by Dr. Iftikhar Ahmad Ayyaz, Khuddam Event Bradford, UK. 13th February 2010
It is a great privilege and honour for me to be given this opportunity to address this meeting on a critically crucial subject such as ‘Islam’s Response to the Global Economic Crisis.’
I am fully aware that the topic I am here to expose is so wide and deep that trying to do justice to it within the time at my disposal would be like trying to contain an ocean in a cup.
Referring to the global situation, Douglas Alexander, U.K Secretary of State for International Development recently stated: “The global Community faces enormous challenges. The Economic Crisis, food security, climate change, energy insecurity, conflict, rising population – these are the challenges of unprecedented magnitude which affect us all, and in particular the world’s poorest and most vulnerable.
The global financial crisis has brought the most significant economic downturn for decades, which has devastated the developing world as 90 million more people are forced into poverty.
The billionaire Investor Warren Buffet, as the unprecedented worldwide financial crisis began to unfold commented: “If the U.S government does not act, we face an economic Pearl Harbour!”
The evaluation of the Credit Crunch in the same breath as Pearl Harbour is a frightening one. The attack on Pearl Harbour was one of the most visible and defining moments of US involvement in the Second World War.
On 7 December 1941, Japanese Imperial General Headquarters initiated the Battle of Pearl Harbour. An incredibly audacious unannounced military strike in which the Japanese navy attacked the United States naval base at Pearl Harbour.
The attack shattered a significant part of US capability and was close to defeating the USA. It was these massive losses and surprise nature of the attack that caused the US to rise and enter into World War II.
When we examine the results of the financial crisis we see that as with Pearl Harbour, the markets had been brought under surprise attack, as with Pearl Harbour none of the experts predicted it’s birth or its consequences and as with Pearl Harbour, it almost destroyed a significant part of the USA’s, and indeed, the world’s economic strength.
Key Statistics About the Crisis
And so the Financial Crisis in many ways does have troubling similarities with Pearl Harbour. Let me introduce you for a moment to some surprising, dispiriting and disturbing statistics about the credit crunch which seems to have ravaged our financial sector, broken the back of our economy and produced a recession that could be the worst for many generations.
Let me present you with some numbers:
The UK bail out plan has cost £500 billion. That results in a potential additional tax liability of £8,000 for each person in the UK. To put that in context, this sum could build 4000 new hospitals.
The Royal Bank of Scotland needed £20 billion from taxpayers to stay afloat.
The cost to the global economy of the credit crunch is £1.8 trillion.
The average amount that will be wiped off the value of each home is £50,000.
General Motors, the USA’s biggest car maker is losing 52 million Dollars every minute as a result of the economic meltdown in the US.
These figures paint a bleak picture. A picture of broken business, bust banks and a fractured financial system. The economy is weak and it is the common man that is paying the price. I’ll speak more about that later on. For now, I want to speak briefly on what caused the Credit Crunch.
What Caused the Crisis?
History of Banking
The global credit crunch was caused by many factors. But its roots lie in the very structure of the modern banking system. The principle of modern banking was first started by Goldsmiths many centuries ago. At that time, Goldsmiths would keep gold safe for wealthy merchants and give them notes of ownerships to exchange at other Goldsmiths branches in distant countries. These were the beginning of the first banknotes.
As the banking system developed, it became apparent that on average, depositors usually extracted some 10% of their gold out during any one year. The rest was saved with Goldsmiths.
Since they generally kept 90% of the Gold, Goldsmiths began to lend out the remaining gold at interest which created profits from the merchants gold deposits.
The gold was lent out and interest was charged on such loans. The interest and capital repayments were secured on property. Essentially, this created money from nothing by satisfying the need for capital on the basis that it would be returned in the form of a healthy interest based profit. This was the beginning of modern banking. It created the ability to make money from money itself. A principle that was prohibited both in Christianity, as a prohibition on usury and in Islam.
This basic principle of creating money from money has continued with minimal regulation, and is the basis of how the financial crisis came into being.
