Amy Singer
Islamic societies – based on 2 assumptions – Quran and hadith provide the common core for reference, which repeatedly praise charity – and that the interpretation of the Quran and hadith are diverse by different muslim societies of different eras.
Zakat and sadaqa not distinguished from each other but certain verses imply two kinds of donation ie obligatory and voluntary giving
Everyone , even those with little worldly possessions, could invoke God’s blessings by voluntary giving eg many common daily actions are considered as sadaqa
Charity generally in the form of individual charitable efforts. But with the development of government agencies and new non-governmental forms of association – a “mixed economy of charity” has emerged.
The Ottoman empire was not a welfare state – rather they were welfare society – the welfare ethos was rooted in society at large and it was the entire society, including the sultan, which participated in providing social services and not the state alone or primarily.
Relying on Halil Inalcik (An Economic and Social History of the Ottoman Empire) – unlike the modern welfare states which give development aid ie developing people’s ability to sustain themselves, the Ottoman Empire provided relief services. Provision of social services was largely through waqf endowed with individual wealth obtained primarily through war booty, military salaries and agrarian tax revenues. They were not regular expenditure from the state coffers before the second half of the 19th century.
Charity supported not only the poor but other including scholars, students, mosque employees, travelers and sufis.
The poor
• P 159 – 2 main factors by which someone is judged to be poor - the existence of need (haja) and the absence of surplus (fadl)
• But there are ambivalent or even negative attitudes to begging in the Quran or hadith (p 168) – although it notes begging as a response to need and includes beggars as a category worth of charity (v 2:177) but it praises the poor that do not beg importunately (v 2: 273)
In the late 19th century shifting definitions of need and entitlement came about - questions of the deserving and the undeserving poor. Also, status of religious scholars and sufies became less important.
Police tool increasingly aggressive role toward vagrants - defined as people without work, and were seen as undesirable and unsightly, and even criminal. Vagrancy laws came about- by 1890, Ottoman law regarded those with no specific residence or job as "vagrants" while the 1909 "law on Vagrants and Suspected Persons" criminalized vagrancy
Waqfs (pg 91)
• Began to appear in greater numbers from roughly 9th century
• Roots in Roman, Byzantine and Sassanian laws and practices, but developed within the context of Muslim legal and cultural demands together with political, social and economic realities.
• Endowments are the most public form of charity in Islamic societies
• Colonial rulers scrutinized waqfs because it seemed to interfere with modern private property regimes and the reform of landholding for purposes of agricultural modernization and development
• Eg of waqf – public kitchen of Hurrem Sultan in Jerusalem (1552) – to feed 400 “the poor and pious, the weak and needy” – the kitchen relied on the revenues from more than 20 villages in the surrounding countryside as well as income from a double hammam
• Other types of waqf – Muhammad Bey Abu al-Dhahab (1772-75) gov of Ottoman Egypt – waqf of mosque, college, fountain and zawiya in Cairo with properties to support the waqf
• Wide range of people made waqr
• Cash waqfs relied on yields generated from investments
• Motives that can be deduced – urban and rural development, imperial legitimation, desire for personal prominence, avoiding restrictions on the division of inheritance, protection of wealth from imperial confiscation, promotion of community or sectarian interests, preservation of social hierarchies and cultural norms (p 104)
• They were also important agent of settlement in newly conquered regions eg in Cairo, endowments of large mosques in Damascus by Selim I and Suleyman I
• P 109 – “Like many philanthropic endeavors, the founding of waqfs was a means to preserve social hierarchies and cultural norms. For the most part, endowments funded activities that reinforced the dominant values of a society: the place of religion and ritual; the accepted curriculum of study and the goal of education; the physical shape of cities; the conventional practice of medicine; the preservation of family wealth; and the status of the poor as poor and dependent. Much of the poor relief distributed through waqfs was aimed at supplying subsistence or relief rather than what is today called development aid. Much good work was accomplished, but it did not have radical aims such as the redistribution of wealth, the promotion of general literacy, or the eradication of need.”
Waqf reforms
•By 19th century, many reforms to the waqf were placed in the Ottoman empire as well as well as other colonized Muslim areas.
