Global Financial Crisis
&
Its Implications for Shari’ah
Prof. Dr. Ahamed Kameel Mydin Meera
Global Crisis
Started from Subprime
Mortgage Crisis
mid 2007
Money meltdown
From burst of housing bubble
Main Characteristics of Present
Monetary System
 Fiat Money
 Fractional Reserve Requirement
 Interest-based
Insurance Firms
The Creation of the Mammoth
Housing Bubble
Excess dollar liquidity is churned into a
housing bubble through the subprime
mortgage
AIG, etc.
Insure Subprime Mortgage default
using credit default swap
Sell High-Risk
Subprime Mortgage
Mortgage Lenders
Investment Banks
Freddy Mac, Fannie Mae,
etc.
Goldman Sachs,
Lehman Brothers, etc.
Subprime Mortgage given
To High-Risk Individuals
People
Sell Subprime Mortgage as safe,
high-return investments to
financial institutions and
individuals
Insurance and Other Financial
Institutions
Nature of Fiat Money
Creation – bubbles
(inflation)
Continuous Growth of Money = Debt
Destruction - meltdown
America has a total debt of $53 trillion and the highest debt ratio in history
$175,154 per man, woman and child
or $700,616 per family of four
Source: http://mwhodges.home.att.net/
Destruction of Money
Contributes to Recession
Destruction of Money
Barter Economy
Recession
Efficient Economy
Money as medium of
exchange
The need for liquidity injection
• Financial institutions – the bailouts
• Real economy – e.g. GM, Chrysler, Ford
IMF:
World economy expected to
recover slightly
OUR’S:
World likely to remain in
recession …. or even into
depression
Exceptions: India, China,
Still Recession, or Depression? Why?
• World overloaded with fiat debt
•
with compounded interest
System unsustainable
Major Economies in Kondratieff Winter
• Kondratieff cycle - capitalist economies
•
displayed long wave cycles of boom and
bust ranging between 50-60 years in
duration
Last Kondratieff cycle ended, around
1949, we have seen beneficial inflation
1949-1966; stagflation 1966-1982;
beneficial deflation 1982-2000; and we
are now in the (winter) deflation cycle,
which should lead to depression.
Major economies in
liquidity trap
• Price level rise, interest rate
tends to fall
• Liquidity trap
•
•
Individuals and businesses are
highly indebted
Interest rate cuts do not stimulate
economy
Nature of Financial Assets
• Just Claims
• Form a web of double-entry
accounting records
• So are banks and financial
institutions worldwide
Nature of Financial Assets
When one financial institution
collapses, it affect another and yet
another in a domino fashion.
DESTRUCTION OF MONEY
takes place
Domino Effect
• Crisis has spread to Europe
• Japan, Hong Kong &
Singapore too
• Dubai
• Europe sovereign defaults Greece, Ireland, Spain,
Portugal etc.
• Malaysia and other
developing nations?
Domino Effect
• Loans, bonds and sukuk
denominated in dollars are
highly vulnerable
Will the $700b bailout work?
• Crisis started from real economy
• Need to give ‘clean-slates’ to
both sides - financial sector and
the real sector
• One-sided bailout tantamount
to a humongous theft.
Bailout may give a false sense of market recovery
Thing to watch is the real economy – the employment data
Expected Effects
• A world recession (Not a normal recession)
• A depression?
• High unemployment rates worldwide
• Serious inflation – hyperinflation
• beginning with assets priced in dollars
• commodities like grains etc.
• Global chaos and conflicts
- Greenspan’s Age of Turbulence ?
• Likely wars
Effects on Gold
• Negative correlation with dollar index
• Proven inflation hedge
• Asset of choice in chaotic, war and
times of turbulence
• Proven money, store of value
Re-emergence of the Shari’ah money?
Gold price is likely to increase considerably in 2010
due to dollar vulnerability
Failure of Current Monetary System
Greenspan admitted in testimony to a congressional
committee on 23 October 2008, that there had been
a ‘flaw’ in his governing ideology.
“I had been going for 40 years with considerable
evidence that it was working very well.
The whole intellectual edifice, however,
collapsed in the summer of last year”
Alan Greenspan
Financial Times, 24 October 2008, p1.
Effects on Shari’ah
• Collapsing monetary system and the
ensuing economic and political chaos
• Search for new monetary alternatives
• Vulnerability of Islamic banks
• Attempt towards global central bank with
single global currency – SDR?
• Legal-tender law
• Internal & External threats
Effects on Shari’ah
The success of Islamic monetary
system lies in using
commodities as measure of
value
The Needed Solution
• Debt write-offs - partial or full - for
all.
• Make credit available to all - just like
other public goods
• It should be interest-free since it only
requires the recording of accounting
entries.
• Gessell’s free-money concept - e.g.
WIR Bank, Switzerland
The Needed Solution
• Global money based on commodities,
particularly gold
• Allows neither the creation of money, at
the stroke of the pen, nor the destruction
of money
• Bretton Woods II etc.
• Regional Complementary Currencies
• Effectively a fixed-exchange-rate regime
The Needed Solution
• Fiscal Stimuli
• Large infrastructure projects –roads, railroads,
bridges, dams, hydroelectric and nuclear power
stations etc.
• Transcontinental roads and railroads
• Wealth and land redistribution
where necessary
Wassalam
www.ahamedkameel.org