The Collapse of the Financial Markets – Sub Prime and Interest only mortgages
Of course there is not one single cause. The crisis can be attributed to a number of factors which include both housing and credit markets. Causes attributed include the inability of homeowners to meet mortgage payments. The main reason for this was that interest rates on low rate mortgages given to people who were less creditworthy rose significantly leaving borrowers in the sub prime market unable to meet their repayments. This form of predatory lending, speculation, risky mortgage products, high personal and corporate debt levels, financial products that distributed and perhaps concealed the risk of mortgage default, monetary policy, international trade imbalances, and government regulation were and in part, remain causal factors.
There were three crucial catalysts of the subprime crisis. One of these was predatory lending practices of mortgage brokers, specifically the adjustable-rate mortgage, that I have just described.
In its “Declaration of the Summit on Financial Markets and the World Economy,” dated 15 November 2008, leaders of the G20 cited the following causes:
“During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards and unsound risk management practices… combined to create vulnerabilities in the system.”
In the years before the crisis, the behaviour of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers. The Subprime mortgages market amounted to $35 billion in 1994 and $600 billion in 2006.
In addition to considering higher-risk borrowers, lenders had offered increasingly risky loan options and borrowing incentives. 43% of borrowers in the US made no down payment on a mortgage whatsoever and those who did, might only have contributed 2% .
Interest-only adjustable-rate mortgages were another significant cause.
And so, in the same way as Goldsmiths, banks took deposits from savers and used it to lend. They did so excessively on high rates of interest. When US mortgage holders on low incomes were unable to meet their loan repayments, their homes were repossessed, and banks were forced to write off their so-called sub-prime loans.
The widespread default on repayments caused panic in the markets. Many banks in the US and Europe had bought these sub-prime loans, often packaged up in pools of debt called collateralised debt obligations. These debt pools increased and their value diminished resulting in their asset value being far less than banks had paid for them. This made them difficult to sell.
Banks stopped lending and central bankers became concerned about a squeeze on the amount of cash in the financial system.
Banks led by the European Central Bank then decided to make large amounts of cash available to commercial banks to try to alleviate any shortages and to pump money into the economy to keep it moving. This caused governments to incur massive debts.
The results are before us today.
The Consequences for Government
Brown, Bush and Obama administrations have managed to avert a depression, but not the crisis. The economy is only slightly recovering largely due to the unprecedented and enormous amounts of money being injected into the economy. Apart from war time years America’s largest deficit has been 6% of GDP. In 2009-2010 it will rise to 13% of GDP, more than twice the wartime record and equating to some $1.8 trillion. In Greece, the national debt is at 13% with the EU demanding that it reduce its national debt for fear that Greece will default on its debts. And now the EU has decided to rescue Greece by injecting billions into its economy. Britain’s national debt is not far behind at 12.6%, and is one of the highest levels in Europe.
There are three ways of financing these debts:
Borrowing from foreigners.
That is through the purchase by other countries or investors of our currency or shares, bonds or companies. The purchase of Cadbury by Kraft is a good example.
Borrowing from citizens
If British savers save £500 billion a year, the money that they put through intermediaries like banks will become available to the Treasury.
Printing Money. This is called quantitative easing and injects money electronically into the market.
Right now, the government is spending 185% of what it earns and so at some point more income and less spending will be required. Raising taxes and cutting expenditure is politically unpopular.
Financing the recovery through debt is temporary fixes. It fixed hole of debt by digging another hole of debt. At some point, that hole needs to be filled. One way of dealing with the deficits would mean making massive spending cuts. That would be unpopular and it may be that a simple default on debts would be less damaging economically and politically than the alternatives. That has its own consequences, such as deep economic downturns and/or hyperinflation.
Governments do need to fix their balance sheets but only when the economy has become stronger. It may be that this takes the form of spending cuts and where more revenue is needed taxes on consumption or carbon, not wages or profits. Governments need encourage productivity but not by subsidising specific industries. They also need to think very carefully about the structure of the banking system and hugely detrimental effects it imposes upon society.
