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Thursday, 14 June 2012

Islamic finance can restore confidence during crisis

COMMERCIAL trade exchanges can facilitate both domestic and international trade. A trade exchange stimulates trade by brokering the members' merchandise, keeping account of members' transactions and trade balances and acting as a clearing house.

Similarly, central banks can use multilateral payment arrangements (MPA) to spur trade among member countries while significantly reducing the need for foreign exchange reserves. It would be even better if the MPA is gold-based, since central banks can leverage on their gold reserve holdings.

The need for cash (or gold) for settlement can  be reduced by increasing the membership size and lengthening the settlement period.

Malaysia has bilateral payment arrangements with about 20 countries. Now is an opportune time to implement the gold-based MPA as proposed by former prime minister Tun Dr Mahathir Mohamad as a response to the 1997 East Asian economic crisis.

As for long-term solutions, one important thing that governments need to do is establish a global currency that is anchored to some "money" commodities like gold.

This would effectively be a fixed-exchange-rate regime that would bring about monetary stability and hence encourage international trade.

Such a currency can play the role of international reserve currency that is not under the control of any one nation. Recently, the governor of China's Central Bank, Zhou Xiaochuan, made a proposal for the adoption of such an international reserve currency, that is, global money to be managed by the International Monetary Fund.

The 2009 G-20 Summit agreed to support a Special Drawing Rights (SDR) allocation which will inject some US$250 billion (RM800 billion) into the world economy. It's this SDR, an instrument created by the IMF to replace gold as an international reserve asset, that is the most likely candidate for a global currency.

To make it truly political-free and stable, the SDR has to be made redeemable for some real commodities like gold.

From an Islamic perspective, the gold dinar and silver dirham were the monetary units of the Islamic caliphate from the dawn of Islam until the collapse of the caliphate in 1924.

The world has to be careful not to allow money or SDRs to be created out of thin air and thereafter, lent out on interest.  Money and SDRs should be made redeemable for gold or other commodities, even oil, in order to prevent abuse and the repeat of monetary crises in the proportions of recent times.

In order to stimulate economic activity, particularly in the current recessionary environment, governments should keep taxes as low as possible. Low rates encourage business activities and do not encourage tax evasion whereas high tax rates discourage business activities while increasing the probability of tax evasion.

For sustainable economic development, governments should move towards imposing negative interest rates.  Experts have shown that sustainable economic development requires negative interest rates.

Unlike in the current system, annual savings should be "taxed" rather than rewarded through interest. A negative interest rate is also consistent with the natural order of entropy and is also a characteristic embedded in the Islamic principle of zakat.

And as learned from the current crisis, the banking sector, rating agencies and hedge funds must be monitored carefully with more regulations and transparency.

Speculative gambling in the derivative markets must also be checked. The derivatives market has grown into a huge bubble, estimated to be in the vicinity of US$1 quadrillion (a thousand trillion).

 Derivatives markets are accelerating the current monetary meltdown, particularly the credit default swaps  that failed during the subprime mortgage crisis in 2008.

 There is a likelihood of huge sums of money leaving that market into the commodities markets, thereby sparking the rise of commodity prices to unprecedented levels.

From an Islamic perspective, the measures outlined above contribute to the attainment of the maqasid al-shariah or the objectives of the syariah, by inculcating values like compassion, justice, avoidance of greed and protection of rights back into the socio-economic dimensions.

The 1990s saw the collapse of socialism; now clearly, capitalism is on a downward trend. Perhaps the world could now give Islam a chance to show the good things it has to offer mankind.

The Vatican remarked that banks should look at the rules of Islamic finance to restore confidence among their clients at a time of global economic crisis
(News Straits Times /  14 June 2012)

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Islamic investments foresee immense opportunity for international growth

JEDDAH — In spite of the recent credit crunch and widespread global economic slowdown, the prospects for growth in Islamic securities markets are likely to be positive, said Abdul Rahman Al Baker, Executive Director of Financial Institutions Supervision, Central Bank of Bahrain, in his address before the Annual World Islamic Funds and Capital Markets Conference held at Gulf Hotel, Manama, Bahrain Sunday.

In his remarks on the "Regulatory Initiatives to Strengthen and Enable Growth in the Islamic Funds & Investments Industry 2012", he said "this positive trend can be attributed to the rapid expansion and increasing sophistication of the GCC financial markets, as well as the geographical spread of Islamic securities products and services that record remarkable growth in Europe, Asia Pacific countries, North Africa and the energy rich Central Asian states."

Islamic financial products represent a class of investment which appeals to those looking for socially responsible or ethical investments, as these products comply with strict Shariah rules that have religious as well as ethical underpinnings. It is estimated that investors globally hold more than $1.5 trillion in Shariah-compliant assets. These include equities that are in line with Islamic principles, sukuk and Islamic funds, he said in his opening remarks.

In order to further enhance the growth of the Islamic investment industry and create deep and vibrant Islamic capital markets, Al Baker said legal and several factors need to be taken into consideration.

First, there is a need to build a system that would be able to facilitate effective and efficient capital and trading flows.

This requires further development of an Islamic financial system which has the entire required infrastructure that includes Islamic financial institutions ranging from banking, takaful, capital market, fund and wealth management entities Shariah framework; and then a financial system that has a comprehensive range of Islamic financial products and services.

Currently, there are more than 500 funds globally that comply with Islamic principles, of which one third of these funds were launched during the past seven years.

Sukuk is another Islamic financial instrument that shows a significant growth during the past five years. It was estimated that the global Sukuk market exceed$200 billion as of the end of the first quarter of this year.

Moreover, he said this year saw a revival in the global sukuk markets due mainly to gradual recovery of global economy and investors’ sentiment which drives the demand for sukuk. "It is clear that sukuk issuance in the first quarter of 2012 exceeded all expectations reaching a record $43 billion globally. This is almost double the average amount of sukuk issued in any given quarter in the past year, and represents half the total amounts of sukuk issued throughout 2011," Al Baker noted.

In Bahrain, he said, the mutual funds industry is one of the fastest growing segments of the overall financial sector.

With around $9 billion in assets under management, through more than 2,700 funds, the industry has been growing at an annual average of about 15 percent in recent years, he added.

Overall, there are 100 Islamic funds incorporated and registered in Bahrain with total assets of $1.7 billion as of March 2012.

The CBB, through its enabling legislation, promotes the development of new products for investors in both Islamic and traditional finance, while at the same time providing credible regulation in both areas, Al Baker pointed out.

(Saudi Gazette.Com.Sa / 14 June 2012)

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