The global financial crisis and the.4

THE GLOBAL FINANCIAL CRISIS AND THEISLAMIC FINANCE SOLUTION

GROUP MEMBERS;ABDUL MUTALIF BIN ABDUL RAZAKHENRY ANAK MEDANGWAN HASRIE

INTRODUCTION…….

The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.

On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns.

WHAT CAUSED THE GLOBAL FINANCIAL CRISIS?

One of the main culprits that is often pointed to as one of the main triggers of the global financial crisis are the mortgage derivative products, where risky mortgages were packaged with more traditionally secure mortgages and sold to corporate investors and other banks as secure investment products.

WHAT CAUSED THE GLOBAL FINANCIAL CRISIS?CONT’D

This packaging of mortgages is generally accepted to have masked the real risks that were linked with such a product, which gradually grew as lending criteria were loosened in the first five or six years of the twenty first century.

CAUSES AND CONSEQUENCES OF FINANCIAL CRISIS

Causes of financial crisis & Risk/Consequence LeverageBorrowing to finance investment

Risk(Bubble that leads to bankruptcy)

Asset-liability mismatchThe disparity between a bank’s deposits and its long term assets leadsto the inability of banks to renew short term debt they used to financelong term investments in mortgage securities

RiskBank runs

Money supplyUncontrolled printing of paper money that is not backed by

realassist/commodity (gold) Risk

Higher inflation

CONTINUED….

Regulatory failureImproper (insufficient/excessive) regulatory control:-Insufficient regulation:1) Results in failure of making institutions’ financial situationpublicly known (lack of transparency)2) Makes it possible for financial institutions to operate withouthaving sufficient assets to meet their contractual obligations.-Excessive regulations that require banks to increase their capitalwhen risks rise leading to substantial decrease in lending when capital is

in short supply

Risk/Consequence-Excessive risk-taking-Financial crisis (of 2008)Potential deterioration of financial crisis.

CONTINUED…..

Fraud, corruption and greed-Enticing depositors through misleading claims about their investment

strategie and manipulating information.-Creating financial assets without any real economic activity-Extreme economic greed overrides basic ethical consideration in

investments Risk/Consequence

Subprime mortgage crisis ContagionWhere the failure of one particular financial institution to meet itsfinancial obligations (due to lack of liquidity, bad loans or a suddenwithdrawal of savings) causes other financial institutions to be unableto meet their financial obligations when due. Such a failure maycause damage to many other institutions and threatens the stability ofFinancial markets. Risk/ConsequenceSystemic risk

GLOBAL RECESSION IS A SIGN OF CAPITALISM’S END ONLY ISLAM CAN SOLVE THE ECONOMIC PROBLEM

Hizb ut-Tahrir in Bangladesh organized an Economic Conference at the National Press Club titled "Global Recession: Impact on World - Islam's Economic Alternative". Three speeches were delivered on the following topics:

1. Capitalism is inherently flawed and causes crises;

2. Causes of current global recession and failure of the patchwork solutions of Capitalism;

3. Only the Islamic economic system under the Khilafah state can provide crisis-free economic justice

GLOBAL RECESSION IS A SIGN OF CAPITALISM’S END ONLY ISLAM CAN SOLVE THE ECONOMIC PROBLEM- CONT’D

Mahmudul Hasan Foyzi said ‘the fundamentals of the capitalist system are responsible for the current economic disaster. These include absolute freedom of ownership, focus on production rather than distribution, paper based currency, usurious banking system, and the financial sector based on speculation.

Second speaker Abu Hamza Al Mamun delivered his speech on ‘Causes of current global recession and failure of the patchwork solutions of Capitalism.‘

Materialistic and consumption oriented thinking of capitalism is the main reason for the collapse of financial market of USA and later transformation of this crisis from US domestic crisis to a global crisis.After that US credit market and related derivatives products attracted global investors


When US federal reserve increased the interest rate, borrowers defaulted, which affected all sectors resulting in the global recession now. To solve the crisis, US-EU have taken multiple rescue packages, by printing money they wanted to reduce the liquidity crisis, reduction of interest rate and altering regulations - all of which have failed.

Problem is capitalism itself. By saving the problem i.e. capitalism, no solution can be achieved.


Mohiuddin Ahmed in his speech titled ‘Only the Islamic economic system under the Khilafah state can provide crisis-free economic justice' said the export sector in Bangladesh is now suffering due to the global recession as Bangladesh economy is run according to the capitalist system. As well as this the economy is designed to serve the imperialist countries.

It is time for the Muslims to throw away the capitalist system which is on its deathbed now. We have seen the collapse of communism aw well. Allah وتعالى the Creator of the ,سبحانهUniverse, gave us economic system free from crises and secures justice and tranquillity. Islam prohibits all the factors that lead to economic crises in the first place.

BAHRAIN FINANCE MINISTER:ISLAMIC RULES SAVED US FROM RECESSION

Manama, Bahrain (CNN) -- Bahrain's finance minister said adherence to strict Islamic rules helped his country escape the worst of the global recession. Finance Minister Sheikh Ahmed bin Mohammed al Khalifa predicts growth of four percent for Bahrain's economy this year, saying "long-term consistent growth" is the kingdom's goal. Sheikh Ahmed said the country "built an economy that is resilient, that is able to withstand shock.“

BAHRAIN FINANCE MINISTER:ISLAMIC RULES SAVED US FROM RECESSION –CONT’D

"We've gone through this period very well. I think the diversification of our economy has helped us tremendously," he told CNN. Asked how the kingdom avoided some of the riskier assets that ended up crippling other economies, the minister said:

"Looking at Islamic finances and industry, because they are barred by their own rules from some of the creative products, they were able to stay away from those industries."

"We've gone through this period very well. I think the diversification of our economy has helped us tremendously," he told CNN.

The minister also said: "Looking at Islamic finances and industry, because they are barred by their own rules from some of the creative products, they were able to stay away from those industries."

“We built an economy that is resilient, that is able to withstand shock.”

CONCLUSION

Principles of Islamic finance could have helped avoiding the crisis, and could alsohelp to recover from it. As discussed above, Islamic finance integrates financialactivities with wealth creation, thus greatly reduces the chances for excessive debtand speculation. Islamic finance also gives an essential role for non-profitactivities, which act as economic and social safety net in case of downturns andrecessions.

CONCLUSION-CONT’D

Overall, therefore, Islamic principles of finance promote productiveand stable economic activities.The essential principles of Islamic finance are not specific to the Islamic faith.They are shared by all Divine religions and many worldly beliefs as well. Themessage of Islamic finance, while ethical, is also universal. At a time when worldleaders are calling for paradigm change and financial reform, it is important toreintroduce into our financial systems ethical and moral principles to serve thecommon good of humanity.

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