Parvez Ahmed, Ph.D. Associate Professor of Finance Coggin College of Business

Similar documents
Parvez Ahmed. University of North Florida

Serving Muslim Clients. A very brief introduction to Islamic Finance

Challenges in Islamic Finance

List of Figures. List of Tables. Acknowledgements. About the Author. About the Website

Overview of Islamic Financial System and its Efficiency

Session 1. Overview of Islamic Finance

ww.fidfinvest.com Islamic Finance an Introduction

Peddling Religion? What is Islamic Finance? & Should we support it?

MODERN TRENDS OF ECONOMIC DEVELOPMENT ALTERNATIVE BANKING SYSTEM FOR MUSLIM STATES MALAYSIA SHOWCASE

What is wrong with Interest? Ansar Finance Group. Islamic Finance for the Community by the Community

Ways to Attract Islamic Compliant Investors to Funds and Products. Jonathan Lawrence 27 June 2012

THEORY AND PRACTICE OF MODERN ISLAMIC FINANCE

w w w.a ims.edu cation 1

The Paradigm of the Islamic Banking System

GLOBALISATION AND ISLAMIC FINANCE

The Islamic Finance Qualification (IFQ) expands upon knowledge gained from the Fundamentals of Islamic Banking and Finance.

Islamic Finance in Asia

Resolution of OIC Fiqh Academy (related to Islamic Economic and Finance) بسم هللا الرحمن الرحيم

23 September, 2017, Manila - Philippine

ISLAMIC AND NON-ISLAMIC FINANCE IN CONTEMPORARY PERSPECTIVE

A Descriptive Analysis of Islamic Finance as a Possible Alternative to Conventional Investment Management

Session 6 The Significance of Islamic Investment Principles - Empirical Evidence from International Investment Funds En. Mohd Syukry Mohd Saidein,

UNDERSTANDING THE SHARI AH PRINCIPLES OF INVESTMENT & WEALTH GENERATIONS

M&SME ISLAMIC BANKING MASTERCLASS PACKAGEE

Islamic Financial Systems*

The Rise of Islamic Finance

Program Brochure. Master Diploma. Islamic Finance. Develope Your Skills to Design Islamic Financial Services.

Financing Public Infrastructure Using Sovereign Sukuk

CERTIFICATE IN ISLAMIC BANKING AND FINANCE

Reviving the roots of Islamic economics & finance. Rice University

Problems and Prospects of Islamic Capital Market In Bangladesh

ISLAMIC BUSINESS LAW AND COMMERCE

Diploma in Islamic Finance

The AEG is requested to: Provide guidance on the recommendations presented in paragraphs of the issues paper.

Chapter 6. Islam and Private Wealth Management

The Islamic Banking and Finance Workbook

TURKEY AIMS TO BECOME CENTER OF ISLAMIC FINANCE

SUKUK a main financial tool funding terror Introduction

Presentation Coverage

Islamic Banking in India

Seminars Organization

ISLAMIC FINANCE AND BANKING MODES OF FINANCE

Establishing Economies According to Islamic Worldview: Problems and Way Forward. Prof. Habib Ahmed Durham University

The Dangers of Riba. Author : MuslimsInCalgary

Islamic Wealth Management: Indonesian Case Study

Destination! Center of Islamic Banking & Economics. Canada. Organized by October, Islmaic Banking & Finance Heading Towards.

Cultivating Good Prospects

Analysis of Minor Proposals outside the Mainstream Islamic Finance in Pakistan

Lahore University of Management Sciences

Lahore University of Management Sciences. FINN 441 Islamic Banking and Finance Fall Semester 2014

The Experience of Islamic Banking in a Conventional System

Program Brochure CIFE. Certified Islamic Finance Expert. Develope Your Skills & Become an Expert in Islamic Finance.

Ch.1 Shari a and Islamic Economic System I. Islamic Way of Life

General Points on Influence of Religion on the Law and the Relevance of Religion for Law

IQRA UNIVERSITY. Essentials of Islamic Finance Course Study Guide. Class Days: Wednesday and Saturday

From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

WT Essay. Christoph Schweinberger. Sukuk Islamic Bonds. Subject: MPF_AFIN Finance (Basics) Advisor: Ing. Luděk Benada

Shariah-Compliant Investments: Risks and Returns

Islamic Banking History, Overview & Future

What is Islamic Microfinance? Making it a Sustainable Reality

Sharia Economic and Finance Development Strategies

Case Studies in Islamic _ Banking and Finance _

MEEZAN BANK S GUIDE TO ISLAMIC BANKING

Practice of Islamic Banking & Finance

Understanding the major causes of Islamic Finance. Under-development in Tunisia

The Application of Islamic Ethics and Aq'dah on Islamic Home Financing Loan Using the Concept of Tawarruq