What I have presented you with so far is an analysis of the issues and what must be done to escape this crisis.
Why was this not Predicted?
But the intriguing part of this is the generally wholesale failure of economists to predict it. The crisis surprised both the economists and politicians.
Niall Fergusen, a respected economic scholar suggests that economists missed the crisis because the markets for bonds, stocks and complex securities were never considered to be sources of economic expansions and slumps. It was always assumed that these areas were secured by deposit insurance and the Federal Reserve which would prevent financial panics.
Instead economists focus on the spending levels of consumers, businesses and government. The problem was that financial markets were de-emphasized. Ultimately it was those very markets that inflated the property market which inspired a consumer spending boom. The losses in the sub prime sector triggered a collapse of confidence a fact acknowledged by the International Monetary Fund.
Ultimately, the cause stems from the indelible injustice of modern finance and banking and its catastrophic impact on the poorest members of society and indeed the world.
Muslim countries have sought to challenge the concept of modern banking by introducing Islamic finance. Its modern history dates back to the 1970s, with the launch of Islamic banks in Saudi Arabia and the United Arab Emirates although its roots stretch back to the time of the Holy Prophet Muhammad (pbuh). Islamic finance rests on the application of Sharia, whose primary sources are the Holy Quran, the Hadith and the practice of the Holy Prophet (pbuh). Emphasising justice and partnership, Islam bans speculation and the charging of interest, riba.
Despite these prohibitions, Islamic financiers have expressed confidence in creating their own versions of conventional finance. In doing so, the judgment of what is and is not allowed as a sharia compliant financial product is made by boards of scholars who act as a spiritual rating agency. They work in close co operation with lawyers and bankers to create instruments and structure transactions that appear to meet Islamic requirements.
Yet as I will go on to demonstrate, the products are often contrived and the distinctions between conventional and Islamic finance are almost indistinguishable. Take for example an options contract to buy a security at a set price at a date in three months. This is speculation because it may result in a loss or a gain at that time and is generally prohibited in Islam. However, a contract to buy the very same security at the same price, with 5% of the payment taken upfront and the balance taken in three months upon delivery, is according to these Sharia Board’s, Sharia-compliant. In this example, there is clearly no material difference in the way in which the contract is structured other than the time for payment. The option and inherent risks remain within.
But mere attempts to establish the Islamic Banking system without the prevalence of the Islamic moral and social values, is futile. What these values are and what are the principal features of the Islamic Economic System is the next part of my talk.
But before that, I would like to mention that the Islamic Economic System is based on the principle that money itself has no power to grow on its own. Its capacity to increase or decrease is bound with human capabilities and abilities.
Money in the hands of an honest, capable, reliable, hardworking, experienced person is likely to increase, otherwise it will decrease.
Therefore, Islam recognises money as an instrument of the expression of human capabilities and depending on the efficiency, competence and integrity of the individual and the Institution or Corporation, can result in positive or negative productivity.
The Holy Prophet (pbuh) once asked a person who was dealing in interest whether his money was capable of bearing children; meaning that money will not grow itself. It is such a means that it will grow through the bright and progressive human capabilities and decrease if those qualities are faulty and inactive.
In the economic sphere the basic concept in Islam is that absolute ownership of everything belongs to God alone (2:108). Man is God’s vicegerent on earth. God has subjected to man’s service:
Whatsoever is in the heavens and whatsoever is in the earth. (45:14)
This has reference to the whole of mankind. Allah is He Who has appointed you (mankind) His vicegerents in the earth, and he who fails to recognize this dignity and to act in accordance therewith shall be answerable for his neglect and will not only suffer loss but will also incur the displeasure of his Lord. (35:40)
Legal ownership of the individual, that is to say the right of possession, enjoyment and transfer of property, is recognized and safeguarded in Islam; but all ownership is subject to moral obligation that in all wealth all sections of society, and even animals, have a right to share.
