Saturday, November 30, 2013

Brunei Darul Hudud

Brunei Darul Hudud

Assalamu ‘Alaikum,

Actually the proposed new name for this blessed nation is Brunei Darul Dzikr in line with the aspirations of a truly inspired King. Consummate obedience to Allah the Almighty is the only way to describe the outstanding bold decision of the Sultan of Brunei to insist his nation be govern by the laws of Allah swt true to the demands of the Quran.

Surah AlMaidah Ayah 48 translates :

“And We have revealed to you, [O Muhammad], the Book in truth, confirming that which preceded it of the Scripture and as a criterion over it. So judge between them by what Allah has revealed and do not follow their inclinations away from what has come to you of the truth. To each of you We prescribed a law and a method. Had Allah willed, He would have made you one nation [united in religion], but [He intended] to test you in what He has given you; so race to [all that is] good. To Allah is your return all together, and He will [then] inform you concerning that over which you used to differ.

Tuesday, November 12, 2013

Islamic Candyfloss

Dear Gillian,

Coming back from the World Islamic Economic Forum in London, and hearing the impassioned speech by UK Prime Minister David Cameron on the virtues of Islamic Finance and the intention of his Government to pursue Islamic Finance with vigour so much so as to turn London into a Centre of Islamic Finance on par with Kuala Lumpur and Dubai, I was equally bowled over by the import and thrust of your article below. With over 22 years involvement in Islamic Finance I do have a little vested interest in seeing it expand.
Expansion of Islamic finance means the expansion of the ideals of fairness and justice in this world. This is where I do not know how to begin to describe my feelings. Pride over its international recognition is tinged with a certain guilt and fear that the current form of Islamic finance as practised in the Muslim world today may not live up to expectations when it comes to the crunch. Let me take the bull by the horn and come up with an explanation of Islamic finance early in my piece so that we are all on the same page. Islamic finance is basically broadly divided into two category, Islamic debt financing and Islamic equity financing. What we have observed in the development of Islamic finance in the world today is the monopoly of Islamic debt finance to almost the total exclusion of Islamic equity finance. Many of us believe the true alternative to Western conventional finance is Islamic Equity Finance and not Islamic Debt Finance. Debt by whatever name is unjust when used to finance risk projects that demand sharing of risks by all parties. Islamic debt finance to finance projects that demands risk capital will be equally unjust to project owners who defaults for business reasons totally out of their control. This is where my mixed feelings earlier came from. Is Islamic finance going to be any different if it is solely based on debt?

Another issue Gillian, is that we cannot discuss finance ignoring the surrounding issues that determines the shape of finance. These issues principally revolves around fraudulent money creation, fractional reserve banking and legitimacy of fiat money as an article of faith in the economy. When we play the board game of Monopoly, inflation is never an issue right, the price of that Mayfair or Park Lane Property never goes up right? Why is that? That’s because we know the bank have a fixed volume of money. Now imagine a game of monopoly where the bank is at liberty to increase the volume of money at its whims and fancy. We will soon find the price of properties being on a permanent upward trend right? In the real world when the volume of money can be increased at someone’s whim and fancy then those on low and fixed wages will suffer will they not? The volume of good and services cannot keep pace with voluminous and callous increase in volume of money.

Who is this someone in a nation who can increase the volume of money at his whim and fancy? If our answer is the government then we will get 10 marks, for on average the government through paper notes and coins produce only 10% of  a nation’s money supply. If we answer banks then we will get 90 marks because on average banks create 90% of a nation’s money supply through what is called fractional reserve banking. The USD1000 you place in a bank’s current account and is given a cheque book to spend? Very soon the banks will lend the same USD1000, at reducing amount of course because of the reserve at Central bank requirement, such that at the end of the day 25 people will hold cheque books believing they hold various reducing portions of the original USD1000 you deposited. This is David Copperfield stuff, where banks create money out of thin air. Mathematically, with a 2% reserve requirement, a USD1000 deposit can result in thin air money of USD25000; and a USD1billion deposit can result in USD 25billion of money created by banks out of thin air.

Why am I describing this obviously fraudulent money creation system? Because an Islamic bank that operates in this system is also guilty of creating money out of thin air. Whither fairness and justice to the world when one is equally guilty of fraudulent money creation? Why do I call it fraudulent? You remember that game of monopoly I described above where the bank is now allowed to create as much money as it wishes? What if the banker choose to lend the newly created money only to his friends and which they use to buy up all properties, will not these select group of friends become very rich, and society then pays for their wealth through inflation when volume of goods and services increases do not match the volume of money increases. This process of enriching the rich and impoverishing the poor is implicit in the debt based banking system when monies are lent by banks only to monied people with collateral. So Gillian, an Islamic bank caught in a fractional reserve banking and Islamic debt banking system is also guilty of enriching the rich and impoverishing the poor. So whither fairness and justice to the world?

