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The growth of Islamic finance is a remarkable story in the history of global financial systems

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Title: The growth of Islamic finance is a remarkable story in the history of global financial systems


1
The growth of Islamic finance is a remarkable
story in the history of global financial systems
  • Islamic banking, starting in Dubai in the early
    1970s now commands an estimated 400 billion
    dollars in assets
  • Operates in 70 countries
  • Western Finance is spurring growth by
    establishing IF divisions
  • Poised to expand geometrically

2
As a transnational movement - Islamic Finance
can be a global force of peace, prosperity and
cooperation
3
Financial systems are more than
economic institutions they are powerful
societal and cultural mechanisms They are
organic - changing over time sometimes gradually
sometimes abruptly
4
19th 20th C review shows the relationship
between monetary systems and world stability
  • While the 20th C saw two devastating wars and
    brutal dictatorships the 19th C was an era of
    peace
  • After the Napoleonic Wars ended in 1815 nations
    formed the Concert of Europe
  • Except for brief localized struggles, peace
    lasted 100 years on European Continent
  • Elsewhere Europeans were carving up whole
    continents as part of colonial expansion

5
Mercantilism to laissez-faire
  • Mercantilism - a joint venture formed between
    the state and its chartered monopolies to gain
    riches thru trade, exploitation and plunder
    ceded to a balance of power, the liberal state,
    a self regulating market and the gold standard

6
Gold standard
  • Gold standard was a fixed currency rate system
    all currencies were convertible to gold
  • As a supranational mechanism, the gold standard
    gave reins to commerce resulting in unprecedented
    prosperity for Europe
  • Transnational projects such as railways and
    canals and capital markets integration kept
    nations out of war
  • To the East the gold dinar had flourished as a
    trade facilitator since the 7th C

7
War brewing
  • In the end - competition for resources and shifts
    in the balance of power set war in motion in
    early 1900s
  • Reaching into the Mid East for more colonial
    possessions, Britain and Germany signed an
    agreement over the Baghdad railway in 1914 too
    late to avert war

8
World War I proved cataclysmic
  • Battle and famine claimed 15 million lives
  • 4 Empires collapsed German, Russian,
    Austro-Hungarian, Ottoman
  • Ruling dynasties imploded into a dozens of states
    in central Europe
  • A pact between Britain and France carved up the
    Ottoman Empire into the mandates of Iraq, Syria,
    Lebanon and Palestine
  • State drawn boundaries in the 1920s produced a
    lasting legacy - causing constant tension for
    over 80 years

9
The gold standard collapsed with the war.
  • The gold dinar that had operated in the Muslim
    world for 13 centuries - longer than anywhere
    else- did not survive
  • Gold convertibility gone - hyperinflation,
    unknown in the preceding century, ravaged the
    economies of Germany, Russia, Austria, Poland,
    Hungary and Bulgaria.

10
Depression followed inflation
  • Inflation of the 1920s ended abruptly in the
    1930s with the complete collapse of the global
    economy.
  • The U.S. and France held 63 of the worlds
    monetary gold but halted credit to Europes new
    nations
  • Nations turned inward and embraced the state as
    the savior from the great depression.

11
Fascism emerged as a response to a failed
monetary system
  • From Tokyo to Madrid
  • Buenos Aires to Caracas
  • Helsinki to Belgrade
  • Without a monetary system, Germany turned to
    barter and by 1932, Mussolini declared capitalism
    dead.
  • Territorial expansion by Italy, Germany and Japan
    seen as a means of solving goods shortage
  • It took another war to revitalize the gold
    standard system - under Bretton Woods in 1945

12
From fixed to floating
  • In 1971, Vietnam War caused U.S. to leave the BW
    gold exchange standard
  • For last 35 years currencies are paper fiat
    issued by sovereign nations
  • The spread of capitalism and the inflation of
    dollars has filled the worlds banks with
    greenbacks
  • U.S. dollar rules as the global reserve currency
    because of Americas post WWII economic position
    and its ability to shape global monetary system

13
Birth of petrodollars how fiat systems produce
imbalances
  • After Arab oil embargo in 1973, dollars flooded
    into Mid East oil producers coffers
  • Fearing a glut of inaccessible dollars,
    International Monetary Fund set up a dollar
    recycling facility
  • Arguably dollar based loans to South America led
    to its debt crisis in the 1980s
  • Recent fast rise of petrodollars helped create
    Mid East stock market bubble and correction

14
Since the fall of communism 1989 -developed world
is giving way to emerging countries
Islamic Finance mirrors emerging
market growth
15
Sea change in productivity and consumption
  • Emerging markets now make up over half worlds
    GDP (purchasing parity basis)
  • U.S. in 1945 was 40 of worlds GDP and is now
    20
  • Emerging markets consume over half worlds energy

16
U.S. Trade deficit has caused huge dollar
reserve build-up in China, India and Mid East
  • Oil exporters dollar reserves rising faster than
    Asias estimated at 600 bn
  • Contrary to standard theory capital runs
    uphill emerging countries finance developed
    ones

17
According to Nobel Prize winner Robert Mundel
  • The present international monetary system
    neither manages the interdependence of currencies
    nor stabilizes prices. Instead of relying on the
    equilibrium produced by golds automaticity,
    the superpower has to resort to "bashing" its
    trading partners which it treats as enemies.