INTERIM REPORT OIC-STATCOM TECHNICAL COMMITTEE OF EXPERTS (TCE) ON ISLAMIC BANKING AND FINANCE STATISTICS

Islamic Capital Markets

Economics and Islamic Economics

Examining Theories of Growth & Development & Policy Response Based On Them From Islamic Perspective

DUBAI THE CAPITAL OF THE ISLAMIC ECONOMY

Islamic Banking Foundation Course Information Pack

ISLAMIC BANKING INDEX BY EMIRATES ISLAMIC. Page 1

Re-directing contemporary Islamic finance from an Islamic wealth management perspective Paul WOUTERS / ceo

Islamic Microfinance 4th - 6th June, 2013 in Addis Ababa - Ethiopia

One Day Specialized Training on Islamic Banking, Finance and Islamic Microfinance

HONG KONG AS THE DEAL MAKER

Zurina Shafii Ahmad Zainal Abidin Supiah Salleh

ECONOMICS OF ISLAM: ISLAMIC PERSPECTIVES OF BANKING IN PAKISTAN

Usage of Islamic Banking and Financial Services by United States Muslims

How Islamic is Islamic finance

Recent Developments in Islamic Finance

INSTITUTE OF HAZRAT MOHAMMAD (SAW)

A Critical Analysis of Mudarabah & A New Approach to Equity Financing in Islamic Finance

4th ICIB Ministry of Planning Development & Reform Conference Secretariat: Mr. Ikram Ullah Khan Mr. Ehtesham Rashid

ISLAMIC FINANCIAL SERVICES. Mohammed Obaidullah Associate Professor Islamic Economics Research Center King Abdulaziz University Jeddah, Saudi Arabia

We re In A Depression: An Interview With Jonathan Davis

Prepared for Members and Committees of Congress

Islamic Economics: Where From, Where To? (Muhammad Nejatullah Siddiqi)

THE ROLE OF CENTRAL BANK OF MALAYSIA IN DEVELOPING MALAYSIA'S ISLAMIC FINANCIAL INDUSTRY

THE ECONOMICS OF FATE AND FREEDOM ROBERT BURK

Teaching Islamic Heritage at Department of Economics, KENMS, IIUM. Muhammad Irwan Ariffin Research Fellow Centre for Islamic Economics KENMS, IIUM

Chapter 1 INTRODUCTION

Customer satisfaction and awareness about Islamic banking system

th th July, 2018 Nairobi - Kenya

ASB/ASN Investment from the Maqasid al-shari ah Perspective. Assoc. Prof. Dr. Mohamed Azam Mohamed Adil Deputy CEO, IAIS Malaysia.

World Islamic Banking Competitiveness Report 2016 Introducing Islamic Banks Into Conventional Banking Systems

Conclusion. up to the modern times has been studied focusing on the outstanding contemporary

Zakat made simple. For business owners. A tailored guide brought to you by:

The Role of IS in Islamic Banking: A Cultural Perspective

Transcription:

Parvez Ahmed, Ph.D. 2009 Fulbright Scholar to Bangladesh Associate Professor of Finance Coggin College of Business University of North Florida

The Global Crisis The most severe crisis since the Great Depression of the 1930s Former Chairman of the U.S. Federal Reserve, Alan Greenspan, on October 23, 2008 testifying before the US Congress called it: once in a century credit tsunami Impact on Stock Market US stock markets lost $6 trillion in value. 2 3 Explaining the Crisis Jeremy Siegel Firms buying, holding and insuring large quantities of risky, mortgage related assets using borrowed money or debt. Silver Lining global imbalance in trade Paul Krugman This financial crisis isn t purely a crisis of the market economy, but rather a crisis of values. Dalai Lama 4 5 1

Success Leads to Euphoria Islamic finance is.. system could help us to get out of the current crisis. Application of Islamic Investment Principles Islamic finance scholar Umar Chapra of the Islamic Development Bank held out Islamic finance as a solution. Loretta Napoleoni Economist Ibrahim Ozturk Turkey s Zaman Islamic finance has entered a bright new stage of development, emerging after the global financial crisis as a more equitable and efficient alternative to the Western approach. Financing extended through the Islamic products can expand only in step with the rise of the real economy and thereby help curb excessive credit expansion. Eliminate a great deal of speculative and derivative transactions. It will also help prevent an unnecessary explosion in debt (from) rising far above the size of the real economy. 6 7 Not Everyone Jumped on the Bandwagon IDC Financial Insights Islamic financial system have been spared the direct impact of the subprime fallout However, the performances of Shariah compliant financial products were not completely immune from the gyrations of the global financial markets. Unwise to frame Islamic finance as a completely separate system from conventional finance As it could alienate and even disillusion potential clients and investors What is Islamic Finance? It is like finance inter temporal allocation of money. It is Islamic in its adherence to moral prohibitions. Riba usury(often viewed as interest). Haram (sinful activity) such as direct or indirect association with alcohol (intoxicants), pork, firearms, tobacco, and pornography. Gharar preventable uncertainty such as financial derivative Maysir Speculation and gambling, including the speculative trade or exchange of money for debt without the transfer of an underlying asset. Bay al inah the trading of the same object between buyer and seller. 8 9 2

