Islamic Finance: The Untapped Potential for Economic Development
Explore the revolutionary macroprudential policies in Islamic finance to enhance economic development. Discover the social, regulatory, and structural controls crucial for financial stability. Learn from historical events like the Great Depression and the European experiment in greed. Embrace the Islamic approach focusing on service-oriented, cooperative, and responsible finance practices.
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A New Phase of the Islamic Finance: Capturing the Untapped Area to Improve the Quality of Economic Development 3rd BANK INDONESIA INTERNATIONAL SEMINAR ON ISLAMIC FINANCE Session 4: Macroprudential Policy Framework for Islamic Finance towards a whole Financial System Stability Dr. Asad Zaman, IIIE, IIUI Nusa Dua Bali, 30th & 31st May 2013
Three Dimensional Approach Social Controls Most Important Structural Controls Regulatory Controls Least Important
Social Controls Develop Character & Social Norms Cooperation Community Responsibility Service Orientation Example of Tokyo Lost & Find Children are born with social instincts.
European Experiment Which Failed Encourage Greed & Selfishness, Ambition. Cut-throat competition will lead, via survival of the fittest, to most efficient organizations. Regulation necessary to ensure fair competition remaining within boundaries. DUAL model Wise and Just Philosopher- Kings of Plato. Rule over ordinary humans.
Boesky: Greed is Good Zuboff: I spent a quarter-century as a professor at the Harvard Business School, including 15 years teaching in the MBA program. I have come to believe that much of what my colleagues and I taught has caused real suffering, suppressed wealth creation, destabilized the world economy, and accelerated the demise of the 20th century capitalism in which the U.S. played the leading role.
Islamic Approach: Revolutionary Macro-Prudential: Allow greed but regulate it Greg Smith resigns from Goldman-Sachs. Islamic approach; Focus on changing the culture of the finance industry. Make it service oriented, cooperation and community oriented, responsible.
Great Depression of 1929 Banks invested heavily in rising stocks. Stock market crashed. Millions lost life savings. Unemployment went from <3% to 25% for decades. Dust Bowl where nothing grew. WHY: Banks gambled with depositors money.
Structural Innovations Differentiated Institutions of Islamic Societies: Dar-ul-Amanah: Keep money safe (value) Service Oriented Saving: Hajj,Transport,Housing Waqf: Spend money on others Investment Banks: Use money to earn Earning must be JUSTIFIED via service provided to society. That is what makes it HALAL.
Post-Depression Regulation Root Cause: Gambling with Other s Money. Remedies did not address root cause SEC, FDIC, Regulation of Banks. No competition, regional banks, caps on interest payments, Glass-Steagall: Barrier between banks & finance. Commercial || Investment Banks
Greed raises head: 60s 70s Regulatory environment remains same. Banks start using loopholes in Glass-Steagall. Can buy on behalf of customers. Can affiliate with companies whose PRINCIPAL business in not securities. NOW accounts offered high interest rates beyond regulatory cap. Regulations + Institutions + Character
De-Regulation & Crisis Reagan - Garn - St. Germain Act of 1982 FSLIC: 100K insurance for S&L. Free Entry, No Caps, No restrictions on Investment. Looters systematically stole more than 100 billion USD -- collaboration at highest levels Eye-Opener: Inside Job: The Looting of America s S&L s by Pizzo, Fricker & Muolo
Causes of 80s S&L Crisies Greed systematic looting. Profits WITHOUT value addition: prized De-Regulation DONE purposefully by powerful. Huge Loss Many people would have lost life savings, but for enormous bailout. Extreme cost to economy.
Subprime Mortgage Crisis More or Less: Repeat of S&L Glass-Steagall Repealed: Gramm-Leach-Bliley Mortgages bundled and sold. Insurance from too big to fail AIG. Created massive & complex dependencies built on fragile base of increasingly risky mortgages. Gambling with others money. Trading of Debt Not permitted in Islam.
Lessons not learned from Crisis Dodd-Frank 848 vs. Glass Steagall 37 pages Regulators do not want to regulate. 1% rule. LESSON: Reform social norms, institutions, and then regulate for violations of these norms. Regulations cannot function when social norms are wrong.