• By this time, large amounts of property all over the Muslim world belonged to waqfs. Eg 75% of arable lands in area of today’s Turkey, 1/5th of Egypt, 1/7th of Irran, ½ of Algeria, 1/3rd of Tunisia and 1/3rd of Greece. Amount of urban property in waqf was considerable. There were 20000 waqfs in Ottoman empire, and had a total annual income of equal ot 1/3rd of annual govt revenues (p 186) –
o All of this excapted taztion entirely
o Perception was that waqfs were detrimental to fiscal capacity of the government esp to fund military and bureaucratic reforms
o In colonized areas, they were seen as stumbling block to agricultural modernization because they hindered land transactions and devleopemnt and prevented access to capital thru sale and mortgage
• Legitimacy of family waqfs as beneficient endeavours bcos they supported public purposes only after the disappearance of original line of family beneficiearies]
• In the Ottoman empire, waqf management was decentralized. Even imperial waqfs had a local manager that reported to the chief black eunuch of the Topkapi palace (darusseadet agast). Total revenues not available to government.
• the waqf management could not be easily challenged. Some of th surplus revenues were abused by the imperial waqf managers who kept them for personal use instead of to maintain or improve the institutions they managed.
So began the reforms to waqf in Turkey.
• Establishement of ministry of Imperial Waqfs (Evkaf-I umayun Nesareti) by Sultan Abdulhamid I (1774 – 89) – at first just to oversee the sultan’s own endowments and to check on the control of the chief black eunuch.
• The destruction of the Janissary corp and the consolidation of all janissary waqf holdings under the ministry (1826), which also extended the minsistry’s power to all aqaf under the control of the chief eunuch, the grand viszier, the shaykh al Islam and the Istanbul qadis, and later (in 1838) the incoporation of the Haramyan waqf administration into the ministry
• Tanzimat reform era (1839 – 1876) that strengthened the sultan’s power and dispersed authority was recentralized to Istanbul and the sultan himself – note the Land Code of 1858 and later the Mejelle 1879
With the reforms, all waqf revenues were forwarded to the ministry, which will then reallocate an annual sum to each waqf as the budget for its expense. Individual waqf managers in the provinces were relieved of their financial authority , which undermined their administrative power. This also diminished the awqaf’s ability to fulfil their original purposes.
• The ministry of Waqfs in Turkey was replace by a General Directorate of Waqf s in 1924. All waqfs in the administration of an official authority at the time of founding of the Republic was nationalized.
• 1954, the Turkish Vakiflar Bankasi was established using the capital from the nationalized waqfs
• 1967 – new waqf law drawing on American foundation law as well as on traditions of Muslim law – provided an impetus for a renewed interest in establishing foundations.
Friday, January 22, 2010
Thursday, December 10, 2009
The End of Poverty How we can make it happen in our Lifetime
Penguin Books Ltd
Jeffrey Sachs
On Economic Growth of countries
In the past 200 years, he notes that the key to growth was consistency. The fact that US maintained an income growth of 1.7% pa consistently.
Why there are different rates of growth in different regions?
He disputes the zero-sum view that the rich countries became that way by transfer of income form the poor countries through force or otherwise, because of the evidence of a overall growth in the world income, at a different rate in different regions.
His program for migrating an unstabilised economy to a market economy – 5 pillars:-
1. Stabilization – ending high inflation and establishing a stable convertible currency (even thru the setting up of a world supported fund to back the currency)
2. Liberalization – allowing markets to function by legalizing private economic activity, ending price controls and establishing where necessary commercial law
3. Privatization - identifying private owners for assets currently held by states – can be done entire enterprises or piecemeal.
4. Social safety net – pensions, health care and or benefits for the elderly, poor to help cushion the transition
5. Institutional harmonization – gradual adoption of economic laws, procedures and institutions of western Europe?
But most importantly, must establish a broad-based goal or purpose or guiding principle for the economic transformation. Eg for Bolivia it was establishing democracy, ending hyperinflation and reinvention of the country. For Poland, it was a return to Europe.
Each country will be different – he calls it clinical economics – differential diagnosis.
