Islamic Economics: An Alternative?

Solving World Financial Crisis

By Dr.Hussein Shehatah

Expert on the Islamic Financial Transactions
After World financial meltdown had dealt a severe blow to the free
market system, economists rushed searching for alternatives that could
avoid the pitfalls of Capitalism. Dr. Hussein Shehata, a prominent
expert on Islamic financial transactions, argues that Islamic economic
system can be a viable alternative. Dr. Hussein Shehata Received his
PhD in administrative accounting from Bradford University, the United
Kingdom. He works as a financial advisor for numerous financial
institutions in the Muslim World.

Islamic financial institutions have increasingly gained momentum in
many parts of non-Muslim world, including United Kingdom, Oct.21.2008.
(Reuters photos) Signs of the collapse of the world financial system
have emerged, causing great panic to people all over the world. Many
governments called upon economists and experts to find a way out.
Financial institutions and their agents began to think about rescue
plans.

Many people rushed to draw their deposits from banks. At the same
time, several financial institutions have frozen the process of
granting loans to companies and individuals for fear that it might be
difficult to take them back.

The drop in the circulation of money among individuals, companies and
financial institutions has given rise to a sharp slowdown in the
economic activity. As a consequence, debtors have become unable to pay
back their debts.

Wall Street meltdown dealt a severe blow to the level of exchanges in
money and exchange markets causing indexes to fluctuate. Furthermore,
used capacities in companies were decreased due to the decrease in
financial flow and the inability to take loans from financial
institutions, except at high interest rates with heavy guarantees.

This shortage of financial flow decreased consumption of certain
commodities, like cars and real estate sector. The drop in
consumption decreases savings, investment projects, and hence
increases unemployment which is eerily climb as many companies become
bankrupt threatening many employees to lose their jobs.

Causes of the Crisis
Credit card debt inflicts high costs on the consumer, and when one can
not pay back his debts, the interest rate is continuously increased.

Maurice Allais, an expert on world economy and a Nobel Prize laureate
in economics, said, "The world economic system is based on some
concepts and rules that will be the very cause of its destruction
unless treated and rectified quickly."
In fact, many economists argue that the neo-capitalist world economic
system rests on principles that will lead to its ruin.

It can be argued that among the reasons that led to the crisis is the
spread of moral economic corruption, such as exploitation, lying,
circulation of prejudiced rumors, cheating, monopoly and the
engagement of nominal transactions, with no real value. In this way,
the wealthy and creditors oppress the poor and debtors who, as a
consequence of being unable to bear such oppression anymore or pay
back these debts and loans, will grumble and be resentful.

Also, wealth has become a weapon used to dominate and control politics
around the world. Money has become the idol the capitalist economy.

Interest-backed banking system inflicts mounting debts on consumers by
working within the framework of the system of trading debts, either
by selling, buying or brokerage.

The more the interest rate on deposits increases, the more the
interest rate on the loans granted to individuals and companies will
also increase. Only banks and stockbrokers benefit from this, whereas
the debtors, who take loans for consumption or production purposes,
bear this heavy burden alone.

Credit card debt inflicts high costs on the consumer, and when one can
not pay back his debts, the interest rate is continuously increased.
Ultimately, consumer's property will be confiscated in order to
guarantee security. This has actually happened to many holders of such
credit cards, causing an imbalance of their house budgets.

Indeed, banks impose additional burdens on the borrower who is not
able yet to discharge the first loan due to the increasingly higher
rate of interest. This is similar to usurers in the pre-Islamic period
of Ignorance who would say to a debtor, "Either you repay or augment."

Furthermore, Stock brokerage firms deceives those in need of loans as
they claim high commission payment if there are potential risks,
leaving the poor debtors to bear their burden and attributed negative
consequences.

Actually, Some economists believe that no real development or wise
employment of the means of production could be achieved unless the
interest rate is zero. This view was held by Adam Smith, the Father of
modern economics.

Furthermore, economists think that the alternative is based on
participating in profit and loss, because it brings about stability
and security. In addition, interest-based system results in the
accumulation of wealth in the hands of few people who will thus be in
control of the world's fortunes.

In addition, The world financial system rests on the basis of the
financial derivatives system that depends mainly on nominal
transactions, with no real exchanges of goods or services. What is
even worse is that most of these transactions are based on credits
taken from banks in the form of loans, and when things develop
unfavorably all that collapses triggering the financial crisis.

Islamic Economics
Islamic economy promotes participation in profit, loss, and actual
exchanges of money and assets.

The current financial crisis debunks the myths of Capitalism, opening
the way for alternative economic systems to emerge, among which is the
Islamic finance and economy.

Yet, instead of just reacting to the crisis, scholars of Islamic
economics ought to explain the concepts and principles of the Islamic
financial and economic system and present its reference and
applications to wider audience.

The Islamic economic and financial system is based on a set of values,
ideals, and morals, such as honesty, credibility, transparency, clear
evidence, facilitation, co-operation, complementarity ,and solidarity.

These morals and ideals are fundamental because they ensure stability,
security, and safety for all those involved in financial transactions.
Furthermore, the Islamic Shari`ah prohibits the economic and financial
transactions that involve lying, gambling, cheating, gharar
(risk-taking), jahalah (unawareness), monopoly, exploitation, greed,
unfairness, and taking people's money unjustly.

In addition, Islamic economy promotes participation in profit, loss,
and actual exchanges of money and assets. In fact, there should be
real interaction between the wealthy, employers, the employees, and
financial experts.

There is no party who is a constant winner or a constant loser; yet
profit and loss is mutually shared.

Based on Shari`ah regulations, economic contracts entail mudarabah,
sharing, murabaha, istisnaa`, salm, igarah, and sharecropping.
Shari`ah prohibits all forms of investment-based contracts of funding
that involve interest loans forbidding financial transactions that
involve gharar (risk-taking) and jahalah (unawareness).

Actually, economic experts assert that the system of financial
derivatives cannot bring about real development. Financial derivatives
create only money, with no real value, causing inflation and price
rise ,as well as moral decadence. For example, financial derivatives
caused quick collapse of East Asian financial institutions.

Regarding debts, Shari`ah prohibits all forms of selling debts, like
discounting promissory notes and checks with postponed payments. Also
forbidden under the Shari`ah is the scheduling of debts at a higher
interest rate. Prophet Muhammad (peace and blessings be upon him)
forbade the sale of debts. In fact, economists contend that selling
debts has exacerbated the financial crisis.

Actually, the Islamic economic and financial system makes it easier
for the borrower to repay debts. Almighty Allah says: "And in case any
person is under difficulty, then he should (be granted) a respite to
(the time of) ease…" (Chapter 2: Verse 280).

Shari`ah allows for a system of funding and investment based on
participation in both profit and loss and interaction between capital
and labor. Shari`ah calls on the parties involved in transactions to
behave in a truthful, honest, clear and transparent way by prohibiting
gharar, jahalah, cheating, gambling, lying, rumors, exploitation and
taking people's money unjustly.

In a word, the only way out of this crisis can be found in the
principles and regulations of the Islamic economics.
***

Dr. Hussein Shehatah is Consultative Expert on the Islamic Financial
Transactions and Professor at Al-Azhar University.