This informal CPD article on Islamic Finance: A Way Out Of Financial Crisis was provided by N M Shafiul Islam Chowdhury ACCA, Programme Director at Academy of Business Professionals (ABP), one of the leading and fastest-growing training and consultancy institutes in Bangladesh.
Financial crisis is a broad issue; fundamentally it refers to the distress in financial market which leads to disruption in businesses as well as families. The impact of financial crisis in a big picture can go beyond the national boundary, which we have seen during the financial crisis 2008. As a consequence of financial crisis asset value of financial institutions may fall drastically, investors may lose their investments significantly, value of stocks may deteriorate, number of defaulters may increase, remarkable commodity price hike and overall inflation could increase in economy. Critical analysis of financial crisis 2008 reflects some factors which stimulate the catastrophe during that time and those derive from conventional financial system. Still there is no obvious elucidation to alleviate these factors for establishing a sustainable financial system. On the contrary, envisaging these factors from Islamic finance perspective, show light at the end of the tunnel.
Objective of the Article
The secular view anticipates that the financial crisis occurred in 2008 due to uncontrolled lending practice, unethical competition between financial institutions, high liquidity, lack of transparency, use of derivatives and other financial engineering model. These factors lead business environment in a risky position. Flexibility of supervisory body was also a major reason and due to this, institutions became involved in ambiguous dealing without considering the risk properly. During that financial crisis it was apparent that the institutions under Islamic Financial system have not been affected to a great extent. Though Islamic Finance is evolving gradually over the years but this indicates that Islamic Finance could be the resilient system for ensuring the sustainability of the financial system as well as economy, and representing this idea is the primary objective of this article. There are different products complying shariah which might be a good alternative of conventional banking. Though, market participants think that these are not sufficient enough against conventional banking products. Different research and development work is ongoing in the field of Islamic Finance to find out more shariah compliant product as well as programmes are undertaken for raising awareness in the market. So, this is also obvious that Islamic Finance is facing challenges in implementation stage compared to conventional system. This article also shed some light on these issues.
Secular Economic System vs. Islamic Economic System
Financial solvency is desired by every human being. To ensure financial solvency or a standard of human living, sustainable financial system or economic growth is essential. According to the view of secular economics there is shortage of resources and economy is performing by best utilization of available resources by ensuring supply and demand matching concept. Though Islamic finance principles disagree with this view but, secular economics view also reflects the significance of proper wealth distribution. Otherwise, some people may be fully deprived of resources and some may get enormous beyond their need. The idea of globalization also demonstrated futile during the financial crisis of 2008. So the financial catastrophe in 2008 drives us to think alternative of conventional financial system (AL MANASEER, 2017).
On the contrary, Islamic economic system believes that Allah is the owner of all property in the world and humans are sent to the earth to perform his responsibilities as per guideline provided by Allah, encourage good deeds and discourage bad deeds (al-Amr bil Maruf wa al-Nahy anil Munkar). Source of sharia is the Quran (word of Allah sent through Jibreel to Prophet Muhammad (SM), Sunnah (Authentic hadith of Prophet Muhammad (SM), Ijma (consensus of the Muslim scholars) and Qiyas (process of deductive analogy). As per sharia, Allah provides all the resources required for a living being who sent to the earth. So there is no shortage of resources, the thing is inappropriate distribution of wealth which leads some people to poverty and some to the extreme wealthy level (Alqahtani and G. Mayes, 2017).
Secular economic system focuses on individual well being and maximization of profit or return without considering others interest whereas Islamic economic system motivates individuals to fulfill his/her duty as per sharia guideline, which covers prohibition of several factors (discussed below), accountability and maintaining brotherhood. As per sharia, universal maqasid are essentials, necessities and luxuries. Once an individual achieves essential part of his/her life then he/she moves to necessity and following towards luxury. Sharia makes it mandatory that after a certain level of wealth gain an individual has to donate or charity 2.5% of the wealth to poor and deprived people of society, which called Zakat. In addition to that, there are some other models e.g. Sadaqah, Jizyah, Waqf in Islamic economic system which ensure proper wealth distribution among the society (AL MANASEER, 2017).