He says that for a country that needs help –
Poor countries need a leg up because they don’t have enough even for subsistence, what more growth and investment and the only way to provide this is by official development assistance by donors. The idea is to increase the income per capita for the country (as opposed to increasing GDP)
• Public sector should concentrate on 5 kinds of investments-
o Human capital
o Infrastructure
o Natural capital
o Public institutions
o Parts of knowledge capital involving r&d for health , energy, climate
• Private sector (funded by private savings ), would be responsible for investments in-
o Businesses (agriculture, industry or services
o Knowledge capital
o As well as for household contributions to health, education and nutrition
5 reasons why he says government should finance the public sector investments –
1. Many infrastructure characterized by increasing returns to scale. If done privately, it can only be afforded by monopolies which would overcharge, and then result in too little utilization by public
2. Nonrival goods – goods when used by 1 person is not diminished by others eg scientific discovery of DNA
3. They exhibit strong spillovers or externalities to their effects. Ie I want you to be healthy so you don’t transmit disease to me.
4. As a matter of right and justice, everybody should have an adequate level of access to key goods and services eg health care, education , safe drinking water
5. To help poorest of the poor to get them started in productive activities
He talks abut the poverty reduction strategies of poor countries, and compare them to the Millenium Development Goals. He says, the problem is that there are missing practical lingkages between the PRS and the MDG – usually, underfunded too.
He says that a true MDG-based poverty reduction strategy should have 5 parts-
• Differential diagnosis
• Investment plan – shows the size, timing and costs of required investments
• Financial plan – how to fund it , and calculate funding gap that need donors
• Donor plan – get a multilayer donor commitment to fill the MDG gap
• Public management plan – outlines the mechanism and governance and public administration needed to implement the expanded public investment strategy
He says that cash transfers alone are not an attractive way to deliver ODA, because they only tend to fill the consumption gap. To end poverty trap he says the ODA must be used for investments in infrastructure and human capital and thereby empowering the poor to be more productive on their own account, and putting the poor countries on the path to self sustaining growth.
(he made a reference to Hernando de Soto’s book The Mystery of Capital, which analysed a single factor – ie the lack of property rights ie titles and deeds – for the poor’s single handed failure in development) Sachs says, there are more than just 1 factor.”
At pg 327-
“Despite the fact that much of the free-market economic theory has championed this vision, economists from Adam Smith onward have recognized that competition and struggle are but one side of economic life, and that trust, cooperation, and collective action in the provision of public goods are the obverse side. Just as the communist attempt to banish competition from the economic via state ownership failed miserably, so too would an attempt to manage a modern economy on the basis of market forces alone. All successful economies are mixed economies, relying on both the public sector and the private sector for economic development.”
“The linkage to democracy has a strong economic dimension, however, because research has shown repeatedly that the probability of a country’s being democratic rises significantly with its per capital income level.” (p 333)
Jeffrey Sachs
On Economic Growth of countries
In the past 200 years, he notes that the key to growth was consistency. The fact that US maintained an income growth of 1.7% pa consistently.
Why there are different rates of growth in different regions?
He disputes the zero-sum view that the rich countries became that way by transfer of income form the poor countries through force or otherwise, because of the evidence of a overall growth in the world income, at a different rate in different regions.
His program for migrating an unstabilised economy to a market economy – 5 pillars:-
1. Stabilization – ending high inflation and establishing a stable convertible currency (even thru the setting up of a world supported fund to back the currency)
2. Liberalization – allowing markets to function by legalizing private economic activity, ending price controls and establishing where necessary commercial law
3. Privatization - identifying private owners for assets currently held by states – can be done entire enterprises or piecemeal.
4. Social safety net – pensions, health care and or benefits for the elderly, poor to help cushion the transition
5. Institutional harmonization – gradual adoption of economic laws, procedures and institutions of western Europe?
But most importantly, must establish a broad-based goal or purpose or guiding principle for the economic transformation. Eg for Bolivia it was establishing democracy, ending hyperinflation and reinvention of the country. For Poland, it was a return to Europe.
Each country will be different – he calls it clinical economics – differential diagnosis.
