An Islamic Approach to Investment.

FAITH CONSISTENT INVESTING

“Valuing Your Faith is Valuing Your Money”~The Islamic Attitude and Approach to Investment~

Presentation Made By:

DATO’ MOHAMED IQBAL RAWTHER

Trustee, Taqwa Foundation, MALAYSIAAnd Trustee, Muslim Agency for Development

and Enterprise in Europe [MADE in Europe]

TBLI CONFERENCE ASIA 2009

Yokohama, Japan

28 May 2009

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ABSTRACT

AN ISLAMIC APPROACH TO INVESTMENT

The global economic crisis has revealed the inherent weakness and vulnerability of the financial systems.

Could the disaster been mitigated?

The Islamic approach – in which faith plays a dominant role – is a possible answer.

The presentation addresses the basic tenets of Islamic investment principles that have shyed away from disaster prone products of conventional banking.

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SUMMARY OF PRESENTATION

The conventional economic wisdom is that “the Invisible Hand” directs the market to perfection. The fundamental assumption was that there will be as a result, equity, fairness and consistency in the market place.

This notion has been dealt with a “death blow”. Markets have been wrecked, leading to the failure of financial and business entities.

The global banking system has served the rich. The creation of wealth has been lob-sided to begin with. The wreckage created by the failure and the collapse of financial institutions, have created a wider chasm.

There will be more poor people with less and less opportunities for earning a livelihood.

One root cause for the failure of institutions and together with it the markets, is human greed and the coercive power exercised by those in whom authority is vested.

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The absence of conscience, devoid of moral conduct and ethical behaviour, has been a contributory factor.

There is a role for faith in modern economy. In fact faith based economic behaviour is an important ingredient for sustainability. The use of natural resources and human capital and human-created assets should be for enrichment and not for impoverishment.

There is a dire need to restructure economic institutions, which will work for all. There should be a greater access to education, power and privileges on an equitable basis.

To achieve this objective, Islamic economic system and the related financial models rely on the “shariah” – God given laws – for their conduct. It is God’s Hand that direct a just and equitable system.

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GLOBAL ECONOMIC CRISIS- individual, institutions, country

IcelandPakistanHungary IMF for short-term liquiditySerbiaUkraine Turkey

South AmericaEastern Europe lining-upAfricaEast-Asia

PART IPART I

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DIMENSIONS & RESPONSES OF THE GLOBAL FINANCIAL CRISIS

Asset Prices Fall asset values – dropped – capital and wealth drop in value

US housing prices fall

Value of Asset Backed Instruments Fall sub-prime mortgage crisis

Financial Institutions Fall Northern Rock – Large British Bank – 2008Federal Reserve – Bear Stearns Countrywide Financial by Bank of AmericaLehman Brothers PANICPANIC

COLLAPSECOLLAPSE

mortgage default,securities value – down,derivates

Government Purchase Government Purchase Suspension of marketSuspension of market – – to market rules onto market rules on

investmentinvestment

Government equity Government equity and loansand loans

PART IPART I

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Credit Curbsfinancial institutions – unwilling to lend(credit crunch) no capital - capital inadequacy

credit crunch

Dollar Shortageindustry economy shortage of US$ - world needs US$

Reserve currency imports paid in US$

Reduction in aggregate demand collapse of aggregate demand

REDUCE DEBTREDUCE DEBT

DELEVERAGINGDELEVERAGING

INCREASEINCREASE

CAPITALCAPITAL

Interest rate reductions Interest rate reductions Quantitive easingQuantitive easing

Dollar lendingDollar lending (swap lines)(swap lines)

Government Government PackagePackage

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FAITH CONSISTENT INVESTING Bank moving to the wrong end of the spectrum

banks – utility - deposits – make loans wholesale money market

– some were better at taking deposits others better in giving loanswholesale grew - and grew wholesale grew - and grew

1980 securitisation –package of mortgages – to other financial repackage – complex financial instrumentsunderlying risk – NOT known

2007 lenders - ? The underlying security valueuntradabletoxiccredit crunch

utilityutility casinocasino

Regulate the casino or separate utility from the casino

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THE ISLAMIC PERSPECTIVE

Human Being True identity Purpose on Earth Destiny

ISLAM TEACHES Man

- Has innate nobility- Has Allah – God given strengths- Has many weaknesses

(by the freedom of choice given)- Guided to fulfill

TRUE HUMAN NATURE Commanded by Qur’an modeled by the Prophet

PART IIPART II

“the mission”

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MAN’S DUAL NATURE

PHYSICALsimilar to other creatures

INTELECTUnique to only humans

RESPONSIBILITY

PERSONAL COMMUNAL

ISLAMIC MODEL OF HUMAN ENSURES MAXIMUM BENEFITFOR ALL INDIVIDUALS AND FOR THE COMMUNITY AS A WHOLE

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FAITH CONSISTENT INVESTING ISLAM – a way of life. All embracing, comprehensive. “From Womb to Tomb” “From Womb to Tomb” [in fact beyond the tomb to the

“hereafter”] The rational being is replaced by the “faithful” being bound by society and communal interest. A branch of knowledge that aims, at analysing, interpreting and resolving economic problems with reference to

the methodology of Islam

Islamic economics broadens conventional economic analysis by exploring religious and moral aspects of economic life.

