World Banking in Disarray What does Islam have to Say Tarek El Diwany London School of Economics, 24

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World Banking in Disarray What does Islam
have to Say?Tarek El DiwanyLondon School of
Economics, 24 October 2008
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SOME PROHIBITIONS IN MUAMALAT

• Murder
• Adultery
• Alcohol consumption
• Theft
• Fraud
• Usury
• Gambling and contracts of uncertainty
• Coercion

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THE DANGER OF USURY


Allah's Messenger (peace be upon him) said,
Even though usury be much it leads in the end to
utter poverty. Narrated by Ibn Majah, Bayhaqi
transmitted it in Shu'ab al-Iman and also
transmitted by Ahmad
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Investors
Invest 80,000

Finance Co.
Home-buyer
20,000
80,000
Partnership
Purchase property for 100,000
Rent 10,000
Property
Tenant
Tenancy Agreement
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TAWARRUQ FINANCING
Bank
Spot sale of commodity
110 payable after one year
100 paid now
Dealer 2
Client
spot sale of commodity
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THE GOLDSMITHS
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THE GOLDSMITHS
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BANK
10 equity
state money 10

PERSON A
PERSON B
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BANK
10 equity
state money 10

PERSON A
PERSON B
loan 100
100 money
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Loan values fall
BANK
0 equity
state money 10

PERSON A
PERSON B
loan 90
100 money
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Loan values fall further
BANK
- 30 equity
state money 10
PERSON A
PERSON B
loan 60
100 money
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Bank run
BANK
- 30 equity
state money 0
PERSON A
PERSON B
loan 60
90 money
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First Paulson plan (state pays 100 for loans
worth 60)
BANK
10 equity (was - 30)
state money 100 (was 0)
PERSON A
PERSON B
loan 0 (was 60)
90 money
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Brown plan (state injects 40 new equity capital)

BANK
10 equity (was - 30)
state money 40 (was 0)
PERSON A
PERSON B
loan 60 (was 60)
90 money
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ACTUAL RESERVES HSBC, 2006

• HSBC Bank plc., Annual Report Accounts, 2006

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IMF Financial Statistics Yearbook 2005, UK data
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IMF Financial Statistics Yearbook 2006, Indonesia
data
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WILLIAM PATERSON ON BANKING

• "The Bank hath benefit of interest on all moneys
  which it creates out of nothing".
• Statement of William Paterson, first Director of
  the Bank of England, upon receiving the Charter
  of the Bank in 1694 quoted in Tragedy and Hope,
  Carroll Quigley, MacMillan New York (1966)

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THE UNITED STATES CONSTITUTION

• No State shall enter into any Treaty, Alliance,
  or Confederation grant Letters of Marque and
  Reprisal coin Money emit Bills of Credit make
  any Thing but gold and silver Coin a Tender in
  Payment of Debts.
• Constitution of the United States, Article 1.
  Section. 10

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ANDREW JACKSON ON BANKING

• The distress and alarm which pervaded and
  agitated the whole country when the Bank of the
  United States waged war upon the people in order
  to compel them to submit to its demands cannot
  yet be forgotten. The ruthless and unsparing
  temper with which whole cities and communities
  were oppressed, individuals impoverished and
  ruined, and a scene of cheerful prosperity
  suddenly changed into one of gloom and
  despondency ought to be indelibly impressed on
  the memory of the people of the United States. If
  such was its power in time of peace, what would
  it have been in a season of war, with an enemy at
  your doors? No nation but the free men of the
  United States could have come out victorious from
  such a contest yet, if you had not conquered,
  the government would have passed from the hands
  of the many to the few, and this organised money
  power, from its secret conclave, would have
  dictated the choice of your highest officials and
  compelled you to make peace or war, as best
  suited their own wishes. Andrew Jackson, 4 March
  1837, Richardson's Messages, vol. 4, p. 1532

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BRADBURYS STATE MONEY, 1914
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THOMAS EDISON ON MONEY AND DEBT

• If our nation can issue a dollar bond, it can
  issue a dollar bill. The element that makes the
  bond good makes the bill good It is absurd to
  say that our country can issue 30,000,000 in
  bonds and not 30,000,000 in currency. Both are
  promises to pay but one promise fattens the
  usurer, and the other helps the people.
• Thomas Edison, quoted in The New York Times,
  December 6, 1921

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McFADDEN ON BANKING

• Some people think the Federal Reserve Banks are
  the United States government's institutions. They
  are not government institutions. They are private
  credit monopolies which prey upon the people of
  the United States for the benefit of themselves
  and their foreign swindlers
• Louis T. McFadden, Chairman of the Committee on
  Banking and Currency, Congressional Record
  12595-12603, June 10, 1932

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TOTAL EXTERNAL DEBT (US bns)

• 1980 1990 2000 2007
• Emerging Developing Countries
  621 1391 2372 3762
•  
•  
• IMF World Economic Outlook Database October 2007

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• Relieved of their annual debt repayments, the
  severely indebted countries could use the funds
  for investments that in Africa alone would save
  the lives of about 21 million children by 2000
• UNDP Human Development Report 1997

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HELPING THE POOR?

• Aid received Debt service paid
• ( millions)  
• Angola 261 1144
• Cameroon 190 549
• Kenya 195 716
• Vietnam 257 1410
• World Bank, Global Development Finance, figures
  for 1999 published in 2001

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TOTAL DEBT AS A RATIO OF GDP

• 1995 2006
• United Kingdom 1.49 2.13
• United States 1.01 1.03 
• Total debt is government net debt plus private
  sector obligations to banks
• IMF World Economic Outlook Database October 2007
• IMF International Financial Statistics 2007

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IMF Financial Statistics Yearbook 2006, Indonesia
data
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AVERAGE UK HOUSE PRICES

Office of the Deputy Prime Minister, UK, 2004
(s)
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"Urwa related that the Prophet gave him one Dinar
so as to buy a sheep for him. Urwa bought two
sheep for him with the money. Then he sold one of
the sheep for one Dinar, and brought one Dinar
and a sheep to the Prophet." al-Bukhari 4. 836
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DISCOUNTING AND THE ENVIRONMENT

• Given the following two forecasts
• Normal farming produces 100 profit per year for
  ever
• Intensive farming produces 150 profit per year
  for 15 years followed by desertification
• Which method should be adopted under standard
  discounted cash-flow analysis using an annual
  interest rate of 10?

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CORPORATE LEVERAGE

• Borrow at 5 interest
• Invest at 20 profit
• Businessman keeps 15 for himself and gives 5
  back to the bank

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HEALTHY BUSINESS COMPETITION?

• Top Shop
• Burton
• Miss Selfridge
• Dorothy Perkins
• Wallis
• Richard Shops
• BHS

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HEALTHY BUSINESS COMPETITION?

• Top Shop
• Burton
• Miss Selfridge
• Dorothy Perkins
• Wallis
• Richard Shops
• BHS

Phillip Green
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HOW BUILDERS USED TO BUILD
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HOW BUILDERS BUILD TODAY
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THE ISLAMIC ALTERNATIVE

• Harmful resource allocation prohibited
• Commodity money and 100 reserve commercial
  banking
• Profit-sharing and trade in place of usury
• De-stabilising contract forms prohibited (e.g.
  gambling, short-selling)
• Education and legal sanctions encourage reform of
  personal values