He says that for a country that needs help –
Poor countries need a leg up because they don’t have enough even for subsistence, what more growth and investment and the only way to provide this is by official development assistance by donors. The idea is to increase the income per capita for the country (as opposed to increasing GDP)
• Public sector should concentrate on 5 kinds of investments-
o Human capital
o Infrastructure
o Natural capital
o Public institutions
o Parts of knowledge capital involving r&d for health , energy, climate
• Private sector (funded by private savings ), would be responsible for investments in-
o Businesses (agriculture, industry or services
o Knowledge capital
o As well as for household contributions to health, education and nutrition
5 reasons why he says government should finance the public sector investments –
1. Many infrastructure characterized by increasing returns to scale. If done privately, it can only be afforded by monopolies which would overcharge, and then result in too little utilization by public
2. Nonrival goods – goods when used by 1 person is not diminished by others eg scientific discovery of DNA
3. They exhibit strong spillovers or externalities to their effects. Ie I want you to be healthy so you don’t transmit disease to me.
4. As a matter of right and justice, everybody should have an adequate level of access to key goods and services eg health care, education , safe drinking water
5. To help poorest of the poor to get them started in productive activities
He talks abut the poverty reduction strategies of poor countries, and compare them to the Millenium Development Goals. He says, the problem is that there are missing practical lingkages between the PRS and the MDG – usually, underfunded too.
He says that a true MDG-based poverty reduction strategy should have 5 parts-
• Differential diagnosis
• Investment plan – shows the size, timing and costs of required investments
• Financial plan – how to fund it , and calculate funding gap that need donors
• Donor plan – get a multilayer donor commitment to fill the MDG gap
• Public management plan – outlines the mechanism and governance and public administration needed to implement the expanded public investment strategy
He says that cash transfers alone are not an attractive way to deliver ODA, because they only tend to fill the consumption gap. To end poverty trap he says the ODA must be used for investments in infrastructure and human capital and thereby empowering the poor to be more productive on their own account, and putting the poor countries on the path to self sustaining growth.
(he made a reference to Hernando de Soto’s book The Mystery of Capital, which analysed a single factor – ie the lack of property rights ie titles and deeds – for the poor’s single handed failure in development) Sachs says, there are more than just 1 factor.”
At pg 327-
“Despite the fact that much of the free-market economic theory has championed this vision, economists from Adam Smith onward have recognized that competition and struggle are but one side of economic life, and that trust, cooperation, and collective action in the provision of public goods are the obverse side. Just as the communist attempt to banish competition from the economic via state ownership failed miserably, so too would an attempt to manage a modern economy on the basis of market forces alone. All successful economies are mixed economies, relying on both the public sector and the private sector for economic development.”
“The linkage to democracy has a strong economic dimension, however, because research has shown repeatedly that the probability of a country’s being democratic rises significantly with its per capital income level.” (p 333)
Thursday, November 19, 2009
Developing the Theoretical Foundations of Economics in Islam
Abbas Mirakhor
From New Issues in Islamic Economics & Finance
• 2 approaches to the systematic development of Islamic economic theory
o to start with Western approach to consumer theory and the theory of the firm and then proceed with the analysis by imposing a series of Islamic constraints on the solution
o to ignore Western assumptions regarding consumer and firm behaviour and assume behaviour that would be compatible with Islamic doctrines, not accepting man as he is but as he should be
• efforts to formulate a coherent foundation for Islamic economics have been disputed by 2 grps of thinkers:
o the group that expresses dissatisfaction with the pace and direction of progress made thus far in Islamic economics and disagrees with the concept, methodology and objective of the discipline
o the group that expresses a strident New Weberian critique of islam, in general, and Islamic economis, in particular, and views Islamic institutions and thought as contrary to the growth and development of Muslim societies (he refers to Kuran a lot)
• a problem is for all Muslim economists to reach a consensus-
o with respect to vocabulary
• so far the only 2 fundamental propositions agreed on are
• interest is riba
• risk-sharing and profit-sharing is the Islamic alternative
• also agreement on 2 fundamental issues
• “Justice and Equity” as the focus of the prophetic message
• the Quran, hadith and fiqh as the sources of Islamic law
o with respect to naming the emerging discipline
o with how to define it
• “means-end” characterization satisfactory?
• The unacceptability of the notion of “scarcity” in the Quran
o New institutional economics
• To do more research on Islamic economic institutions and their operation at present in Muslim societies.
