economics class in College my instructor was trying to say that Minimum wage hurts the economy.

That's when I knew it was all b.s.

Economics is not a science that is dictated by numbers, it is dictated by human nature. You can have all the money in the world. If you're found with terminal cancer, all that money can't save you. Most crashes are people being fearful, and pulling out of investment before they lose too much, then it escalates.

You omitted the part where most bubbles are people being greedy and pile into investments before they miss out too much, and then it escalates.

Like real estate in Vancouver...

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Could Islamic finance save capitalism?

Islamic finance is widely misunderstood but its core principles could provide a blueprint for a sustainable global economy

The ideals of Islamic finance link money as a medium of exchange to hard assets in the real economy.

Thursday 4 December 2014 02.00 EST

Is there a place for ethics and morality in the global economy? Should we continue to rely on governments to tweak at the margins of financial regulation, or is there a credible argument that a root and branch reformation is required a revolution in capitalism?

Anthropologist and co-founder of the Occupy Wall Street movement David Graeber believes along with an increasing number of leading intellectuals that the worlds reliance on our current banking system has had a catastrophic impact on society, leading to an increasing divide between rich and poor, an increase in contemporary versions of debt bondage, and perpetuating the idea that credit creation is a mark of human progress.

Other academics support the notion that mainstream economists, bankers and politicians focus on symptoms without questioning the monetary system itself. If banks are given the power to create money and grant credit, then unfettered credit expansion can lead to bad investments, as the last few years have demonstrated. In addition, money creation by central banks to bail out the financial services industry only encourages those banks to take ever greater risks. This is the concept of moral hazard: profits are privatised but losses are socialised.

Even our measure of human progress seems fundamentally flawed. Gross domestic product the universal measure of economic output does not measure rates of literacy, divorce or suicide. GDP does not account for our impact on the environment. In short, it reflects the culture of the modern corporation: a vehicle designed to eliminate all moral imperatives except for profit.

Logically it is impossible to maintain an engine of perpetual motion on a planet with finite resources. Intellectuals such as Mufti Taqi Usmani, a renowned scholar of Islamic jurisprudence, contend that Islamic economic theory may have some answers to the thorny dilemma of balancing the free market with protection of the vulnerable. Indeed, the Prophet Muhammad in his last sermon before he died emphasised human and property rights to his followers, leaving them to codify the ethical principles he had bequeathed through the word of God and the documented precedent of his own life. This codified law is known as sharia and is perhaps more misunderstood today than at any time in its history.

Where once sharia was an organic and evolving body of law, emphasising mercy, tolerance and inclusiveness, it is now characterised as an instrument of control by post-colonial Muslim rulers searching for identity. When Europes barbarous principalities once slumbered through their Dark Ages, the Islamic world experienced an age of scientific, literary and philosophical enlightenment, borrowing whatever was good from the cultures around them and building on it. Islamic scholars in medieval Baghdad and Cordoba developed rules and mechanisms to encourage entrepreneurship, leading to the dissemination of financial innovations along the Silk Route and into southern Europe. These were the roots of modern capitalism, but somehow along the way the protection of the weak became forgotten.

Today, as the Islamic world experiences a crisis of identity, Islamic finance remains a rare bridge between two cultures. David Cameron announced last year that London would become one of the global capitals of Islamic finance and, soon after, a UK sovereign Islamic bond was issued in the capital markets. Mufti Taqi has spoken at Davos on reforming the worlds post-crisis financial landscape through the lens of faith.

Conventional commentators describe the industry as banking without interest but the fundamental differentiator is the nature of money itself: in Islamic economic theory, money is merely a medium of exchange, not a commodity to be traded. It has no intrinsic value. Financial transactions must have an underlying attachment to the real economy. Real assets must be bought and sold as opposed to the trading of intangible pieces of paper, like the infamous derivatives that brought down Northern Rock and Lehman Brothers. And (in theory at least) because money itself should have an asset backing, it cannot be created out of thin air. A blueprint for a stable global economy and one which can bring long-term societal benefits, according even to some non-Muslim academics.

But are the ideals of Islamic finance reflected in the industry? Not for me theyre not. An industry dominated by conventional bankers addicted to cheap credit and exotic derivatives has focused on reverse engineering of conventional financial products into their sharia-compliant counterparts. An emphasis on the letter of the law over the spirit of the law has left the layman confused. With a global Muslim population of 1.6 billion, much of it under penetrated by financial services, surely the time has come to emphasise broader ethical principles over adherence to arcane contractual mechanisms? Just as Christian financiers in the Middle Ages created elaborate contractual structures to circumvent the Churchs ban on usury, is Islamic finance not guilty of the very same today?

The industry balances on a turning point. The next few years will determine whether the history of Islamic finance blindly follows that of medieval European finance, or whether its revolutionary ideals can bring something of benefit to the whole world.

Harris Irfan is author of Heavens Bankers: Inside the Hidden World of Islamic Finance and managing director at EIIB-Rasmala, a boutique investment bank

http://www.theguardian.com/sustainable-business/2014/dec/04/could-islamic-finance-solution-capitalism

That is not a novel concept by any means. That is a description of pre-19th century economics. That would not work today. There is a reason we abandoned the gold standard. There are a few problems you would run into:

1. Essentially, if money is meant to be tied down to a asset, you have to determine which asset it is eg) gold.

2. There is literally not enough gold in the world to meet the amount of money in circulation. This is really tough to explain, but there is a reason we made money legal tender.

3. If you use a few multiple assets like precious metals, then one of the metals would abolish the value of the weaker one pretty significantly and put it out of circulation (this happened when gold and silver coins were used, after which, we went back to gold coins)

4. The system of exchange would collapse if you did not have money with intrinsic value (we would essentially go back to barter system). This may not seem that bad, but it would absolutely bring the economy to a standstill, because there is no medium to determine what things are worth, and it would be a barrier to every exchange of goods and services.

5. Even in international exchange, we have a "currency" which is the american dollar. When you exchange your canadian dollars into british pounds, what happens is the Canadian dollars are exchanged into american dollars which, which are then exchanged into british pound. American dollar is the intermediary step to all global currency exchange. That is necessary because you would otherwise have an exponential amount of different rates to track, and they may not necessarily be synchronized.

6. The "western" economic system with free floating currency that is also legal tender, for all of it's faults, has led to unprecedented growth in the 20th century. There is a direct causal link between decreases in barriers to exchange and innovations in science, technology etc. We all take the benefits we got from it for granted sometimes.

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