Spiritual and Natural Roots of Economic Reflection

prepared by Frank Kaufmann for the

Conference on Islamic Finance & Investment

Irish Business Executives Forum (IBEF) 5th and 6th June 2012.

Section 1: Islamic Finance and Investment (A) Islamic Law Islamic religious law derives from four basic sources: The Qur'an: Muslims believe that the Qur'an is divine revelation, the dictated word of God given to the Prophet Muhammad (Peace be upon him PBUH) by the angel Gabriel Sunnah: Sunnah means the way and the manners of the prophet. These texts compiled under rigorous standards of verification, provide guidance for life that is based on just how the Prophet Muhammad (PBUH) himself dealt with different matters and issues (i.e., Family, social, financial and government matters etc). Ijmah: Means consensus of the community, or of qualified scholars on matters under consideration. Qiyas: Is the effort to interpret the Qur'an and Sunnah as they apply in the current reality and environment. (B) History of contemporary development of Islamic Finance. The major names (and then meetings) that are quickly and immediately recognizable to those familiar with recent and emergent elements of Islamic finance include: Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952) Mawdudi (1950) Muhammad Hamidullahs 1944, 1955, 1957 and 1962 Muhammad Uzair (1955) Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), alNajjar (1971) and Baqir al-Sadr (1961, 1974)

Page

- Frank Kaufmann Islamic Finance use with attribution

First International Conference on Islamic Economics in Mecca in 1976, International Economic Conference in London in 1977

They all recognized the need for commercial banks and their perceived "necessary evil," and thus proposed banking systems based on the concept of Mudarabha, meaning profit and loss sharing. The involvement of institutions and governments eventually led to the application of theory to practice and resulted in the establishment of the first interest-free banks. The Islamic Development Bank, an intergovernmental bank established in 1975, was born of this process. (C) Basic Tenets for Islamic Finance The two core tenets are: No interest (riba) can be earned on loans Socially responsible investing. Risk is not gambling You cannot trade risk No haram (forbidden) industry (such as tobacco, alcohol, pork, pornography and other industries that are morally and socially harmful, or otherwise forbidden in Muslim life.) These principles shape Islamic finance. Islamic banking itself requires that money be used productively, and investment activities should be dealt with in partnerships so that risks and rewards are shared by creditor and debtor alike. Also, according to sharia (Muslim law), excess capital (i.e., profits) ought to be put back into the community in the form of zakat (alms). Other than close attention to these important strictures, most financial activity is permitted (for example, stocks, real estate investments, insurances, and currency swaps, provided that whatever is engaged is sharia-compliant (called sukuks).

(D) Present situation and attractiveness Page - Frank Kaufmann Islamic Finance use with attribution

Several hundred Islamic banks with assets estimated at near half a trillion. Projected growth of 15% per annum. Shariah compliant products and services (that also fit the concerns of other religious people, not only Muslims) Growing effort in the industry worldwide to develop and promote Shariah compliant tradable instruments for the Islamic banking industry. The existence of these systems in approximately 75 countries worldwide

(E) Criticism of Islamic Finance There are two main arguments against Islamic banking: Many knowledgeable economists argue that it is interest-based in the end, just that that is well-hidden; The money considered as interest in a typical bank transaction is instead designed into the contract agreement in another way. Some Muslims consider Islamic banks to be engaging in legal trickery to hide the fact that they charge and pay interest. Many economic analysts would probably agree (7). Since zakat can be given to anyone and does not need to be accounted for in the books, concerned people have expressed concerns as to whether money has been given to questionable, even dangerous groups (F) Issues and difficulties 1. LEGAL FRAMEWORK An appropriate legal, institutional and tax framework is a basic requirement for establishing sound financial institutions and markets. Islamic jurisprudence offers its own framework for the implementation of commercial and financial contracts and transactions. Nevertheless, commercial, banking and company laws appropriate for the enforcement of Islamic banking and financial contracts do not exist in many countries. 2. EXCESS LIQUIDITY Page
3