• To create an incentive structure for the establishment of new institutions compatble with Islamic objectives
• He suggests that along with an Islamic economic vocabulary, 2 other sources are useful in order to develop a common language-
o History of thought-
• That its ok to borrow the results of investigation from others, That ideas developed belong to all humanity
• “…,moral philosophy gave birth to political economy, out of which grew the present discipline of economics. And moral philosophy from the Middle Ages to the time of Adam Smith was influence by the scholarship of Muslims. While the historians of economic thought generally ignore Muslim contributions, they emplhasize the Aristotelian thought fo the Middle Ages. However, the latter arrived in Europe already influenced by Muslim intermediation and was as Aristotelian as present day neoclassical economics is classical.” (p 224)
• on Hicks model of mercantile behaviour (1986) , Adam Smith and Theory of Moral Sentiment
o Economic hermeneutics – which as used by Abbas Mirakhor does not mean tafseer but rather the process of extracting economic meaning from the first order of interpretation done by fuqaha (see Ali Khan and Chapra in The Future of Economics)
o Relating Hermeneutics to the Islamic Economic History – see Hasanuz Zaman in The economic Funcitons of the Early Islamic State (International Islamic Publishers, Karachi 1981)
From New Issues in Islamic Economics & Finance
• 2 approaches to the systematic development of Islamic economic theory
o to start with Western approach to consumer theory and the theory of the firm and then proceed with the analysis by imposing a series of Islamic constraints on the solution
o to ignore Western assumptions regarding consumer and firm behaviour and assume behaviour that would be compatible with Islamic doctrines, not accepting man as he is but as he should be
• efforts to formulate a coherent foundation for Islamic economics have been disputed by 2 grps of thinkers:
o the group that expresses dissatisfaction with the pace and direction of progress made thus far in Islamic economics and disagrees with the concept, methodology and objective of the discipline
o the group that expresses a strident New Weberian critique of islam, in general, and Islamic economis, in particular, and views Islamic institutions and thought as contrary to the growth and development of Muslim societies (he refers to Kuran a lot)
• a problem is for all Muslim economists to reach a consensus-
o with respect to vocabulary
• so far the only 2 fundamental propositions agreed on are
• interest is riba
• risk-sharing and profit-sharing is the Islamic alternative
• also agreement on 2 fundamental issues
• “Justice and Equity” as the focus of the prophetic message
• the Quran, hadith and fiqh as the sources of Islamic law
o with respect to naming the emerging discipline
o with how to define it
• “means-end” characterization satisfactory?
• The unacceptability of the notion of “scarcity” in the Quran
o New institutional economics
• To do more research on Islamic economic institutions and their operation at present in Muslim societies.
• To create an incentive structure for the establishment of new institutions compatble with Islamic objectives
• He suggests that along with an Islamic economic vocabulary, 2 other sources are useful in order to develop a common language-
o History of thought-
• That its ok to borrow the results of investigation from others, That ideas developed belong to all humanity
• “…,moral philosophy gave birth to political economy, out of which grew the present discipline of economics. And moral philosophy from the Middle Ages to the time of Adam Smith was influence by the scholarship of Muslims. While the historians of economic thought generally ignore Muslim contributions, they emplhasize the Aristotelian thought fo the Middle Ages. However, the latter arrived in Europe already influenced by Muslim intermediation and was as Aristotelian as present day neoclassical economics is classical.” (p 224)
• on Hicks model of mercantile behaviour (1986) , Adam Smith and Theory of Moral Sentiment
o Economic hermeneutics – which as used by Abbas Mirakhor does not mean tafseer but rather the process of extracting economic meaning from the first order of interpretation done by fuqaha (see Ali Khan and Chapra in The Future of Economics)
o Relating Hermeneutics to the Islamic Economic History – see Hasanuz Zaman in The economic Funcitons of the Early Islamic State (International Islamic Publishers, Karachi 1981)
Tuesday, November 10, 2009
Strengthening the Islamic Financial System: Lessons from the Crisis
Public Lecture
Dr Abbas Mirakhor
29 September 2009
Securities Commission Malaysia
1997 Asian crisis gave rise to policy recommendations by IMF which included-
• avoid debt dependence
• rely mostly on equity investments
• if must have debt, shld not be more than 25% GDP
• countries’ obligations should not be geared to short term
• must have enough strength in economy
• shld ensure sovereign bonds include certain clauses to ensure risks are shared equally between creditors and debtors
• transparent balance sheet, marked to market financing, not heavily leverage
• domestic institution must be regulated
• shld establish orderly bankruptcy procedures and restructuring mechanism for workouts
• periodic audits of the soundness and stability of the economy, “financial sector assessment report”
Majority of IMF members accepted this, but major economies incl the US did not implement them eg they refused to have financial sector assessment
The recent subprime crisis occurred and 2 possible explanations:-
Conventional and non conventional
Conventional explanation-
1. policy failure
a. to undertake strengthening regulations, lax monetary policies and fiscal policies
b. refusal to deal with asset and actual incentives of policy makers towards highly risky and complex instruments.
