The world economy has been undergoing severe turmoil. The last 2 years have seen dramatic collapses of household names and some aggressive ‘damage control’ measures taken by governments of the developed world. The financial crisis has affected all of us in one way or another. Many of us have lost our jobs and our homes. Developing countries have suffered even more; some are struggling to provide enough food for their citizens.
Socialism failed as a model and now it seems that a paradigm shift is taking place: we are all realising that capitalism is not infallible. Recessions have happened before but instantaneous knowledge transfer through the World Wide Web has ensured that we all ‘tuned into’ the crisis. We see analysts, journalists and the ordinary public asking the inevitable question: has capitalism failed; and if it has, what comes after it?
The vast majority of the global population living in the developing world is well-acquainted with uncertainty. Yet, the developed world had a very strong faith in the ‘certainty’ offered by capitalism. Insurance guaranteed against suffering, pension payouts were predictable, house price increases seemed to be permanent and jobs were easy to find. More than anything, people living in the developed world are reeling from shock: their faith in their ‘certain reality’ has been cruelly shattered.
The global financial crisis has provided an excellent opportunity to put forward other economic models, like Islamic finance, which suddenly finds itself in the limelight. Universities in the UK are scrambling to offer Master’s degrees in Islamic finance to benefit from the sudden interest in the subject. After all, Islamic banks fared much better than conventional banks in the throes of the crisis and now we all want to find out what it is that fundamentally distinguishes Islamic finance from conventional finance. (Although, this statement has a caveat attached to it: Islamic finance is not being practiced in its truest form and there is a tendency amongst Islamic banks to mimic conventional financial products but re-brand them as Islamic).
It is quite strange to see that whilst many learned people have commented on the global financial crisis in the context of irresponsible risk taking, asset bubbles, complex financial instruments and the banks’ bonus culture, none of these analysts seem to have questioned the root cause of the problem: charging interest on loans (the ability of money to grow on its own). It is this root cause that should have been discussed at length. However, interest-based dealing is a given; a vast body of literature is dedicated to highlighting the advantages of interest-based lending. We rarely question ‘interest as a mechanism of resource allocation’ and we rarely think of alternatives, not even in purely economic discourse. So it is not strange to see interest missing from the thousands of articles written on the credit crisis. The closest various writers have come to it is when they have talked about the growth in credit.
Unsustainable asset bubbles are a warning sign, not the cause of a crisis. Irresponsible risk taking is a consequence of following the established financial models; those products of mathematical wizardry that encourage short-term investments and promise ‘certainty’. Complex financial instruments like derivatives, which are used for risk management, are a favourite with speculators who love risky overnight gains; yet they offer nothing of real value. The bonus culture is a result of the disembodiment of finance from the real economy. Surely, something is very seriously wrong here.
This blog will look at all of these things. It is written both for the average reader and the expert. We all want to understand capitalism and how it has shaped human society today. We all want to know why markets have lost their moral compass, why human society is struggling with profound unhappiness, why income gaps between first world and third world countries are widening. This blog will also look at the fundamentals of Islamic finance and develop an understanding of how a different economic system can affect human behaviour, attitudes and decision making.
I will specifically focus on the role of interest, as I will initially set out to prove that it is not the profit motive per se that has created today’s volatile economic reality; rather it is the charging of interest on money that has led to mass scale exploitation at the hands of banks. I will also look into insurance as we know it and explain how insurance is assuming an increasingly greater importance in our day to day decision making.
My belief in Islamic finance as a welfare-oriented system is not based on faith but on a critical analysis of its fundamentals. The overarching purpose of starting this blog is that I would like to prove to the readers that Islamic finance ‘makes sense’. It is logical and thought provoking. It is a system that works towards universal welfare. It is a system that contrasts strongly with secular capitalism: Islamic finance brings its own ethos, where finance is intimately linked with ethical decision making. It is a system which recognises the human need for material prosperity; however, it also puts measures in place to create that gentle balance between personal well-being and selfish pursuit of wealth.
Please, read on. Your questions and disagreements are welcome.
