Friday, November 1, 2013

What’s Wrong with Current Global Economy

In the Name of Allah, the Entirely Merciful, the Especially Merciful

Following is the draft of a speech I recently gave. Just wanted to share.

Current Global Economy has gone through a rough period in recent years, and a lot of wealth was lost due to that. As Muslims, and citizens of this world, we should think and ponder over the reason behind this turmoil, and how it can be improved. Allah says in the Quran.

“You are the best of peoples ever raised up for mankind” (Quran 3:110)

Instead of pointing figures, and finding someone to blame, we should be the source of solutions and benefits for the humanity. So, let us analyze this problem that the whole world is suffering from.
  1. First, we should understand how Global Economy interconnects all the countries into one marketplace.
  2. Second, we should understand the flaws in the current Economic system due to deviation from Islam.
  3. Lastly, we should discuss ways Islam can help heal the Global Economy and provide a long term sustainable economy.
Interconnected Global Economy
A community or a country always has a goal to be self sufficient, and they do everything in their power to have recourses to be independent of foreign dependency. However, it is a very difficult, if not impossible goal to achieve, because there will be some resources that will be required and not available locally to meet the needs. This creates a need of trading and mutually beneficial transactions, where one entity provides the goods that the other needs and vice versa. Since it is natural, and necessity, Allah has made trade halal, as He says.

“…Allah has permitted trade and has forbidden interest..” (Quran 2:275)

For most of the human history Economy was local, because the system was closed within an area, and the impact of foreign economies was not felt in most nations. Of course, there was trade with foreign lands, but most economies were not dependent on each other. There were some exceptions like trading between Makkah and Syria and Yemen, during the time of the Prophet (PBUH). All this changed when global financial institutions were established, and modern currency system connected the economies and countries. Today, world economies are so much interdependent on each other that any change in economic outlook in one country can impact a country thousands of miles away. 

For example, if USA companies’ profits decline, impact can be felt in Singapore.
Also, the current economic system, by and large, is based on capitalist philosophy, which is based on motivating participants to maximize their share, and avoid any transaction that will render a loss or reduction in profits. In the absence of Allah’s guidance, this is seemingly the best strategy, and the strategy is Greed. In addition, the measurement of wealth is based on currencies, which in some cases is arbitrarily created and destroyed. In fact, currency can be an acceptable representation of wealth, if it is based on the true wealth, which is the natural resource. 

After 1971, however, when the collapse of the Bretton Woods agreement meant that the link between dollar and gold was severed, that is no longer the case. So, now, all the economies are interconnected through the currencies and convenient methods of trading, which are not prohibited in Islam or a bad thing at all. In essence the global economy is a blessing, and provided a lot benefits to all of us.

Flaws in Current Economic System
Although global trading and interconnected economies are not against principles of Islam, underlying greed, unfair economic environment, and Riba based financial system has turned this blessing into a curse. Greed is the opposite of charity, and wealth has been accumulated with few and most is impoverished.  It seems intelligent to increase the profits regardless of the welfare of the community as a whole. 

For example, in the years between 2000 and 2007, banks gave loans to anyone who wanted to sign up for it, and that loan was traded multiple times as a commodity, although it has not yet collected. It is interesting to note here that Islam prohibits the trading of debt because collecting it in cases of default becomes complicated. Amazing isn’t it how Islam appeals to the logic when not blinded by greed. Greed indeed blinded the investors, and homeowners, and even the government from regulating it. Economy was inflated unfairly to lure people to invest their life earnings. Interest based loans expected more money in exchange of money, and then the trading of the loan as increased Riba to satisfy the Greed and unfair economic practices.

This situation kept building up and every Riba based transaction was accumulated with another layer of Riba based transaction between investors. All experts agree that collapse of 2008 was caused by the US housing bubble and the bubble has burst by unsustainable interest based profits not materializing, and hence stressing the insurance companies to accommodate the losses, whose capital, in turn, was invested in the same Riba based market. So, when the bluff was called, and demand was made to pay the losses, the financial sector went into a panic mode, and the whole world felt the shock waves. 

Trillions of US Dollars were lost. Millions of people lost billions of their savings. Losses caused layoffs and homeowners defaulted on more loans and the cycle continue to spiral the economy towards oblivion, until the US government stepped in and start printing money which was also based on the interest based loans from foreign countries, who in turn depend upon the same US dollar for their wealth. So this vicious cycle continues till today in different sectors.

Islam as a Solution
As you can see that current global economy is based on Greed, unfair economic environment, and Riba based financial system. Islam on the other hand provides economic principles based on earnings combined with charity to purify it, fair trading policies to protect all parties, and Riba free transactions which guarantee the sustainable growth based on natural resources and shared sacrifices. Allah says

“And whatever you give for interest to increase within the wealth of people will not increase with Allah . But what you give in zakah, desiring the countenance of Allah - those are the multipliers.” (Quran 30:39)

Making reasonable profit is one of the goals of any trade, but making the profits the sole purpose of life is unIslamic. Any economy should be based on mutual benefit and welfare and not selfish greed, and safe guard should be in place to prevent greed from taking priority over the right of the poor and needy. Also, if the wealth does not flow through the whole system, poor will become poorer and rich will become richer until the system will collapse, because the rich depends upon the poor population to pay for the profits.

“Woe unto every greedy, arrogant, one who hath gathered wealth (of this world) and arranged it. He thinketh that his wealth will render him immortal. Nay, but verily he will be flung into the Consuming One.” (Quran 104:1-4)

Islam demands that trade transactions are fair, and does not deprive any party unreasonably, so any transactions that lead to unbalanced economic system or undue stress, or victimizes people should be prohibited. Following are some of the evidences from the Quran and Sunnah providing the fair principles.

"Do not devour your property among yourselves falsely except that it be trading by your mutual consent" (Quran 4:29)

"Give a full measure when you measure out and weigh with a fair balance" (Quran 17:35).
Narrated Abdullah ibn Umar: Allah's Apostle said, "He who buys foodstuff should not sell it till he is satisfied with the measure with which he has bought it. (Bukhari Book of Sales and Trade)

Also, Islam prohibits Riba, which will be the best way to prevent the issues that current economic systems are suffering from. Practically, Riba based growth is not sustainable and even non-Muslims begin to see the flaws in the Riba based financial system, which is like a balloon being pumped, and it is a matter of time before it bursts.

“O ye who believe! Devour not usury, doubling and quadrupling (the sum lent). Observe your duty to Allah, that ye may be successful.”  (Quran 3:130)        

“And of their taking usury when they were forbidden it, and of their devouring people's wealth by false pretences, We have prepared for those of them who disbelieve a painful doom.” (Quran 4:61)

Ironically, this is the way American financial experts have explained the boom and bust cycles in USA economy, which is caused by building up of growth in one sector due to promised return of more money on money lent, but the system collapses when money runs out to provide interest payments. Since the Global Economy is based on US Economy, the same cycle repeats globally. On the other hand, UK markets are adopting Islamic compliance investments to avoid high risk high profit Riba based investments.

All in all, we are blessed as Muslims to have the solutions for human problems with us in the Quran and Sunnah, and we should share with others and help implement in the society, so greed can turn into earnings purified by charity, dubious deals turn into fair transactions, and false promise of more money for money turns into reasonable risk based profit sharing. We should not be observers but the leaders in Global Economy and turn it into blessing from Allah and beneficial for the humanity. InshAllah!

Power Point Presentation can be found here.

JazakAllah Khairin
AbuArman Jumani

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