c. These are premised on the interllectural idea o the policy maker which drives his policies.
i. In Greenspan’s idea, he believes in “perfect markets”. If this is true, the risks in the economy will be distributed efficiently. 2 issues affect any economy- (a) what is the total aggregate risk in the economy (b) how do you distribute this risk among the participants of the economy. If you believe in perfect markets, you will want as many instruments to spread the risks efficiently;
ii. The idea that the value of the firm relates to its marginal profitability. So it does not matter how it is financed, ie whether debt or equity. MM model. If you believe in this idea, instruments can be derived based on payoff which is interest rate;
iii. EMH- were the prices of the security includes all the information that a decision maker requires. So if the price increases, it means demand increases and later with over demand supply increases which leads to prices falling again. Thus, Asset Bubbles will never occur
d. The conclusion is that Greenspan will never interfere in policy and regulate markets as you don’t believe that either monetary policy or regulatory measure will affect asset bubbles.
e. But in Dec 2008 Greenspan concluded that he was following a flawed model.
2. regulatory failure – hands off policy, segmentation of economy
3. governance failure – internal and external idea that profit seeking did not create a systemic risk – too complex, too big instruments and institutions resulted
4. globalization failure- increase the vulnerability of the world system, becos there was no institution to overlook the global system. An excess in sovereign funds of some countires , invested in the debt instruments of the US – treasury bills – created a huge inflow into the US – no regulation – debt imbalance
Non conventional explanation
• crisis cannot be avoided in a financial capitalist society where it is based on interest and debt contracts
• 2 components to this-
o capitalism is vulnerable and fragile due to the Fractional Reserve banking system (refe Morris Alais or Holbern) – the fragility sets in because once the banks can create credit, they can also create “shadow banking” ie leverages without taking deposits
o this is the money multiplier of the conventional banks and the leverage of the shadow banks. The fragility is due to the ease in contraction and expansion
• so the “Chicago Plan” during the Depression years came about, but was not adopted as the banking lobby was so strong – the suggestion of that school being that the banking system that operates on 100% reserve
• also mismatching – banks borrow short and lend long. If this does not occur, there won’t be ny need for banking deposit insurance. James Token proposed this system which would anchor the market economy
• Keynes says that capitalism and market economies are inherently fragile because the system interferes with surplus / shortfall of supply of funds. Even in a market economy, there can be no perfect balance, cos savers and investors have different motivations. So consumption in 1 period cannot validated investment in a previous period. So you also cannot guarantee full employment situation.There is also rentier class (interest rate system). If you don’t have this class, saving will find its way into a project and the payoff will be the profit. With interest, it creates a wedge in the economy that make the system fragile. So he says get rid of interest and the rentier class.
• Minsky, a student of Keynes – repeated Keynes ideas and he says financing must be done based on equity financing – “Financial Stability Hypothesis” – during prosperity, firms see investment opportunities, use equity to finance it with little debt. When prosperity picks up momentum, the businessman decides that he want to take advantage by undertaking debt in order to grow. Then begins interest payments, asset bubbles leading to financial distress – “rolling bubbles”
• Soros – “super bubble” which takes magnitude fromt eh bursting of smaller bubbles within it.
• So there must be equity financing and risk sharing to stabilize an economy
What are the lessons for Islamic Finance?
Since they exist side by side with conventional system
-how do you cushion the system from price shocks, so that they can adjust very rapidly in such events
-islamic mathematical models of finance before this assumed that they were bank based, but this cannot be relied on to create stability
also regulatory frameworks is important. The major lesson from the crisis is reulation. We are not assured, because there is no quality control. So a stong enough regulation must be in place acceptable in all jurisdiction and an authority with enough mandate to implement. Otherwise the system can be destroyed. – reputationa damage of sukuk failures
with 100% reserve system, there is no money created. Only the State will create money.
