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

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
Wad
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 non-Shariah
compliant assets, not only as a pricing
tool.
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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
growth of the real economy
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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 Bai 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;
AAOIFIs Standards must be applied for all
banks and areas.
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Thanks
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