The Financial Meltdown: a Muslim perspective?

One of our most valued "assets" as American Muslims is our Islam. We believe that Islam has answers to our personal, family, and communal challenges. Instead of simply "rebuking" the "ills" of America, we must be able to translate Islam into meaningful contributions to the American society. What is our perspective on the most difficult challenges facing America? And, it is not enough just to say: "I told you so"; or that "you are bad". What is our solution? What do we stand for, rather than what do we stand against.

I dream of the day when Muslims may be able to mature our discrouse in America to make such a contribution. Where Islam and Muslims are seen as a real value add to solving all sorts of challenges that we are facing in our beautiful country.

Below is a "step" in this direction. A perspective of Islamic Finance on the current financial challenges facing our financial institutions. It is, however, more difficult to produce solutions. And this is what we need. Can we create a forum of Muslim economists that can dig deep into Islam and who understand the realities of America, and would be able to produce some practical solutions?

Enjoy the article below, written by Dr Ali Khan



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An Islamic Perspective
Meltdown in American Markets
By LIAQUAT ALI KHAN

Call it the consequences of irresponsible American invasions, call it the irrational exuberance of short sellers, call it the catastrophe of subprime lending, call it the mismanagement of leveraged products, blame it as you may, American markets are facing unprecedented meltdown and doomsayers see little promise in the federal bailout package. Ironically, the Wall Street has noticed that Shariah-compliant investments--which avoid speculative risk and debt-ridden greed--have fared much better in these troubled markets. In the past few years, Shariah-compliant investments in Western markets have grown to more than half a trillion dollars.

Islamic financing is attracting huge academic curiosity. Many experts participating in the 8th Harvard University Forum on Islamic Finance held this past April wondered if Islamic financing could have prevented the meltdown that American markets are facing primarily due to mortgage debt and mortgage-backed securities—now known as "toxic investments." This legal commentary highlights the two fundamental principles of Islamic financing that I presented at the Forum.

High Risk Investments

The Quran prohibits al-Maysir or speculative risk, warning the faithful to avoid games of chance in which the probability of loss in is much higher than the probability of gain (2:219). Shariah-compliant investments, therefore, avoid speculative risk, including interest rate options, naked equity options, futures, derivative and numerous leveraged products purportedly designed to hedge investments. Many of these financial products attract speculators in hopes of making quick money. When trusted fund managers, under institutional pressures to show profit, resort to speculative risk, hedge investments turn into suicidal strategies for financial destruction.

In pursuit of greed and thrill, straightforward investments in companies engaged in socially useful activity has become unattractive, even boring, because of their presumably lower rate of return—frequently a self-fulfilling prophecy. Billions of dollars are dumped into companies that promise huge profits but produce nothing. While Islam would allow risking investments in socially beneficial research projects, it prohibits investments in companies peddling alcohol, tobacco, pornography, debt, and weapons—products that undermine our health and safety.
Some investment strategies rampant in the markets are not only morally corrupt but socially harmful. Short sellers, for example, make money when companies collapse and close. Turning the conventional logic of investment on its head, short sellers wish companies to crash rather than prosper for they make most money when companies go bankrupt, workers and employees lose jobs, and pension funds evaporate through declining company stock. Such cynical investments, touted as useful forces that balance the market, are contrary to Islamic law.

