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No Meltdown in Islamic Finance Sector

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    Meltdown in American Markets: An Islamic Perspective By LIAQUAT ALI KHAN September 27 / 28, 2008 http://www.counterpunch.com/khan09272008. html Call it the
    Message 1 of 1 , Sep 30, 2008
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      Meltdown in American Markets: An Islamic Perspective
      By LIAQUAT ALI KHAN
      September 27 / 28, 2008
      http://www.counterpunch.com/khan09272008. html


      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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