PAK ECO Slides

7/28/2019 PAK ECO Slides

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ARTICLEPRESENTATIONOF PAKISTAN

ECONOMY


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ARTICLE

How Can Islamic Finance Help to Solve

Economic Crisis?by Mr. Irfan Shahzad.

PUBLISHED IN PAKISTAN

TRIBUNE,MARCH 2012.


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INTRODUCTION

The downfall in the world financial system has

given rise to intense questions about its radical

flaws and its future prospects.

There is a great concern to bring aboutreformations in the current monetary system.

Deleveraging is the name given to such

downward spiral.


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Deleveraging: It is the forced reduction of

debt accumulated by the households and

the financial institutions such crisis leads to

low drive of prices in the market as moreassets are dumped in it.


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Once this hideous cycle starts it gets

such a momentum that even huge

monetary back up fails to hold it back.

The economic mangers, in addition to

their good governance, need to find out

new ways to tackle such situations arise

time to time.Islamic finance can help solve such

crisis.

PROBLEM


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1: Banks give out money as loan in excess without much

prudence in hope to get fixed interest from their customers who

take loans. By lending money the banks get an unrestrained

opportunity to earn money out of money. Hence, they treat

money as commodity, which should be treated as medium ofexchange for goods and services according to Islamic finance.

This accumulated money by the bank is further used in

procurement of more money by giving out more loans and

receiving money through interest.

CAUSES OF ECONOMIC

RECESSION


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2: Some people who take loans but their

business flop or they fail to make good

enough to pay back loan with interest so they

have to withdraw from their mortgage or lettheir property confiscated.

Loss of money leads to loss of purchasing

power. The market experiences an overall

reduction in economic activities when peoplelose purchasing power.


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3: Who take loan from banks and succeeded in

making profits out of their economic activities, they

charge the extra amount of interest, which they have

to pay to banks, through their products and services.In this way they get it from their customer. This gives

rise to Inflation.

Bank again succeeded in accumulating the money

bubble to exploit through it further. This leads tooverall recession in economic activities.


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4: In the last decade according to economists this wasthe result of the lack ofGood governance of current

financial system.

Prof John Gray of Oxford University calls it, Virtual

financial economy

that has enormous capability ofdisturbing the real finance as it was witnessed when

Barings the oldest of the Britain banks went default in

1995.

James Robertson said that money and finance

system is not fair. It is ecologically destructive and

economically inefficient. He raised concern about

generating money out of money; according to him

generation ofMoney should be against real goods

and services.


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SOLUTION

The solution lies in the Islamic system of finance.

Executive education in the fist place needs to be

oriented to learn how to put it in proper practice.

The money is not a commodity according to Islamic

finance, but a medium of exchange for goods andservices.

When loan is to be taken it can be given as

investment and creditor and the receiver of money

can share the potential profit and loss. This way bothparties will be partners in a joint venture and will

generate actual money out of exchange of goods

and services.


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CONCLUSION

Islamic banking is distinguished in two ways:

A) It concentrates on the real goods and services

B) Flow of money by profit and loss sharing,

It gives great stability to economy. Even if the

economy enters into the recession the system

based on profit and loss sharing helps

safeguards the financial operators fromaccumulation of money through interest, hence

minimize the threat of bankruptcy and default.


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