Before we start our exciting passage to Islamic finance, I would like to discuss its relevance in the contemporary global financial milieu.
Financial crisis of 2008
All of you must have debated many times about the ‘mother of all financial crises’ the world has experienced so far. I mean the financial crisis of 2008. Nevertheless, it is important that we review the crisis one more time which would greatly assist in understanding the relevance of Islamic finance in the present day and age.
The financial crisis emanating from US financial markets in 2008 and spreading globally at breakneck speed left the world fairly poorer and created considerable uncertainty about its economic future. Although financial pundits claim that the world has largely recovered from it, the aftershocks of the turmoil are regularly felt from time to time in different parts of the world economy. Far from being over, I can at best relate the current global financial situation to walking on thin ice which could cave in at any time, plunging humanity into ice-cold water and struggling to jump up to safety.
One of the core causes of the financial crisis stemmed from highly overleveraged and extremely complex derivative products which were based on utmost greed, as well as exploitation, as the driving factor. The sharp conflicts of interest developed among various groups and individuals involved in structuring and selling such derivatives and similar speculative products led to the complete failure of ethics and morals as each one of them wanted maximum share of the kill.
The subprime mortgage products and the other derivatives of similar nature became the classic combination of greed, exploitation, non-transparency, unfairness, uncertainty, excessive risks and gambling – all put together proved a disastrous recipe for humanity.
The economic philosophy of Islam negates all such harmful elements while handling money and finance. It stands for the abolition of interest and usury (Riba), gambling (Maysir), exploitation (Zulm) and uncertainty (Gharar). Most importantly, it underlines respecting the interests of all parties concerned in a given transaction in pursuit of material gains, instead of every party in the transaction being self-centered and keeping its own interest as the top priority.
Against this backdrop, let us examine the relevance of Islamic financing principles in today’s chaotic financial world and find out if they have any message for the entire humanity, and not for Muslims alone.
The root cause of the financial crisis – the failure of morals and ethics
Conventional financial institutions, including banks, investment companies, insurance companies, etc, are managed by hired professionals. Those who control these large institutions by virtue of owning majority shares appoint such professionals in order to fulfill their motives of achieving very high profitability, which is different from the innocent objectives of ordinary shareholders who are content with a reasonable annuity.
The majority of the populations in developed countries are engaged in a capital-supplying role by way of purchasing stocks, bonds, insurance policies, contributing to pension funds and investing in various capital and money market instruments as a way of life. While these ordinary people anticipated reasonable profits from such smaller investments and were more concerned about the stability of the economy, the availability of jobs, social welfare, healthcare, etc, the mission of the executives hired by the boards of directors in such institutions was profit maximization and acceleration so as to increase the shareholders’ value.
Since the incentives and bonuses of these executives were tied to performance, at times these executives took excessive risks in order to multiply their own material gains. Then there were those who worked as middlemen at a fee and they too earned more when the transactions got multiplied.
In such an environment, nobody cared about the consequences their actions may bring to investors and other stakeholders of the economy. There are regulators and members of elected bodies supposedly to maintain a semblance of order in such a chaotic financial world. However, these regulators were often found wanting, unable to adequately comprehend the complexity of instruments and the unwarranted inherent risks, or in some instances were found seeking to maximize their own private gains. Both these factors – ignorance and greed – compelled them to overlook the treacherous gaps.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the projects advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected]