Sunday, June 04, 2006

Immature stock markets + poor Islamic governance = Arab stock market (now crashing) bubbles

Most people who are interested in the middle east know about the crashing stock markets in the region. I only have very little anecdotal evidence, but here's the likely scenario: Many rich investors, and few poor ones, are allowed to buy on margin (borrow to buy stocks and leverage their returns when stock prices are rising). This starts a speculative bubble, with price increases accelerating and more small investors trying to get in. Then, the rich investors stop buying (they buy gold and platinum instead, or buy other markets, real estate, etc.). Simultaneously, banks start to tighten credit for margin buyers, and the rich start to sell and short sell (i.e. borrow the stocks from prime brokers to sell them, paying interest and dividends to the owners, hoping to close their short positions at a later date when the price falls) the over valued markets. In certain instances, some of those large investors may have access to insider information about bank policies, since they may own or operate the banks and brokerages that allow margin trading and short selling. The result, of course, is what we see.

Islamic jurisprudence had built-in regulatory controls to prevent this game. The prohibition of borrowing to invest (margin trading) is obviously the prohibition of riba, which everyone knows very well: greed drives one to borrow in order to leverage his resources in investing, but riba leverages losses the same way it leverages gains -- and now you are gambling. The Hadith also explicitly forbids "selling that which you do not own/possess", which is an explicit prohibition of short selling. Needless to say, contemporary jurists and lawyers have found ways around those prohibitions (for "Islamic hedge funds" and other dealings that received jurists' blessings; of course, most traders engaged in such schemes couldn't care less about Islamic jurisprudence). It is the rich investors who are manipulating the markets as described and profiting from those relaxations of or non-adherence to Islamic prohibitions, and the small investors who are lured in with those relaxed rules, only to lose their life savings and fall into terrible debt. That is extremely un-Islamic.


Blogger ney_reed said...

your title will be more apt if you had called it "no/un-islamic governance" rather than "poor islamic governance"

islamic governance, from the time of Holy Prophet(pbuh) till the fall of the Ottoman Caliphate, had the common good of society as its main objective.

in instances where, the optimization at the margin(individual level) yielded the maximum overall social benefit, then it was promoted. in instances where, the optimization at the society level yield greater benefit than at the marginal level, then optimization at the society level was promoted. in both these approaches what was paramount was common good of society.

during the historical period mentioned earlier, there were many instances when political order was not consistent with true Islamic governance. since the essence of the Muslim societies then were Islamic, there was a tendency for the political hegemony, when it departs from such forms of Islamic governance, to revert/revive itself through society's response or reaction even when it may take a long time to achieve it.

in today's Muslim societies the essence of them is rather not islamic. hence it contributes to poor/no/un-Islamic governance and provides for no tangible and/or effective response/reaction from society.

2:39 AM  
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5:10 AM  

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