- Frank Kaufmann Islamic Finance use with attribution

Islamic banks have over 60 % excess liquid funds which cannot be properly utilized due to non-availability of Sharia'h Compliant products and instruments. The competitiveness and soundness of financial institutions depend on the availability of efficient financial products. Islamic banks urgently need Sharia'h compliant products to meet a number of pressing needs. Section 2: Contents of social relations: Systems, cultures, and components of civilizations While one can identify a great many parts of human life and enterprise that make up our pursuits, a helpful breakdown in simple terms is that human life is comprised of: Religion Politics Commerce Finance, manufacturing, commodities, and trade Education Media Culture Arts, sports, leisure, entertainment Health and Wellness Security Natural intuition tells us that no single part from among these can be considered in isolation from the others. Presently life in the world is suffering under steady moral breakdown in virtually each of these several areas listed above. But where do we typically look to find the basic building blocks of human character and rectitude? These are typically understood as the purview of religion (in some fashion or another) Section 3: Healthy, moral, and just life in the world, and in our life's many endeavors.

Page

- Frank Kaufmann Islamic Finance use with attribution

(A) Religion and morality As stated above, people typically imagine that the formation of socially responsible character requires application of religious principles, (or some adequate substitute for human development in its place). When one considers religion (or some surrogate) it is clear that proper human formation is forged in two (and ultimately three) core arenas: Approach to God (or some higher ideal, force, system, or figure) This could be described as a vertical relationship Approach to fellow people and social life This could be described as horizontal relationships The third element noted above refers to our relationship with our natural environment (nature)

Each world religion speaks to these three moral directions for human beings, but each one has key distinctions that each group of respective believers find most helpful and most compelling. (B) Religion and the current financial crisis If we were to examine each religion and its history closely, which system will show itself to have most consistently produced morally incorruptible people? What reasonable person would argue for the superiority of any particular religion so far as this point is concerned? Then this same matter should be examined when inquiring into finances. We naturally ask, is the failure of the Western financial infrastructure the result of an inferior system for the management of wealth? OR is it the result of abandoning Western spiritual, and moral guidelines grounded in Judaism and Christianity until recent times. Said otherwise, could immoral people find a way to game any system of banking? Even banks guided by Islamic finance? If I were a practitioner of Islamic banking seek to grow in Western or Asian environments, I would want to know, is the Western interest in Islamic banking interest in a better way of banking? OR is it just these same cads trying to get into the emerging arena of Islamic banking? Page
5

- Frank Kaufmann Islamic Finance use with attribution

Question: Do I really want a bunch of young non-religious, non-moral, greedy maniacs putting all their little genius into figuring out how to sidestep Islamic Banking laws too? What is it exactly that wrecked the centuries old universe of Western banking and finance that oversaw trillions upon trillions of dollars of real growth in capital and value? Section 5: Revelation, nature, human relations, and morals (A) Different laws, different groups There is a degree to which people can ignore cultural and moral differences when seeking to profit together. Everybody makes money, everybody's happy. At the end of the day, this is fools gold. Unresolved difference at the core of life's most fundamental and most important concerns is only a formula for trouble down the line. As Europeans and Islamic-culture sphere people begin this conversation, and even shared action in the arena of investment, finance, and the growth of wealth, it is pressing that these two communities find genuine common ground at a deeper level than just making money. There are vastly, radically, and DEEPLY held, differences in how each group understands and approaches at the very most fundamental level to how to make better human beings, and healthier societies. If this is ignored and unexamined it is a liability, with FAR too much at stake. What is needed right at the start, and throughout the process of ever increasing cooperation is a basic, cross-cultural, common human basis, that can help us find a way to cooperate in an environment of trust, and confidence that the sacred will hold in tact? Cooperative finance must be safeguarded with sincere efforts to establish inter-cultural and global commerce under at least minimal hopes that it will not be shredded by greed, wed with perverse twists of imagination and innovation. For now there is a fascination with Page
6

- Frank Kaufmann Islamic Finance use with attribution

Islamic Banking, and I for one pray that its ideals grow in their influence, but there are a great many reasons to be concerned.
1. People relate to the system from extremely different reference

points, and for extremely different reasons. a. One respects the authority of the Qur'an b. One has a practical and utilitarian approach i. This creates an environment of inherent clash, and a mild distance in trust, which is the very prime quality for healthy commerce 2. Jurisprudence must evolve to accommodate ever changing circumstances, yet the two groups approach law from fundamentally different starting points. Eventually a group will emerge with power over huge resources with a religiously based authority, yet they will be swimming in a world that does not acknowledge that authority. a. The Western version of highest juridical authority, is often suspected to be influenced by political an ideological concerns. Said otherwise, there always is politics in the emergent qualities of law. b. Differences of interpretation to forge the horizons of Islamic Banking will (and probably do) obtain even inside Islam. How much more will this come to the fore when nonMuslims must engage this finance universe.