18
Since the collapse of Bretton Woods U.S. trade
deficit has ballooned Flip side to C/A surpluses
elsewhere
  • in millions of dollars

19
Current Account positions in emerging regions
20
Current accounts in emerging regions
21
Next stage of emerging market development
  • Fewer dollars will be recycled into American debt
    markets reversing U.S. credit cycle
  • Money will be used to facilitate banking and
    credit institutions to promote growth and
    consumption in emerging markets
  • Clout of IMF to dictate terms to other countries
    (such as it tried in Malaysia in 1997) further
    diminished

22
Islamic Finance can build a more equitable and
balanced financial system in rapidly changing
world
23
Islamic Finance putting money to work is
profoundly different from Western Finance
  • Dollarized world has left Western Finance awash
    in liquidity
  • WF increasingly involved with speculative
    ventures such as hedge funds
  • Hedge fund activity is becoming cannibalistic
    extracting money from money
  • Derivatives trading now tops a quadrillion in
    notional amount in US
  • Capital raised by sukuks can be put to work for
    infrastructure or transportation for real use and
    revenue streams
  • Oil development projects often structured like
    commodity bonds that pay back in kind i.e.
    Iranian Oil Bourse in which investors and state
    predetermine tonnage receivable based on capital
    investment

24
Investment in IF harmonious with peaceful
co-existence
  • WF places top priority on profits
  • Ignores any social, moral or religious component
  • Joins the state and corporation in military
    enterprises like 18th mercantilism
  • IF defines permissible investments
  • Forbids investment in
  • weapons/defense
  • Harmonizes financial activities with social and
    religious life

25
Concept of risk sharing has powerful implications
  • WF increasingly focused on risk transfer -
    creates wall between lender and borrower i.e. -
    housing bubble affects owner not lender
  • Creates constant conflict between
    workers/shareholders and lenders/borrowers
  • Average citizens in developed world are losing
    out in globalizations spoils wages declining
  • CEOs now make 300 times average wage earner
  • IF - Risk sharing decreases bubble likelihood
  • Mortgages share home value risk
  • Labor and capital providers more equitable in
    profit and loss sharing partnerships
  • Micro-finance is proving to be highly successful
    in alleviating poverty

26
IF is similar to gold standard era of 100 years
peace
  • Like gold standard, IF is transnational aids
    state to state cooperation
  • Promotes non-adversarial relationships
  • Views conflicts as destructive to society

27
Gold dinar?
  • In 2002 Malaysia and Iran tried to revive the
    dinar did not succeed
  • Mistake may have been to believe all paper
    currency needs gold backing it does not
  • A gold signal system can work as well
  • If gold price increases money supply needs
    decreasing and vice versa
  • This system was used by the U.S. in 1800 when the
    new country had no gold at all.

28
Gold dinar?
  • A gold signal system would be a powerful new
    financial system
  • Historically gold creates price stability, high
    employment and balanced trade
  • High theological appeal

29
Is it possible?
  • Monetary systems change with every war
  • The past century has seen no less than 5
  • gold standard
  • interwar dirty floats,
  • pound sterling (ended 50 years ago over Suez
    canal crisis)
  • Bretton Woods
  • Dollar-centric fiat floats and pegs

30
The world is changing at an unprecedented pace
  • Russia, which suffered an economic meltdown in
    1997 is now a trade surplus nation and the
    worlds largest energy supplier
  • Triple alliance of Russia, China and Iran are
    forming a counterweight to U.S. hegemony
  • China is now the largest consumer of tin, steel,
    copper and the 2nd largest importer of oil
  • The U.S. is becoming increasingly protectionist
    as shown by its rejection of the DPW in Jan
  • Creation of the Euro in 1999, a peacetime event,
    has shown benefits of fixed rate system

31
History suggests change is coming
  • U.S. can no longer use emerging market financing
    to fund its debt burdens
  • Median wage stagnation and asset depreciation may
    put America into sharp recession
  • Emerging markets have tremendous opportunity to
    refashion global monetary system

32
IF has rare window
  • To create a sound hard money system
  • To form a more distributive system across society
  • To integrate the financial system with society
    making a cohesive whole
  • To promote global peace and prosperity
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