What are the Sources for these Prohibitions? Shairah (literally means the way ) consists of: The Quran (Muslims believe to be the Word of God) The Hadith (Sayings, actions and approvals of Prophet Muhammad). Together they form the basis of Islamic jurisprudence known as fiqh (juristic opinions based on the Shariah). These distinctive properties are predicated on: The creation of an equitable system of distributive justice The promotion of permitted activities (halal) and public goods (maslaha). How is Islamic Finance Practiced? Buy sell back arrangements (Arabic name: murabaha). 10 11 How is Islamic Finance Practiced? Lease to purchase (Ijara) Diminishing partnership arrangements (Musharaka Mutanaqisa). How is Islamic Finance Practiced? Consumer finance through a three party contract (Tawarruq ) literally: monetization of some commodity. 12 13 3

How is Islamic Finance Practiced? Islamic bonds (sukuk) Other Islamic Financial Products Salam advanced payment is made for deferred delivery of goods Istisna sale transaction where commodity is transacted before it comes into existence Takaful mutual insurance 14 15 The State of Islamic Finance Shariah based investment industry currently hasassetsassets globally worth U.S. $700 billion and is expected to double to $1.4 trillion by 2010. In the U.S., Shariah compliant funds have outperformed the broad market. The Islamic finance market was about 1% of the global finance market! In 2006 the world GDP was $48 trillion and the stock market capitalization was $50 trillion, debt market was $69 trillion and bank assets $74 trillion. The More we Know..The Less we Understand What we know about the global financial crisis is that we don't know very much Paul Samuelson And yet we look for answers How did this happen? What factors caused this crisis? 16 17 4

The Credit Crisis A credit crunch happens when businesses and individuals find it difficult to borrow money. Channels of credit are the arteries of the financial system. Once they got constricted, the patient can go into cardiac arrest. Who is impacted by this crisis? EVERYONE. How did this happen? Why now? Credit Crisis A Brief Explanation In wake of dot.com crisis and September 11 th, the Federal Reserve cuts interest to 1%. Good for businesses and banks but bad for investors. Current account surpluses in the China and Middle East leads to abundance ofcredit in the US. Banks (Wall Street) over leverage their business. 18 19 Securitization From Savior to Fallen Angel Securitization, which originated in the 70s, enjoyed a successful ride for over two decades. Securitization worked because the holders of securities assumed that they were not bearing any credit risk. By 2008, securitization broke down as homeowners defaulted on mortgages and investors felt that they were no longer insulated from credit risk. The Fallacy Housing Prices Will Always Go Up 20 21 5

Expert Cheerleaders The idea that we re going to see a collapse in the housing market seems to be improbable, John Snow, Treasury Secretary, 2005. It's impossible for prices to go down this year, Orange County Association of Realtors, 2006. At this juncture,.. The sub prime markets seems likely to be contained, Alan Greenspan, 2007. The national media is reporting a housing bubble. Don t believe it. Dale Atkins, Market Edge, 2006. For a While Everything Worked! Housing prices will never fall! Already own an home? Buy another! Already own an home? Refinance at inflated prices Banks pooled mortgages and renamed them Collateralized Debt Obligations (CDOs). Then they sliced the CDOs into 3 categories Safe, Okay, Risky The Safe and Okay received AAA and BBB ratings The CDOs were then sold to other Banks, Insurance Companies, Pension Funds, Hedge Funds etc. 22 23 Then Came the Fall Once the prime mortgages were collateralized, what next? Sub prime mortgages! Fancy name for excessively risky loans that were being passed from one party to another like hot potatoes. But housing prices cannot go up for ever! The Crisis of Confidence We have got a big problem, George W. Bush, September 26, 2008 24 25 6

Impact of the Crisis National debt is over $12.3 trillion and climbing Budget deficit for 2010, $1.56 trillion (10.6 percent of GDP). US Sovereign Debt is at risk of being downgraded. The PIIGS are already in the mud. Where in the world is Dubai? 26 27 All that Glitters is not Gold Housing prices have fallen by 50% in the past 6 months. Dubai World, the state owned holding company, has liabilities of about $60bn, not all debt. Nakheel does not have enough cash to meet its huge bond obligations sukuk worth $3.5bn. What caused such a deep and broad crisis? Greedy traders Lax bankers Clueless regulators All failed to perform their fiduciary duties! But this alone does not explain the depth of this crisis. At the core lies a dogmatic beliefs: In the invisible hand of the market. In assuming human beings are rational 28 29 7

