Tuesday, August 16, 2005

Failure of Islamic finance in Sudan

At a recent interview with aljazeera.net, Hassan Al-Turabi admitted the failure of his Islamic experiment in Sudan. He indicated that he has come to admit that this was a human effort, and like all human efforts, it was imperfect and it has failed. He said that his was an experiment in the Sunni Islamic world, and hinted at another experiment in the Shi`i world (I assume he meant Iran), indicating that both have failed. However, he said that one should learn from those failures, rather than feel despair. Unfortunately, the bulk of the interview focused on the new constitution, the relationship with the South, etc. I wish the interviewer had asked him about economics and finance.

So, I went ahead and made my own interview with a friend who has done some significant work trying to fix the Sudanese economy over the past few years, after it was falling down the drain. His prognosis, which he says officials in the central bank, bankers, etc. would admit in private, is that "Islamic finance" has virtually destroyed the financial sector in Sudan. While the "Musharaka certificates" have been popular with Islamic banks, who hold them to maturity, that is mainly a signal of the lack of other investment vehicles or credit creation. My friend said that the list of failures was too long, but the most important effects of years of bad economics is the central bank's loss of control over the money supply, and its inability to conduct monetary policy more generally, due to lack of open market operations. The misconceived Islamic finance experiment in part contributed to de-monetization of the Sudanese economy, with estimates of money supply to GDP at a disastrously low 12%.

In economics as in politics and military action, jumping before you calculate future steps often leads to disaster. That has been the Sudanese tragedy of following the fantasies of idologues. Islamic scriptures and traditions have much to offer, and the first lesson of early Islamic history is care in making any changes, and openness to borrowing successful models from other traditions. The Prophet (p) and his companions (r) were very pragmatic people, who sought knowledge and expertise wherever they found it, to the point where the Prophet (p) told his companions "you know more about your worldly affairs, "أنتم أعلم بأمور دنياكم", and the Qur'an orders us to seek knowledge from those with expertise "فاسألوا أهل الذكر", and yet, Islamic economics has set as its aim to replace advances in economic thought, rather than to build on those advances in light of scripture. The result has been catastrophic... Have we learned that lesson, as Al-Turabi has said, or should we expect other Islamic countries to repeat the same tragic mistakes?

6 Comments:

Anonymous Mohammad Fadel said...

There was an interesting article published a few years ago in the International Journal of Middle East Studies on the Iranian banking sector. As I remember it, the authors (Iranian economists) argued that the Iranian government uses various manipulative techniques, e.g., off-balance sheet financing, as well as politically driven allocation of credit, as fundamental tools of macroeconomic policy making. I'm wondering if you have done any specific analysis of the monetary regime of the Islamic Republic of Iran?

3:21 PM  
Blogger Mahmoud El-Gamal said...

No, unfortunately, I have not done any analysis of the Iranian banking sector. However, I recall reading a dissertation written on the topic in the mid to late-1990s, which made similar points. On the other hand, it is my understanding that Iranian officials now like the GCC-style Islamic finance, and may adopt it as a camouflage (e.g. by issuing lease sukuk instead of variable rate musharaka sukuk, etc.) that allows them to conduct proper monetary and macroeconomic policy. It is definitely a topic worth investigating.

3:34 PM  
Blogger heraish said...

Peace

No Mandatory Pay Increase in Private Sector

http://www.arabnews.com/?page=1§ion=0&article=69200&d=29&m=8&y=2005

In Saudi the government raises salaries across the board. The Private Sector responds by raising the salaries across the board in the same percentage. Some people even raised the salaries of their maids.

Stores start increasing prices. The government starts fining stores.

Is this policy adding any value to the society in a macro-economic sense? (Except maybe for the maids who send some of their money to back to their home countries.

8:45 PM  
Blogger Muhammad Saeed Babar said...

One of the reasons cited for the collapse of Islamic Banking looks like of credit extension as the following quotation from the blog "His prognosis, which he says officials in the central bank, bankers, etc. would admit in private, is that "Islamic finance" has virtually destroyed the financial sector in Sudan. While the "Musharaka certificates" have been popular with Islamic banks, who hold them to maturity, that is mainly a signal of the lack of other investment vehicles or credit creation."

Whereas debt is most disliked by Prophet(PBUH) and is difficult to practice as a business ref Aya 280 Sura Al-Baqara and on the other hand business on the basis of partnership or joint venture is most liked by Allah(SWT).

Narrated AbuHurayrah (R.A.A)
The Apostle of Allah (peace be upon him) having said: Allah, Most High, says: "I make a third with two partners as long as one of them does not cheat the other, but when he cheats him, I depart from them." Hadith # 1497 Sunan Abu-Dawood

What happened to Sudanese is probably that as described in Aya 65 of Sura Al-Baqara "And well ye knew those amongst you who transgressed in the matter of the Sabbath; We said to them: "Be ye apes despised and rejected." Their evil deeds and deceit appeared lawful on the surface, but they were in reality wicked. This is why their punishment was compatible with their crime.(Tafsir Ibn-e-Kathir)

5:08 AM  
Blogger Seenath Kumar said...

That allows them to conduct proper monetary and macroeconomic policy. It is definitely a topic worth investigating,just like mutual fund investment.

5:37 AM  
Blogger fourth aly said...

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1:41 AM  

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