Islamic Economics Research Centre
King Abdul-Aziz University, 10 June, 2009
Assets Managements from An Islamic
Perspective and the Current Financial Crisis
NAGAOKA Shinsuke
PhD, Islamic Economic Studies & Islamic Finance
JSPS Research Fellow,
Center for Southeast Asian Studies (CSEAS), Kyoto University,
JAPANE-mail: [email protected] (permanent) &
[email protected] (official)
Website: http://homepage3.nifty.com/~nasafas/
Objective of this Presentation
 Distinguishing
the features of the Islamic
Economic System (IES)
 Presenting the common ground between
the IES and Modern Capitalism (MC)
 Providing a theoretical framework for
understanding relationship between Islamic
finance and the current financial crisis
Methodology
 Clarifying
the legitimacy of Islamic financial
products
 Reviewing the legal resolutions (Fatawa)
issued by Sharia scholars
 Presenting two Case Studies
1. Murabaha
2. Tawarruq
Case 1: Murabaha (1)

Basic Scheme of Murabaha
 The
most popular product of asset side
Case 1: Murabaha (2)

Resolution by Sharia Scholars

Fatwa of the first Al-Baraka Seminar in 1983

A: In Murabaha … is conducted in the form of
exchange … real goods for money. The specific
feature of Murabaha, as compared to Ribabased loans, is that even if the mark-up amount
is predetermined the seller’s profit will be
influenced by the market price of the relevant
real good. Therefore, any profits in Murabaha
are expressed as a function of supply and
demand in the real goods market rather than
the monetary market.
[ABS 1983]
Case 2: Tawarruq (1)

Basic Scheme of Tawarruq
 Alternative
method of securing
consumption loans
Case 2: Tawarruq (2)

Critique against Tawarruq Munazzam in
the Resolution by MWL [2004]
 Against
the possibility of overlooking the
actual transfers of real goods
 Against fictitious forms of interest-based
loans
 Against the involvement of the Islamic bank
in resale transactions
Features of IES (1)
 Actual
transfers of real goods are required
as an essential condition of Murabaha and
Tawarruq.
 Murabaha
and Tawarruq are legitimized not
because of the “loan” but because of the
“buying and selling of goods.”
Features of IES (2)
 Profits
from Murabaha are expressed as a function
of supply and demand in the real goods market.
 The mark-up in Murabaha is considered as
opportunity costs of the real goods
 Involvement of Islamic banks in resale transactions
and is prohibited in Tawarruq.
 Scheme of Murabaha and Tawarruq must bear the
market risk of the relevant real good.
Features of IES (3)
 Strong
link with the real domain of the
economy
 Market mechanism in the real domain
affects the performance of the
monetary domain.
 “Embeddedness” (Karl Polanyi)
of the monetary domain of the
economy into the real domain
Common Ground of IES and MC (1)

Economic Fluctuation and Islamic Finance
 Considering
the response of Islamic finance
to the impacts of economic fluctuation
 Are there specific devices for mitigating
economic shocks?
Common Ground of IES and MC (2)

Case 1: Price Fluctuation Caused by
Monetary Factors (e.g., Inflation)
 Islamic
finance allows price indexation in
Ijara (lease contracts) and Qard Hasan
(interest-free loan).
 Islamic
Economic System equips devices for
mitigating economic shocks from the
monetary domain.
Common Ground of IES and MC (3)

Case 2: Price Fluctuation Caused by Real
Factors (e.g., supply-demand imbalance)
Islamic finance does not allow price indexation
in case of price fluctuation caused by real
factors.
 Any profits from Islamic financial products must
bear the market risk of the relevant real goods.


Islamic Economic System does not equip
devices for mitigating economic shocks from
the real domain.
Common Ground of IES and MC (4)

Economic Fluctuation and Islamic Finance
 No
specific devices for mitigating economic
shocks in the real domain of the economy

Common Ground between IES and MC
 Common
theoretical platform as far as the
real domain of the economy is considered.
 Similarity between partnership finance in
Islamic finance and equity finance in modern
capitalist finance
Implication to the Financial Crisis (1)

Try to providing the theoretical
framework for understanding
relationship between Islamic finance and
the current financial crisis
 “IES
and Islamic finance” is robust & stable
compared with “MC and conventional
finance”?
Implication to the Financial Crisis (2)

What does the notion of
“Embeddedness” imply?
 Instability
arising from the Islamic financial
system itself (i.e. monetary domain) does
not tend to occur
 No autonomous mechanisms to prevent the
economic crisis arising from outside the IES
and Islamic financial system
Implication to the Financial Crisis (3)

Important theoretical implication
 Islamic
finance itself does not have
possibility to be a starting point of the
economics crisis
 Instability of the Islamic financial system is
necessarily accompanied by the depression
caused by the other sectors (real sectors or
conventional financial sectors)
 “IES and Islamic finance” is not necessarily
robust & stable compared with “MC and
conventional finance”?
Implication to the Financial Crisis (4)

How to understand the relationship
between Islamic finance and the current
financial crisis (theoretical framework)
Conventional Financial System
As a Starting Point of the Current Financial Crisis
No Direct Negative Impact, rather Positive
Islamic Financial System
As an “Embedded” System into the Real Economy
Implication to the Financial Crisis (5)

How to understand the relationship
between Islamic finance and the current
financial crisis (theoretical framework,
contd.)
Conventional Financial System
As a Starting Point of the Current Financial Crisis
No Direct Negative Impact, rather Positive
Islamic Financial System
As an “Embedded” System into the Real Economy
Indirect
Negative
Impact via
the
depreciation
Real
Economy
caused by
the Financial
Crisis
Implication to the Financial Crisis (6)

Impact of the current financial crisis to
Islamic finance (theoretical insight)
 Direct
positive impact > Indirect negative
impact via real economy
 Impact

of the financial crisis is positive
Direct positive impact < Indirect negative
impact via real economy
 Impact
 As
of the financial crisis is negative
a matter of fact…?????
Islamic Asset Management role (1)

What is roles of “Islamic Asset Management”
in this framework?
 Two
edged roles:
 Positive role: excluding the autonomous causes
of the financial crisis
 Negative role: increasing the possibility to
come under the influence of the shocks in the
real economy
Islamic Asset Management role (2)
 The
more growth of Islamic Asset
management, the more impacts (whether
positive or negative) from the financial crisis
 Policy Proposal
Need to set buffers for preventing the negative
impact via the real economy
 E.g. more prudential selection, more
engagement by Islamic finance to the business

Conclusion

Distinguishing feature of the IES


Common theoretical platform


“Embeddedness”
Real domain of the economy
Financial crisis & Islamic finance
Instability is necessarily accompanied by the
depression caused by the other sectors
 Impact of the current financial crisis
depends on which direct or indirect is larger

Thank you for your kind attention.
Golden Temple in Winter Kyoto, JAPAN (since 14th century)