Economy — 22 October 2008

Can you remember the olden days when a billion was a large number? In the midst of this immense financial crisis, it is difficult to keep a sense of proportion while trying to follow the attempts of western governments to contain the financial meltdown. When markets, and even individual institutions, valued in trillions are of the verge of collapse, it inspires a sense of wonder (or is it shock?) that such immense sums could be wiped out, regained, then lost again in the course of a few days or even hours.

Nowadays in the media, we find Capitalism’s strongest advocates claiming the rules of the game haven’t changed, and the current unpleasantness should be treated as a rare, but cyclical occurrence. However it is almost a certainty that the huge public debt governments have taken on to mitigate the private losses of the banks, will be borne by the general public for years to come. This has opened up many painful and unanswered questions regarding the validity of free-market Capitalism as a global model.

The Islamic alternative to this mayhem and instability revolves around two key pillars: the bimetallic standard and the prohibition of Gharar.

The Islamic Khilafah issues two major units of currency, the (gold) dinar and the (silver) dirham. While the State mint may issue paper currency, these notes must be 100% backed by either gold or silver. This produces much greater stability in the long term value of the currency in the state, and limits the ability of the state to pursue to print currency irresponsibly.

One of the key factors that has contributed to the current economic turmoil is the relentless printing of paper currency the Bush administration undertook, in order to stave off the last recession in 2000. The banks used the massive increase in the money supply to provide easy credit and mortgages leading to the bubble which has collapsed so spectacularly.

In Islamic contract law, gharar refers to uncertainty regarding the sale of an asset whose value cannot be known at the time of the contract. The Prophet Muhammad (peace be upon him) prohibited forms of trade where quality or quantity of the sale item were either not specified or unknowable at the time of the contract.

In contrast to this, we find that trillions of dollars have been lost globally due to the financial markets exposure to the sub-prime mortgage housing market in the US. The banks giving these loans to clients with poor credit histories used these debts as assets to borrow themselves, or packaged them and resold tem as financial instruments, despite the inherent uncertainty involved. The major credit rating institutions such as Standard and Poors and Moody’s labelled many of these inherently risky products as of high grade. Now that the whole banking sector is unsure which of its products – which institutions – are linked to these ‘toxic’ loans, the whole financial system has come to a standstill.

For the promoters of the free market, who for decades now have been preaching about the robustness and efficiency of Capitalism, these should be humbling times. Free markets seem to exist at an unacceptably high cost for the rest of the society. It is inevitable that people will start to question the blind devotion given to the Capitalist system and start looking for genuine alternatives. Advocates of the Islamic way of life will be in the forefront of those providing the answers.

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