Dr Abbas Mirakhor
29 September 2009
Securities Commission Malaysia
1997 Asian crisis gave rise to policy recommendations by IMF which included-
• avoid debt dependence
• rely mostly on equity investments
• if must have debt, shld not be more than 25% GDP
• countries’ obligations should not be geared to short term
• must have enough strength in economy
• shld ensure sovereign bonds include certain clauses to ensure risks are shared equally between creditors and debtors
• transparent balance sheet, marked to market financing, not heavily leverage
• domestic institution must be regulated
• shld establish orderly bankruptcy procedures and restructuring mechanism for workouts
• periodic audits of the soundness and stability of the economy, “financial sector assessment report”
Majority of IMF members accepted this, but major economies incl the US did not implement them eg they refused to have financial sector assessment
The recent subprime crisis occurred and 2 possible explanations:-
Conventional and non conventional
Conventional explanation-
1. policy failure
a. to undertake strengthening regulations, lax monetary policies and fiscal policies
b. refusal to deal with asset and actual incentives of policy makers towards highly risky and complex instruments.
c. These are premised on the interllectural idea o the policy maker which drives his policies.
i. In Greenspan’s idea, he believes in “perfect markets”. If this is true, the risks in the economy will be distributed efficiently. 2 issues affect any economy- (a) what is the total aggregate risk in the economy (b) how do you distribute this risk among the participants of the economy. If you believe in perfect markets, you will want as many instruments to spread the risks efficiently;
ii. The idea that the value of the firm relates to its marginal profitability. So it does not matter how it is financed, ie whether debt or equity. MM model. If you believe in this idea, instruments can be derived based on payoff which is interest rate;
iii. EMH- were the prices of the security includes all the information that a decision maker requires. So if the price increases, it means demand increases and later with over demand supply increases which leads to prices falling again. Thus, Asset Bubbles will never occur
d. The conclusion is that Greenspan will never interfere in policy and regulate markets as you don’t believe that either monetary policy or regulatory measure will affect asset bubbles.
e. But in Dec 2008 Greenspan concluded that he was following a flawed model.
2. regulatory failure – hands off policy, segmentation of economy
3. governance failure – internal and external idea that profit seeking did not create a systemic risk – too complex, too big instruments and institutions resulted
4. globalization failure- increase the vulnerability of the world system, becos there was no institution to overlook the global system. An excess in sovereign funds of some countires , invested in the debt instruments of the US – treasury bills – created a huge inflow into the US – no regulation – debt imbalance
Non conventional explanation
• crisis cannot be avoided in a financial capitalist society where it is based on interest and debt contracts
• 2 components to this-
o capitalism is vulnerable and fragile due to the Fractional Reserve banking system (refe Morris Alais or Holbern) – the fragility sets in because once the banks can create credit, they can also create “shadow banking” ie leverages without taking deposits
o this is the money multiplier of the conventional banks and the leverage of the shadow banks. The fragility is due to the ease in contraction and expansion
• so the “Chicago Plan” during the Depression years came about, but was not adopted as the banking lobby was so strong – the suggestion of that school being that the banking system that operates on 100% reserve
• also mismatching – banks borrow short and lend long. If this does not occur, there won’t be ny need for banking deposit insurance. James Token proposed this system which would anchor the market economy
• Keynes says that capitalism and market economies are inherently fragile because the system interferes with surplus / shortfall of supply of funds. Even in a market economy, there can be no perfect balance, cos savers and investors have different motivations. So consumption in 1 period cannot validated investment in a previous period. So you also cannot guarantee full employment situation.There is also rentier class (interest rate system). If you don’t have this class, saving will find its way into a project and the payoff will be the profit. With interest, it creates a wedge in the economy that make the system fragile. So he says get rid of interest and the rentier class.
• Minsky, a student of Keynes – repeated Keynes ideas and he says financing must be done based on equity financing – “Financial Stability Hypothesis” – during prosperity, firms see investment opportunities, use equity to finance it with little debt. When prosperity picks up momentum, the businessman decides that he want to take advantage by undertaking debt in order to grow. Then begins interest payments, asset bubbles leading to financial distress – “rolling bubbles”
• Soros – “super bubble” which takes magnitude fromt eh bursting of smaller bubbles within it.