Interest-Bearing Debt

In addition to prohibiting high risk investments, the Quran also prohibits no risk investments. The prohibition against riba, interest on loans, is strictly forbidden. Islam does not prohibit passive investments. Nor does it prohibit giving interest-free loans. Debt is not contrary to Islamic law. Charging interest is. Although some experts argue that usury, and not interest, is prohibited under Islamic law. Most Muslim scholars agree, however, that interest on loans is contrary to the Shariah.
Refuting arguments that money has time value or that interest is analogous to profit, the Quran offers a categorical principle that “trade is permitted but interest is not.” (2:275). The prohibition against interest was revealed not only to save the poor from unscrupulous lenders but also to deter investors who demand a set return on their investments and decline to take the risk of engaging in useful trade.
Contrary to Islamic principles, lending in general and subprime lending in particular was predestined to harm American financial markets for two distinct reasons. First, debt braced with high interest was being extended to persons who simply could not afford to pay back loans. This was usury. Second, the real estate mortgage was no longer a prudent investment decision, since numerous investors were trading in real estate with inflated prices. Investment bankers and other geniuses on Wall Street were securitizing mortgage debts, turning them into interest-bearing securities. These fancy securities began to fail when their underlying assets were foreclosed or deflated. The debt turned deadly and its holders bankrupt.

Shared Destruction

Between the prohibited limits of maysir (speculative risk) and riba (no risk), however, Islamic Law permits creativity in financial markets where investors mobilize surplus monies for the production and distribution of halal (Kosher) goods and services. These permissible markets are neither risk-free nor prone to irresponsible risk. Though innovative and authentic, the markets are infused with the values of fairness, transparency, and reasonable profits. They are free of predatory practices that corrupt transactions with greed and inflict hardship on the poor, the elderly, and the novice.

The federal bailout package that the Bush Administration is selling as a quick cure of all problems will only aggravate the underlying cancer of interest-bearing debt. It is unlikely that the infusion of more money will reform institutions and companies built on layers of interest-bearing debt. When the best and the brightest are engrossed in finding ways to make money with money, and no more, the system may look creative and intelligent but it is geared toward shared destruction.

Ali Khan is Professor of Law at Washburn University in Topeka, Kansas.

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Other articles on how Islamic Finance is performing in these times of financial stress :
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20081005/REG/310069971/1030/MUTUALFUNDS


http://business.smh.com.au/business/islamic-finance-rides-the-storm-20081010-4yft.html?page=1

So, when is EID?

The Drama continues. When is Eid? Should we follow local sighting or global sighting? ISNA or MANA or ICNA or TRICNA? Calculations or the local Masjid? Halal/Haram or valid difference of opinion?

In fact, there is some benefit to the Eid drama. It is like the small amount of pain that the body experiences that alerts to a bigger problem that needs to be taken care of. A warning sign of sorts. Disabling valid warning signs so that we can live happily is not a good idea (ask Wall Street).

The Eid drama brings to the attention of the masses a much more important challenge that we need to address as a community. The challenge is: how do we make decisions together? How can we stay unite? Which decisions must we move together in, and which decisions is OK to move separately?

You see, uniting in Ramadan/Eid is one of the lower priorities for unity that is needed in the Muslim community. For Allah’s Sake, just enjoy two eids, or even three! We need to exhibit a united voice in so many more important aspects of our communal affairs. Challenges such as our priorities in America, political goals, communal priorities, financial priorities, and so on. But we lack the structure, discipline, and leadership to make this happen. We lack the will because each masjid is an island, happily drifting in any direction the “leader” chooses. It is therefore appropriate to have the Eid drama come as a warning sign that reminds everyone that we really need to come together.

How do we do that ? your thoughts ?

PS: Eids Mubaraks :)

Take a look at this funny song made by an MIT student on when eid is : http://www.youtube.com/watch?v=UZDmVRohS94

Fundraising in the Muslim community

Muslims attending mosques in the US have seen their share of fundraising this month. Fundraising is a crucial excercise in order to support the Islamic institutions. However, the majority of fundraising is mostly focused on a traditional excercise of a speaker who "presses" people to give (who can give $10,000, ... etc...).

Many individuals from the community have come to dislike these excercises. They dislike both the frequency, as well as the style.

What is the way out?

What ideas do you have that can make our fundraising more acceptable to the community.
What lessons can we learn from other communities?
How can we manage both the longer term plan (endowment, grants, etc..) with the short term plan : need to pay for this year's bills.

What do you suggest ?