In their wealth they acknowledge the right of those who asked and of those who could not (51:20)
Part of this obligation is given legal form and is made effective through legal sanctions, but the greater part is sought to be secured by voluntary effort put forth out of desire to achieve the highest moral and spiritual benefits for all concerned. In fact, this supplementing of legal obligations through voluntary effort runs through every part of the Islamic system. Its operation can be observed in every sphere.
The object of the Islamic economic system is to secure the widest and most beneficent distribution of wealth through institutions set up by it and through moral exhortation. Wealth must remain in constant circulation among all sections of the community and should not become the monopoly of the rich (59:8)
Islam recognizes the diversity of capacities and talents, which is in itself beneficent, and consequently the diversity in earnings and material rewards (4:33). It does not approve of dead-level equality in the distribution of wealth, as that would defeat the very purpose of the diversity, and would amount to denying the favour of Allah (16:72). It is obvious that if the incentive of proportionate reward for labour, effort, skill and talent were to be removed, not only would initiative and enterprise be adversely affected, but intellectual progress would also be arrested. That is why the theoretical doctrine of equal reward irrespective of the diversity of skill capacities and talents that have gone into production of wealth has never been maintained for long, even where it has been proclaimed as State policy, and has had to be modified through recourse to various devices designed to secure diversity in reward. On the other hand, Islam does not leave the principle of competition and of proportionate rewards to work itself out mechanically; that too would lead to hardship and injustice, and would retard the moral and spiritual development of individuals and of society as a whole.
The principle economic obligation is the payment of the capital levy called Zakat (22:79; 23:5). The word Zakat means that which purifies and that which fosters. All original sources of wealth – the sun, the moon, the stars, the clouds that bring rain, the winds that drive the clouds and carry the pollen, all phenomena of nature – are the gifts of God to the whole of mankind. Wealth is produced by the application of man’s skill and labour to the resources which God has provided for man’s subsistence and comfort over part of which man enjoys proprietary rights, to the extent recognized by Islam. In the wealth that is produced, therefore, three parties are entitled to share; the workman, whether skilled or unskilled; the person who supplies the capital; and the community as representing mankind. The community’s share in produced wealth is called Zakat. After this has been set aside for the benefit of the community, the rest is purified and may be divided between the remaining parties that are entitled to share in it.
The proceeds of the Zakat are devoted towards relieving poverty and distress, winning over the cheerful co-operation of those who have not yet completely adjusted their lives to the Islamic system, providing ransom for prisoners of war, helping those in debt, providing comfort and convenience for travellers, supplying capital where talent is available but funds are lacking, providing stipends for scholars and research workers, meeting the expenses involved in collecting and administering the Zakat, and generally towards all things beneficial for the community as a whole, such as public health, public works, medical services, and educational institutions (9:60). It thus fosters the welfare of the community (9:103).
Besides the Zakat, which was described by the Prophet as a levy imposed upon the well-do-do which is returned to the poorer sections of the people implying that it is their just due and must be paid back to them, there are other institutions within the economic sphere operating constantly to further the objective of the whole system. One of these is the Islamic system of inheritance and succession. Under this system a person may not dispose of more than one-third of his property by testamentary directions. While he is in the enjoyment of normal health he may dispose of his property freely, subject, of course, to the moral obligations; but neither by will nor by gift, once he enters upon a stage of illness which terminates in death, may he dispose of more than the permitted one-third. By such disposition he may provide legacies for friends, servants, and for charity.
The difference between the normal share of female heirs and male heirs in the same degree of relationship to the deceased is not in fact discriminatory to the prejudice of the female heirs. Under the Islamic system, the obligation of maintaining the family always rests upon the husband, even when, as is often the case, the wife’s personal income may be larger than the husband’s. To enable the male to discharge his obligations towards the family, his share in the inheritance is twice that of a female in the same degree of relationship as himself. Far from operating to the prejudice of the female heir, this actually places her in a favourable position as compared with the male heir, because she does not have financial obligations to the family.
