» Why Islamic Economy?

Why Islamic Economy?

Nowadays, global economy is suffering from a severe financial crisis that hit the world as an earthquake and flipped things upside down. In the midst of the serious search of a solution for the crisis, the Islamic economy appeared to introduce itself as a comprehensive economic theory and showed doubtlessly in the first practical applications that it would solve the problems of the global economy well. The article aims at informing a non-Muslim friend asking about what could possibly make him interested in Islamic Economy, and I replied in an objective and neutral way.
What are the problems of the global economy that the Islamic economy can handle? , asked my friend. I said that the global economy is suffering from speculations described as the AIDS of the economy by Jacques Chirac; the former President of France. Nowadays, our world lies under the pressure of a fake inflation in economy which does not fit with the real situation. It is like a balloon filled with air and at a certain point the pressure on it is going to make it explode. This motivated me to explain the real crisis that broke out in 2008 and its implications on the European Union and the whole world. Then, we will discuss the role of the Islamic Economy to solve the crisis.

The origin of the crisis
Capitalism contains paradoxical ideas that resulted in periodic crises which reached the number of 33 in 200 years as scientists estimated. Such crises have become an integral part of capitalism. However, the global financial crisis of 2008 had other factors that multiplied its impact to the extent that it was about to eliminate the American domination over the global economy. These factors have been represented by breaching the banking systems by the banks and the financial institutions. These banking systems were established 400 years ago. The breaches took place on the grounds of freedom of banking and deregulation of Federal Reserve System and European central banks. This resulted in 75% of extra budgetary banking operations without any supervision. In addition, the investment banks under the supervision of the central banks that disregarded these serious violations lent massive amounts of money to individuals and institutions without following the ordinary procedures or even searching the history of the debtors and without enough guarantees especially in subprime mortgage which led to debt problems. Simultaneously, the real-estate prices decreased resulting in sinking in debts and reducing its prices with an increase in supply. These factors pushed financial institutions to the edge of bankruptcy. At that time, speculations at Wall Street reached shocking proportions leading to the lack of confidence in the economy and subsequently causing more losses. Moreover, the financial derivatives such as options or futures and other risk trading that are not related to the tangible economy represented in real production aggravated the crisis. The unwise behavior of financial institutions motivated them to use derivatives in selling these bad debts and securitizing it involving interest and deceiving ignorance.  I do not forget to mention the corruption of those leading financial institutions. For instance, Lehman Brothers Chairman received 486 million dollars for the year 2007. In 2008, a series of crises started and the symptoms of crisis appeared clearly represented in the collapse of Lehman Brothers bank and the declaration of its bankruptcy, the nationalization of AIG insurance company that issued insurance policies to the debts of subprime mortgage, and the state of the two largest corporations dealing in subprime mortgage Freddie Mac and Fannie Mae investing in 6 trillion dollars and their debts at that moment reaching 5.4 trillion dollars that underwent the trusteeship of the US Treasury. This major collapse paralyzed the movement of capitals in society and affected the tangible economy badly. It was evident in important industries such as car industry and many people lost their jobs resulting in increasing unemployment in all economies related to the leading American economy. The crisis impact is still present nowadays in the collapse of the Greek economy, its impact on the European Union, and the crises of the banking sector in Spain due to lending a massive amount of money to the real-estate investments. Moody’s for credit ratings thought of degrading the AAA rating of the European Union.

Attempts to treat the crisis
The attempts only help treat its symptoms and reduce its serious and negative effects on society, but not to remove it. Countries hurry to pump liquidity and to save the financial institutions as much as possible. Money pumped by the first and second bail-out plans in the US reached 4 trillion dollars. Other measures are taken by countries to pump liquidity in markets.

Role of Islamic finance in eliminating the crisis
First, I would like to express that the Islamic economy is mainly protecting the tangible economy by encouraging the values of work, trade, honesty, and etc. It also tackles the Islamic finance that is our concern in this article. Islam does not impose a detailed system for the crisis, but it rather provides general rulings that are effective in achieving the economic stability and the economic growth of the society. Islam gives man free will to choose in the scope of general rulings. The first ruling regarding this matter is that Islam does not refuse the states’ intervention to solve the problems. On the contrary, Islam considers such intervention a duty and I cannot find any proof that Islam refuses any procedure taken by the states to reduce the severity of the crisis. Yet, Islam forbids usury and interest and provides a pragmatic substitute to the loans with interest represented in sharing profits in the contracts of istizraa, ijara, istisnaa, and etc. Islam fights all forms of taking people’s money without a cause by aleatory, ignorance, fraud, false misrepresentation, and all kinds of gambling as options and futures financial derivatives. Unfortunately, interest is the base of all contemporary finance though usury is a mere evil with no good at all. Usury makes the capital itself a profit so it hinders the productivity in tangible economy and imposes excessive interests on consumers, in addition to hindering the economic growth and causing commodity recession. Usury is also the cause of periodic crises of capitalism. The financial institutions which proved themselves invulnerable to the impacts of the global financial crisis such as the Islamic Development Bank and the other institutions which do not deal with interest are the best proof of the success of Islamic finance. I have to admit that the Islamic practices in economy are still new born and these mistakes in application are in fact due to the lack of Islamic banking experience in comparison with the traditional banking practices which started 400 years ago. The Islamic banking only started few years ago and the first Islamic monetary institution was established in 1975. The Islamic economic theory is a promising experience worth attention and use. In the Islamic finance fiqh, there is a type of contracts called unnamed contracts which mean contracts without an origin in Islam, but in line with its rulings. This is one of the proofs of the greatness of Islam as it allows the openness of the Muslim community to all societies and to benefit from any useful science or life experience. The Islamic banking uses all banking systems and products within the limits defined by the shari’a so as to guarantee the effectiveness of finance and protect economy from all crises caused by usurious interests.

Finally, I told my friend that there is much to say, but unfortunately I do not have space for details. I think that the crisis has no urgent solution except for getting rid of usurious practices gradually, sticking to the rules and principles of the banking systems, using the alternative Islamic financial solutions of the traditional financial means, and pumping liquidity to save the stunted economies from recession.