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Established in 2006 as a Community of Reality

Welcome to the Neno's Place!

Neno's Place Established in 2006 as a Community of Reality


Neno

I can be reached by phone or text 8am-7pm cst 972-768-9772 or, once joining the board I can be reached by a (PM) Private Message.

Established in 2006 as a Community of Reality

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    The crisis of global finance banks between the traditional system and the Islamic finance thesis

    Rocky
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    The crisis of global finance banks between the traditional system and the Islamic finance thesis Empty The crisis of global finance banks between the traditional system and the Islamic finance thesis

    Post by Rocky Tue 02 May 2023, 3:34 pm

    The crisis of global finance banks between the traditional system and the Islamic finance thesis

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                Dr.. Haitham Hamid Mutlaq Al-Mansour
    In light of the continued activity of international banks according to the rules of the traditional financing system, the world has been facing since March 2023 major banking crises, especially after the announcement of the bankruptcy of the Silicon Valley Bank and the subsequent collapse of the four other banks in the United States, and the transfer of the crisis to Europe in a bank that is the largest among the banks. And what happened to the deep problems of the management of the Swiss bank (Credit Suisse), which raised serious indicators of the occurrence of financial panic in the corridors of banks and financial markets, and generated real fears for the stability of the global economy that suffers from inflation and slow growth.
    From the recent crises, a technical trend has emerged that calls into question the ability of the banking financial system’s operations and its financial tools to continue without deep and serious crises that may afflict the overall structure of the global economic system, and calls for a review of the way banks operate under the rules of financing and financial balance, which is evident with Over time, it suffers from real banking problems, most notably the problems related to the deposit and loan system, as it is a system that adopts the mechanism of deriving deposits according to the interest rate as a tool for financing and lending.
     The traditional financial treatments by the managements of crisis banks, as well as the intervention of institutions and governments, despite their seriousness, did not give those banks high flexibility to adapt to the variables of the local or global economy. Islamic banking that does not adopt the interest rate as a tool for financing and lending and eliminates the role of traditional financial intermediation in favor of the productive investment sector, and thus reduces the possibility of exposure of banks to financing risks.
     It is not surprising that this trend crystallized in a number of steps taken by some countries towards allowing a number of Islamic financing mechanisms to work in the field of banking activity and adopting them as an alternative to the interest rate that it avoids, as was applied in a laboratory in France, similar to many of the pioneering Southeast Asian countries with their pioneering experience, such as Malaysia, Indonesia and Pakistan and the experiences of a number of West African countries such as Senegal and other countries that have adopted the rules of Islamic finance as a successful alternative to avoid financing crises, as it derives its ability to overcome crises from being supporting the pillar of real investment restricted to the rules of money from the Islamic perspective and the economic philosophy that seeks to achieve the total balance between The real and monetary sectors in the light of a comprehensive development vision.
    Therefore, the financial crisis can be analyzed from the perspective of Islamic finance through the following:
     The reliance on the mechanism of deriving deposits in light of the interest rate tool to finance the operations of banking activity led to banks falling into mismanagement of financing risks and the inflation trap that resulted from the Fed's strict policy, which generated high levels of inflation and the erosion of the real value of long-term bonds, which by their nature constitute the strategic investment of banks. Collapsed financing, so it is not surprising that we find major errors in the banks’ dealings, as in their selling of low-yielding assets at prices below their value, to ensure obtaining liquidity to face withdrawals. Rather, it is noted that some banks tended to raise the volume of their capital, or even sell it, which had negative effects In exporting the crisis to the stock market and the rise in indicators of financial panic, and the decline in the shares of banks and the financial sector, and from it the acceleration of the crisis and then the collapse, as banks did not follow real flexible investment policies aimed at diversifying the portfolio, but rather relied entirely on lending activity and financial facilities for startups that led toThe balance of the financial bubble as a result of the widening gap between what is real and what is nominal, was reflected in the ability of banks to face the demand for deposits and increase their losses from financial assets as well as the erosion of their capital and exposure to risks and mismanagement.
    The fragility of the economy generated by the traditional financial balance that suffers from the turmoil that strikes the banking sector, widening the gap between the real and monetary sectors, which is reflected in demand, the labor market, and inflation.
    The deposit derivatives under the interest rate tool led to the transformation of the mechanism of transferring the impact of monetary policy to the price system without going through the real sector, which supports the idea of ​​prohibiting interest as it works in cooperation with the deposit system to consolidate the imbalance between the real and monetary sectors.
    The system of deriving deposits or what is termed the creation of money influences the levels of money supply and the general level of prices, while the role of money in the Islamic economy recedes in being a medium for exchange, a measure and a store of value, without the derivation or creation of money, despite the slight difference. In the opinions of some jurists, it is not possible to deny the ability of Islamic banks to derive money and deposits, but rather derive according to the structure of assets and liabilities from the Islamic formula.
     It is inferred from the foregoing that Islamic finance presents a prerequisite for the stability of the financing system with the least crises in generating the outputs of economic activity, through its organization of the organic covalent relationship between capital and other elements of work, land, or organization, by directing it towards the economic sectors to produce real economic values ​​of goods and services. The rules of Islamic finance target economic activity directly without financial intermediation or deriving deposits in order to adjust the direction of investment towards what achieves the added value of the real output of the development sectors, and thus reduces inflation levels and the gap between the real and monetary sectors, as they are the most dangerous in the interest rate system as a tool for financing and lending. , to achieve stability in the macroeconomic equilibrium.
    It is clear from the rules of the general framework of Islamic banking activity that the defining factor in the ability of Islamic banks differs from their traditional counterparts in that they are not based on the creation of deposits and money, but rather that the sources of funds and their uses are based in the Islamic bank on the principle of speculation based on sharing in profit and loss.
    Therefore, the financial crisis of international finance banks and many financial institutions arose through the dependence of financial activity on the rules of deriving deposits and neglecting the real activity to the degree that exposes the financial and economic cycle to bottlenecks and then many crises, on the contrary in Islamic finance, legitimate Islamic transactions such as participation and murabaha Mudaraba, Istisna’a, farming, selling commodities, selling on credit, leasing, forms of Takaful insurance, investment funds, and many others, all work within the framework of producing economic value, which gives strength and ability to Islamic finance to overcome the financial crises that arise in this framework. Islamic financing mechanisms also aim at managing loans and debts in light of development policies that support the principle of righteousness and benevolence, such as zakat and a good loan, away from usurious returns, which can produce different forms of economic and social problems.


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