• So there must be equity financing and risk sharing to stabilize an economy
What are the lessons for Islamic Finance?
Since they exist side by side with conventional system
-how do you cushion the system from price shocks, so that they can adjust very rapidly in such events
-islamic mathematical models of finance before this assumed that they were bank based, but this cannot be relied on to create stability
also regulatory frameworks is important. The major lesson from the crisis is reulation. We are not assured, because there is no quality control. So a stong enough regulation must be in place acceptable in all jurisdiction and an authority with enough mandate to implement. Otherwise the system can be destroyed. – reputationa damage of sukuk failures
with 100% reserve system, there is no money created. Only the State will create money.
A Short Outline of the Foundations of Islamic Economics
Usama Uthman
2nd Harvard University Forum on Islamic Finance 1998
He defines Islamic economic system as one that constitutes 3 aspects:-
moral values
economic policy
economic theory
2nd Harvard University Forum on Islamic Finance 1998
He defines Islamic economic system as one that constitutes 3 aspects:-
moral values
economic policy
economic theory
The Challenge of Poverty and the Poverty of Islamic Economics
by Mohammad Omar Farooq
SSRN eLibrary 2008
Islamic economics is suffering from "poverty of substance" . As a discipline it is just a "context of post colonial Islamic resurgence." He finds that Islamic economics is focussed on the alleviation of poverty (why? because poverty leads to kufr) rather than achieving affluence. He calls this "economics of poverty".
This is achieved through a "caring society" and via a reliance on the zakat mechanism to alleviate poverty. He cites the situation of roaming zakat payers that cannot find any zakat beneficiaries during the rule of Hadrat Umar and Umar Ibn Abdul Aziz (2nd khalifa). However he questions the extent of effectiveness of zakat, and speculates that the affluence of the times came from redistribution of wealth obtained through conquests and not thru zakat.
Farooq observes that "Islamic economics" is torn between those that want to "Islamize" the current body of conventional economic thought and those that reject conventional economics outright. But neither focuses on poverty. Even Choudhury (of hte Tawhidi economics) does not tackle poverty head-on. Farooq opines that poverty is not caused by shortage, but by failure in distribution/ redistribution.
SSRN eLibrary 2008
Islamic economics is suffering from "poverty of substance" . As a discipline it is just a "context of post colonial Islamic resurgence." He finds that Islamic economics is focussed on the alleviation of poverty (why? because poverty leads to kufr) rather than achieving affluence. He calls this "economics of poverty".
This is achieved through a "caring society" and via a reliance on the zakat mechanism to alleviate poverty. He cites the situation of roaming zakat payers that cannot find any zakat beneficiaries during the rule of Hadrat Umar and Umar Ibn Abdul Aziz (2nd khalifa). However he questions the extent of effectiveness of zakat, and speculates that the affluence of the times came from redistribution of wealth obtained through conquests and not thru zakat.
Farooq observes that "Islamic economics" is torn between those that want to "Islamize" the current body of conventional economic thought and those that reject conventional economics outright. But neither focuses on poverty. Even Choudhury (of hte Tawhidi economics) does not tackle poverty head-on. Farooq opines that poverty is not caused by shortage, but by failure in distribution/ redistribution.
Islamic Economics and Finance - a Fiasco
by Masudul Alam Choudhury
Middle East Business and Economic Review Vol 20 Issue 1 page 38
Islamic economics as based on a Tawhidi epistemology. Takes it on a completely different paradigm, based on Principle of Pervasive Complementaries. Based on this principle, assumption of scarcity cannot exist in Islamic resource allocation plan as resources flow occurs over three time dimensions, as oppose to linear. Therefore, there would be no such thing as production possibility curve, opportunity cost, marginal substitution, competition.
Middle East Business and Economic Review Vol 20 Issue 1 page 38
Islamic economics as based on a Tawhidi epistemology. Takes it on a completely different paradigm, based on Principle of Pervasive Complementaries. Based on this principle, assumption of scarcity cannot exist in Islamic resource allocation plan as resources flow occurs over three time dimensions, as oppose to linear. Therefore, there would be no such thing as production possibility curve, opportunity cost, marginal substitution, competition.
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