Thus the Islamic system of inheritance operates to distribute wealth so that a large number of people may have a competence or, at least, a little, rather than that one or a few should have a large share and the rest nothing. As if all this left something to be desired, the exhortation is added:
If other relations, who are not included among the heirs, and orphans and the poor, be present at the division of the inheritance, bestow something upon them there from and speak to them words of kindness (4:9)
Another major provision is the prohibition against the making of loans on interest. The word used in this connection in the Quran is riba, the connotation of which is not identical with the word ‘interest’. Riba is prohibited because it tends to draw wealth into the hands of a small circle and to restrict the exercise of beneficence towards one’s fellow beings. In the case of loans which bear interest, the lender in effect takes advantage of, and makes a profit out of, the need or distress of another. Islam urges the making of loans, but says they should be beneficent loans, meaning without interest. If the debtor finds himself in straitened circumstances when the time for repayment of the loan arrives, he should be granted respite till his circumstances improve, but if you remit it altogether as charity, that shall be the better for you, if only you knew (2:281)
It is mistake to imagine that transactions involving interest bring about an increase in the national wealth. The Quran says that in the sight of Allah it is not a beneficent increase. But whatever you give in Zakat, seeking the favour of Allah – it is these who will increase their wealth manifold (2:273).
Trade, commercial partnerships, co-operatives, joint stock companies are all legitimate activities and operations (2:276). Islam does, however, lay down regulations with regard to commercial activities, designed to secure that they be carried on honestly and beneficently. All contracts, whether involving large amounts or small, must be reduced to writing setting out all the terms thereof, as this is more likely to keep out doubts, and avoid disputes (2:283). The writing should set out the terms agreed upon fairly, and as further precaution it is laid down that the terms of the contract shall be dictated by the person who undertakes the liability. If the person on whose behalf the liability is undertaken is a minor, or of unsound judgement, then his guardian or the person representing his interests should dictate the terms of the contract (2:283)
Monopolies and the cornering of commodities are prohibited; so also is the holding back of produce from the market in expectation of a rise in prices. All this is opposed to beneficence, and those who indulge in such practices seek to take advantage of the need or distress of their fellow beings. The seller is under obligation to disclose any defect in the article offered for sale. Goods and commodities for sale should go into the open markets, and the seller or his agent must be aware of the state of the market before proposals are made for purchase of the goods or commodities in bulk. He should not be taken unawares, lest advantage be taken of his ignorance of the state of the market and the prevailing prices.
There are stern injunctions in the Quran with regard to the giving of full weight and measure (26:182-185)
Woe unto those who give short measure; those who, when they take by measure from other people, take it full, but when they give by measure to others or weigh out to them, they give them less. Do not such people know that they will be raised again unto a terrible day, the day when mankind will stand before the Lord of the worlds? (82:2-7)
Defective or worthless goods or articles should not be given in exchange for good ones (4:3). In short, any kind of transaction which does not comply with the highest standards of honesty and integrity must be eschewed, for God loves not the dishonest (8:59)
Gambling is prohibited, inasmuch as it promotes dissension and hatred and tends to deter those who indulge in it from the remembrance of God and from Prayer, thus occasioning a great deal more harm than any possible benefit that may be derived from it (2:220; 5:92). It also brings sudden and undeserved accession of wealth and encourages extravagance. Indulgence in gambling often brings ruin and misery in its wake.
All unlawful means of acquiring property are prohibited, as these in the end destroy a people (4:30). Acquisition of property or goods through falsehood falls in the same category. It is equally unlawful to seek to establish a title to property by obtaining judgement through corrupt means like bribery or false evidence (2:189). The Prophet said that a party to a dispute which obtains a judgement in its favour, knowing that it is not in the right, only collects a quantity of fire for itself and not something from which it can draw any benefit.