(B) Arenas of common ground, common experience, and common moral guidelines There needs to be something more fundamental and more universal than laws and authorities honored by just one sector or group. The two areas that are universal in all human experience are that we live in the natural world around us, and we have innate irremovable inner direction that derives from the reality that our life as individuals is life in families. If there is ever a chance that not only finance and investment be made wholesome and healthy, but indeed all parts of life and Page
7

- Frank Kaufmann Islamic Finance use with attribution

civilization, it must come from a place that informs sound and moral behavior commonly for all people, even those who do not reference revelation or scripture. Section 6: The nature and parameters of growth in relation to economic development One essential dimension of economics is growth. Growth as a phenomenon is not limited to economics. All creation is characterized by growth. Not only do we have immediate access to the truth of growth through our being immersed in Divine creation (the growth of plants, animals, even inanimate objects), but even our own very being is a direct educational presence giving us immediate and direct access about the nature of growth. The first thing to note is that everything grows through three orderly stages of growth. Formation, growth, and completion. This is hard and fast. No stage may be skipped. This is true, and divinely ordained. It is a principle by which growth occurs. For believers, the fact that all creation, and all creatures, including ourselves grow in precisely the same way would indicate (in the language of believers) that this is Allahs way. If you try to grow in ways differently than absolutely everything in the universe grows, it is clear that you violate divine law, not only because it is stated in the Qur'an, but in ways that everyone can clearly see, even non-Muslims. There are many many other principles of growth that are universal and absolute in all cases, both in nature, animals, and with humans too. There also are ways to help increase the rate of growth, but there are clear limits and rules. It is HIGHLY likely that a deep study of growth as a natural phenomenon would confirm the basic laws found in the Qur'an from which Islamic banking is built. By identifying the clear evidence of Gods unbreakable laws in ways available to all people even nonPage
8

- Frank Kaufmann Islamic Finance use with attribution

Muslims, partners in this undertaking can be relied upon to grasp wisdom in Muslim banking, not only in the utilitarian and possible greedy purposes, but in keeping with the knowledge that violating Gods basic laws, simply does not work. Section 7: Roots of human dignity under conditions of inequality The second area that is universal to all people in all cultures and all civilizations is the experience of being in a family. As this is universal, without exception, here too we have a second area through which we can presume that divine guidelines, instructions, and evidences of divine order, are accessible. In the case of family, there is a second aspect of economics that is manifest, and addressed. This is the issue and matter of inequality. Of any social unit, the family is the most extreme form of economic disparity, inequality and injustice. Parents have all the money and poor little babies have none. One sector has all power, the other has flat none. Yet in billions of instances, this economic inequality does not harm the health, joy, development, and positive welfare of all involved. A close study of a loving family would reveal outstanding guiding principles for an equitable distribution and use of wealth. We use out money to empower the ones who start out disadvantage economically. Little by little, these little ones become sources for the generation of wealth in their own right. Does anyone lose in the unfolding of such a dynamic? All gain. Section 8: Conclusion This paper is written to advocate serious attention to spiritual, religious, and moral, dimensions of international and economic cooperation.

Page

- Frank Kaufmann Islamic Finance use with attribution

The paper is positive about religious influence on secular and mundane society and culture, but points out that religious differences should not be glossed over, or pocketed while we simply hope for the best. As different groups have different sacred authority, and derivative jurisprudence, there exists a danger of conflict when much is at stake. I argue that life in nature, and life in families are universal human experiences that can inform shared commitments to spiritual, moral, and constructive service in which all benefit from healthy investment and finance. Frank Kaufmann Wednesday, July 18, 2012

Page

10

- Frank Kaufmann Islamic Finance use with attribution