Are we rational or human? A rational being: Prefers more wealth to less. Pursues this goal in an optimal manner. Is a Homo economicus or Economic human Makes decision using logic not emotion. A human being: Does not perceive gains and losses in the same way (Prospect Theory). Animal Spirits Five "animal forces" (emotion) that drive economic choices: Confidence: Rather than make investment decisions based on objective facts, investors are more likely to use gut feelings. Fairness: People in general want to be fair and they want others to live with fairness (may contradict pursuit of efficiency). Corruption: Each major financial crisis of the past century has been preceded by anti social behavior. Money illusion: People often take the numerical or face value of an asset as its true value ignoring the impact of inflation. Stories: Stories propagate myths, which in turn leads to bubbles. 30 31 Human Beings Perspective from the Quran "We have indeed created man in the best shape, then We reduced him (to be) the lowest of the low, except those who believe and do righteous deeds: for they shall have a reward unfailing." (95:4 6). The presence of animal spirits is well illustrated in the many stories of human failings in the Quran. However, the same human being bi is also capable of extraordinary compassion and understanding. Prophet Muhammad said, God created Adam in His form. Understanding Human Nature Humanbeingshave unlimitedcapacity for development and the pursuit of perfection with: proper nurturing, appropriate p environment and enforceable reward punishment structure Human beings can gain reasonable control over their animal spirits. 32 33 8

Understanding Nafs or the Soul The Quran describes 3 stages for the human soul: Nafs al ammarah bi al su, (the self urging evil) In this stage the soul directs its owners to hypocrisy, arrogance, greediness, etc. Nafs al lawwama, (the blaming self) In this stage our self conscience if properly nurtured can spur us towards growth and perfection. Nafs al mutma inna, (the self at peace) At this stage a person achieves satisfaction while his personality manifests mildness, tolerance, and forgiveness. 34 What does this mean? Muslim philosophers like al Farabi and Ibn Rushd assert that the human soul is seeking one final end happiness. Happiness cannot be measured. Happiness cannot be reduced to Homo economicus (the economic man) Thus systems (including financial) ought to promote human happiness. The American Declaration of Independence states that, Life, liberty, and the pursuit of happiness are among the "inalienable rights" of all human beings. This requires mutuality. 35 Islamic Philosophy and American Values Remarkable congruence between Islamic view of human goals and fundamental American values. The capitalist, free market system in many ways have values consistent with Islamic goals (maqasid Shariah). Yet fundamental misunderstandings exists about each other and in self perception. Wealth Maximization Islam does not prohibit the pursuit of finance s fundamental goal wealth maximization. Upholding promises, fulfill contracts, avoid usury, excessive speculation Take care of the basic needs of all people, regardless ofcolor color, religion, ethnicity orsocial status. Obliges individuals to work hard to earn a living. 36 37 9

How can Islamic Finance be a Solution? Islamic finance needs to find broader resonance. Islamic finance cannot be Muslim centric. Islamic finance needs to move away from being prohibition driven. Making the industry prohibition driven has limited the appeal to only the most ardently faithful Many are questioning if Islamic financial products are really different from conventional finance products. Attitude of Users Evidence from Bangladesh 6 in 10 believe that the development of Islamic banking has more to do with being faithful to Islam than any other criterion. 7 in 10 believe that the rate of profit or markup profit charged by Islamic banks do not differ much from interest based transactions offered by the CFI. 7 in 10 are unwilling to transact with the IFSI. 38 39 Reasons for Success Catering to the pious Branded as Islamic Supported by most major religious personalities and institutions. What is not being questioned? Is it transparent? Is it efficient? Is it sustainable? Islamic Finance 2.0 Traditionally thought of as only the following: Prohibitions against riba (usury), gharrar (speculation) and maysir (gambling) in financial transactions. Islamic Finance needs to expand to encompass: The inclusive vision of Shariah. Lax regulation. Un transparent or opaque contracts. Lack of ethics. 40 41 10

The Fusion of Islamic and Conventional Finance Thaler and Sunstien libertarian paternalism Arguing that markets need to be free But government can be paternalistic by providing people smarter choice architecture Nudging people to make decisions that attain what Adam Smith called the internal good. Public policy can be improved: Not by government interventions but by the government educating people about the choices they have and the consequences of those choices. Parvez Ahmed Department of Accounting and Finance Coggin College of Business University of North Florida pahmed@unf.edu 42 43 11