On the other hand, goods and property lawfully acquired are a bounty of God which is provided by Him as a means of support. They should be properly looked after and should not be wasted through neglect. A person of defective judgement should not be permitted to squander away from his substance. It should be managed and administered for him, and provision should be made for his maintenance out of the income (4:6)
Niggardliness is condemned as a negative and destructive quality. While, on the one hand, ostentation and vanity are disapproved off, on the other, it is not considered right that a person who is well off should pretend to be poor, fearing lest he be called upon to help others. By doing this he makes himself poor in effect, and deprives himself of the benefits that may be derived from God’s bounty (4:38). The wealth of misers, instead of bringing them any advantage, becomes a handicap and arrests their moral and spiritual development (3:181). The other extreme extravagance is equally condemned. Even when giving to, or sharing with, others, a person should not go so far as to render himself in turn an object of charity (17:30). Hoarding is absolutely prohibited because it puts wealth out of circulation and deprives the owner as well as the rest of the community of its beneficent use (9:34). The truth is that God alone is All-Sufficient, and all prosperity proceeds from Him. It is men who are in need, and prosperity is achieved not through miserliness or holding back, but through beneficent spending, which is spending in cause of Allah, namely, in the service of His creatures (47:39).
As already stated, a legal owner of property is not the only person entitled to its use. Those in need who ask, and even those who do not ask or are unable to express their need, have a right in the property of those who are better off, inasmuch as all wealth is a bounty of God and is acquired through the use of resources which God has provided for the benefit of the whole of mankind (51:20). That is why the Quran directs that kindred, the needy, the wayfarer, must be paid their due (30:39). To this end there is emphatic and repeated exhortation in the Quran. Such giving should be in proportion to the need of the person to be helped and in accord with the means of the giver, and should not proceed from any expectation of receiving a return (17:27; 74:7)
It is indeed the highest bounty of God that He should have endowed man with appropriate faculties and capacities and then subjected the universe to man’s beneficent service to enable him to achieve the fullest development of his faculties in every sphere of life. Yet some people instead of putting their faculties to beneficent use in the service of their fellow beings and spending that which they possess for the same purposes, have a tendency to hold back, not realizing that even from the purely selfish point of view the greatest benefit is to be derived from the beneficent spending and not from parsimonious holding back. This is the fundamental principle which is the basis of all prosperity, individual, national and universal. The Quran emphasizes this repeatedly. For instance, Allah says:
Behold, you are those who are favoured by being called upon to spend in the way of Allah; but of you there are some who hold back, yet whoso holds back does so only to his own prejudice. It is Allah Who is All-Sufficient, and it is you who are needy. (47:39)
In sum, economic principles of Islam are subordinated to its God given value system. The underlying philosophy of that value system is summed up in this verse:
Say, My Prayer and my sacrifice and my life and my death are all for Allah, the Lord of the Worlds. He has no partner. And so am I commanded, and I am the first of those who submit (6:163,164).
In fact, this is the true spirit of the unified and comprehensive code of conduct provided by Islam. As vicegerent of Allah on earth, man has to carry out His purpose within the authority delegated to him and this has to be treated as a sacred trust. To Him every one will have to account for the use of his or her God given faculties and material resources. There is no escape from that reckoning. Of the things man will have to specifically account for on the Day of Judgment will be his wealth – how he earned and used it.
Man must not forget that his obligations to society are no less important than the obligations to himself. It is in this perspective that Islamic teachings regarding economic life are to be seen.
This indeed is a great challenge for the members of the Ahmadiyya Muslim Community. The Community was founded by the Promised Messiah, the Messenger of this age, to revive the pristine pure teachings and practices of Islam. The Community is striving to present to the world the peaceful, benevolent face of Islam and the Community’s young men and women are in the forefront of this noble mission and by Allah’s Grace the day is not far when we shall see the true Islamic values system prevailing and humanity enjoying the benefits of an economic system based on the nature and needs of creation.
And my last words are that All praise belongs to Allah, the Lord of the Worlds.