Conventional economics is a predominantly secular discipline maintaining difference between the positive and normative

ResourcesAll resources are God – givenownership – all belongs to Godindividual – only a Trustee – is accountable to God for His actions

Islam widens the concept of utility in 3 ways :- Utility encompasses the spiritual as well as the material- Utility is extended from this life to the next life- Well being requires a concern for the welfare of others

QURAN : human beings – khalifa – vicegerents must voluntarily obey and observe “SHARIA”- which regulates life.

“ “ We sent aforetime our messengers with clear Signs and sent down with them theWe sent aforetime our messengers with clear Signs and sent down with them the Book and the Balance, that men may stand forth for justice” (Surah Al-A’raf : 25)Book and the Balance, that men may stand forth for justice” (Surah Al-A’raf : 25)

ISLAMIC ECONOMIC SYSTEM - JUSTICEISLAMIC ECONOMIC SYSTEM - JUSTICE

personal(individual enterprise)

social

individually

self destructive

collectively

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FAITH CONSISTENT INVESTING CREATOR – CREATION

TRUST POSITION – Khalifa – VicegerentAllah is the owner

Man is an agent/Representative Responsibility to look after (eco systems)

Manage in the ways prescribedBestowed with – intelligence, intuitive moral sense (inborn ability)

A Muslim accepts revelation as the basis of ethics and justice Natural Preference for

- what is good/desirable - Rejection of evil/undesirable

O Embedded in the notion of trusteeship is a call for conduct based on a code of personal ethics and a blueprint for justice.

““Allah doth command you to render back your Trust to those to whom they Allah doth command you to render back your Trust to those to whom they are due, and when ye judge between man and man, that ye judge with justice : are due, and when ye judge between man and man, that ye judge with justice :

verily how excellent is the teaching which He gives you! verily how excellent is the teaching which He gives you! For Allah is HE who hearts and sees all things”For Allah is HE who hearts and sees all things”

(Surah An-Nisa’ : 58)(Surah An-Nisa’ : 58)

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BASIC ISLAMIC PRINCIPLES

Islam had to deal with monetized free market exchanges from its inception.

Trading was extolled. Needed to determine what particular forms of trade and exchange were unjust.

A detailed framework prohibits usury, gambling, gharar, extravagance, hoarding, fraud and corruption, and encourages benevolence and mutual cooperation.

While the market is retained, the aim is to reform it ‘internally’ and on an ethical footing – ‘justice in exchange’.

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FAITH CONSISTENT INVESTING CAUSES FOR FAILURE FROM AN ANALYTICAL POINT OF VIEW

lax lending standards

Weaknesses in the credit transfer process

Overly optimistic assessments of structured securities

FROM AN ISLAMIC PERSPECTIVE THE CAUSES ARE MORE FUNDAMENTAL

greed

gharar – signifies ambiguity, uncertainty or lack of specificity in contracts. Islam insists information be easily accessible to all.

Speculation – speculation and gambling prohibited in Islam because it destroys the moral, economic and social fabric of society.

Governance – in the Islamic system discipline is provided by religious auditing.

Fixed interest debt (usury) – Islam prohibits riba (usury) and interest debt.

financialization

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THE WESTERN RESPONSE

Greed treated as fact of life, endemic and incurable

Countered by ‘external’ constraints through regulation

THE ISLAMIC BASE

The holy Qur’an accepts people as greedy and possessive“Truly Man is, To His Lord, Ungrateful;

And to that (fact) He bears witness (By his deeds);And violent is he In his love of wealth”

(Al Adiyat 100:6-8)

the faithful person relies on altruism, co-operation, brotherhood, fraternity, affection and mutual respect to rein in selfishness and lust for riches

Self-restraint a discipline in areas that regulation cannot reach

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FAITH CONSISTENT INVESTING FINANCIALIZATION

Islam rejects debt and prefers PLS financing

- Position undermined by use of murahaba, bai’muajjal, istisnaa, ijara, sukuk the ‘ijtihadi’ instruments).

- These look like interest, but differ from conventional finance.

In the West with growth of ‘financialization’

- The value of financial assets greatly exceeds that of tangible assets - In some European countries financial claims are multiples of GDP

(in the UK four times and Iceland eight times)

In the Islamic system financing is based on real goods.

- Financing expands with the growth of the real economy, constraining excessive debt and unchecked credit creation.

No decoupling of financial activity from tangible asset investment as in the West.

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CRISIS COULD HAVE BEEN MITIGATED FROM AN ISLAMIC ECONOMIC PERPECTIVE

If greed can be tempered internally by self-restraint

If mortgage borrowers had been fully informed

If speculation and risky trading is forbidden

If religious principles are written into bank governance

If usury is banned and financing based on concrete assets

If the financial sector does not outstrip real activity then the conditions that arose might have been avoided and the crisis mitigated.

An Islamic Approach to Investment.

Economy & Finance

Transcript of An Islamic Approach to Investment.