The overriding Islamic legal maxim in Muamalat or Islamic economic matters is AlGhunm bi AlGhurm i.e rewards comes only with risk. Only when Islamic banks practise this; only when they favour equity finance in place of debt, only when risk is not a four letter word to them, will they be the true saviour the world awaits.

Best regards,

November 8, 2013 6:39 pm

When candyfloss costs dear

By Gillian Tett

‘Western finance was like a bubble of sticky froth, from which a few “real” assets had been spun and re-spun’
©Shonagh Rae
Seven long years ago, I had a chance to meet Sheikh Muhammad Taqi Usmani, a Pakistani scholar who is also a leading expert in Islamic finance. It was an unexpectedly memorable conversation. Back then, during the height of the credit bubble, there were very few people who expressed strong criticisms of how western finance worked. But Usmani was scathing. Most notably, he bewailed the tendency of American and European banks to create money untethered from any real assets; or, as he put it, to spin “derivatives out of more derivatives”. Indeed, to Usmani it seemed as if western finance was almost akin to a giant ball of candyfloss: a bubble of sticky froth, from which a few “real” assets or economic activities had been spun and re-spun to support numerous ephemeral financial deals, much in the way a tiny piece of sugar can be used to concoct a giant puffball. “Western banks create money from money,” Usmani told me, contrasting this with the world of Islamic finance, where “money is always backed by assets” and relies on “equity financing not debt”.
Today, such criticisms no longer look quite radical – or unusual. On the contrary, following the collapse of the credit bubble even men such as Alan Greenspan, the former chairman of the Federal Reserve, are fretting about the inexorable expansion of western finance. And, if you listen to American Tea Party activists discussing the tottering piles of American debt and exploding money supply, their concerns (ironically) sound rather similar to those of Usmani.
In the past few days I have had reason to ponder Usmani’s words again. Late last month, George Osborne, the British chancellor, announced that the UK government plans to issue its first “Islamic bond”, or a debt instrument that complies with Islamic principles. The news has provoked cynicism in some City quarters, since it seems something of a diplomatic ploy. But, to my mind, this partly misses the point. For whatever Osborne’s motives, one benefit in having a British Islamic bond in play is that it might prod more people to glance at the principles behind Islamic finance. And those ideas are thought-provoking, for Muslim and non-Muslim alike, since they present a vision of money that is refreshingly different from the ideas that 21st-century western financiers and consumers take for granted.
What are these core principles? The central issue is a belief that usury is morally and religiously wrong (haram). In that sense, then, Islamic scholars echo the precepts of the medieval Christian church. Observant Muslims are not supposed to make or receive loans with any interest. But another crucial point is that debt as a whole is discouraged: Islamic finance prefers to finance business and government via investors who share risks, ie with equity.
And Islamic scholars hate the idea of using money to make more money, as a game in itself. Instead, they believe that financial flows should be tethered to tangible productive enterprises or trade, since money should serve the “real” economy. This is very different from the embedded ideas of 21st-century western finance or banking in previous centuries.
In the 20th century, some Islamic financiers started to build financial structures that complied with these ideas (say, by creating risk-taking “banks”). And, ironically, these days western banks such as Deutsche Bank, Citigroup and HSBC have now jumped into the fray too, borrowing modern western financial innovations, such as securitisation, to dance around Islamic strictures.
Some of this activity looks contradictory, if not comical: like the church of medieval Europe, there is a whiff of hypocrisy and religious arbitrage. But notwithstanding that, the fact remains that the core principles – if not all the practice – are fascinating. After all, the idea of tethering our financial system more closely to the “real” economy and tangible, productive enterprises seems distinctly appealing these days. Likewise building a system around equity, not debt, with a less financial candyfloss. Indeed, perhaps the really curious issue here is not that Islamic scholars are promoting those ideas but that other religious groups have not been trumpeting them on moral grounds too. Yes, the new Archbishop of Canterbury has appealed for bankers to behave in a more moral way but why didn’t the Church criticise western finance more loudly before 2007? Why is nobody demanding Christian bonds to support infrastructure spending, say?
It would be an intriguing question to ask when, or if, those Islamic British bonds ever appear. Finance might just possibly be one area where religions could learn from each other.

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