Yahya Sheikho

Eid Mubarak to all Muslims

Yahya Sheikho — Sat, 19 Sep 2009 04:44:52 -0000

Eid Mubarak to all Muslims

Nationalism and Islam

Yahya Sheikho — Wed, 20 May 2009 04:16:00 -0000

Updates to playlist: corruption

Yahya Sheikho — Sun, 19 Apr 2009 18:55:39 -0000

ANY ABSOLUTE POWER CORRUPT ABSOLUTELY

Yahya Sheikho — Sun, 19 Apr 2009 15:53:34 -0000

Resilience and stability of Islamic finance

Yahya Sheikho — Fri, 03 Apr 2009 09:12:14 -0000

Abbas Mirakhor, former executive director at the International Monetary Fund (IMF), and Noureddine Krichene, economist at the IMF and former advisor at the Islamic Development Bank in Jeddah, examine the issue.

In contrast to conventional finance which has periodically experienced crises, Islamic finance is considered as a stable financial system capable of promoting sustained growth of income and employment. Prohibiting interest, speculation, and debt trading, Islamic finance establishes one-to-one mapping of financial and real sectors of the economy. That is, it is based on real trade and production activities. The financial sector cannot expand beyond the real economy, and is immune to unbacked credit expansion and speculation that are characteristics of conventional finance and that have destabilised even the most sophisticated and complex financial systems.

Conventional finance is inherently unstable

The financial crisis that broke out in August 2007 is considered to be the worst in the post-war period. Representing the collapse of trillions of dollars of fictitious credit derivatives and the meltdown of uncontrolled credit growth, the scope of the crisis could reach unmanageable size. The crisis has shown that advanced financial systems are very vulnerable. Massive bankruptcies were avoided only at the cost of gigantic government bailouts. Capital markets are frozen. Consequent de-leveraging led in turn to an unexpected crash in stock markets, wiping out trillions of dollars in share values and in retirement investment accounts.

Economic uncertainty has never been as high. Has the crisis been correctly tackled or has it only been made worse? Could affected industrial countries grow with unsustainable public debt? In view of the incredibly high liquidity injection by major central banks, is money supply growth out of control? What will be the crisis’ impact on growth and employment? What will be its fiscal and inflationary cost? While precise answers are not possible, the present crisis has already slowed down economic growth in industrial countries, triggered food riots and energy protests in many vulnerable countries, increased unemployment and imposed extraordinary fiscal costs. Notwithstanding its devastating consequences, the crisis has made the quest for financial stability a pressing and fundamental issue in economics and finance. Such was the purpose of the G20 Summits in November 2008 and April 2009.

Financial instability has been a recurring phenomenon in contemporary economic history, affecting countries with varying intensity. The most enduring crisis was the Great Depression of 1929–33. Eminent economists who lived through the Great Depression fought very hard to establish a banking system capable of achieving and preserving financial stability. Their proposals became known as the Chicago Reform Plan, as they were elaborated by some members of the economic faculty of the University of Chicago. Although unaware of Islamic finance, their proposals were a natural restatement of some basic pillars of Islamic finance. The Chicago Plan basically divided the banking system into two components: a depository component with 100 per cent reserve requirement and an investment component with no money contracts and no interest payments, where deposits were considered as equity shares and were remunerated with dividends, and where assets’ and liabilities’ maturities were fully matched. Independently of this plan, Muslim economists reached the conclusion that if Islamic finance were to achieve stability, the banking system had to be organised along a similar ‘two-tier’ structure.

In view of its devastating effects, considerable effort has been devoted to explaining the causes of financial instability and to prescribe remedies that would reduce risk of deep contraction in output, large-scale unemployment, bankruptcies, dramatic fall in real incomes and social hardship. The classical economists attributed financial instability to money and credit expansion. They considered excessive credit expansion and contraction to be caused by deviation of the money interest rate from a non-observable natural interest rate which equilibrates real savings and investment in the economy. The natural rate of interest was defined in many ways; mainly, it was seen as a rate of profit, productivity of capital in roundabout production, or marginal efficiency of capital.

Irving Fisher, a prominent American economist of the Great Depression era, strongly argued that two dominant factors were responsible for each boom and depression: over-indebtedness in relation to equity, gold, or income which starts a boom, and deflation consisting of a fall in asset prices or a fall in the price level which starts a depression. He noted that over-investment and over-speculation were often important, but they would have far less serious results if they were not conducted with borrowed money. That is, over-indebtedness may reinforce over-investment and over-speculation.

Another American economist, Hyman Minsky, considered that conventional finance dominated by interest-based debt contracts is inherently unstable. This assertion is based on a construct known as Financial Instability Hypothesis (FIH), which posits that stability is inherently unsustainable. A fundamental characteristic of a conventional financial system, according to Minsky, is that it swings between robustness and fragility and these swings are an integral part of the process that generates business cycles. In the early 1990s, Minsky addressed financial innovation, which he considered to be evolving at a fast pace and to be driven by fierce competition among financial institutions for profits. In his view, the proliferation of innovations in deregulated capital markets would lead to a huge inverted credit pyramid based on a thin real basis, i.e. over-leverage. Any small fall in expected cash flows would send this pyramid crumbling.

Central banks’ cheap money policy is a key factor in a major financial crisis. Notably, the present crisis was caused by major central banks deliberately setting interest rates at record lows irrespective of risk. As a consequence, total credit expanded at an unsafe high rate of twelve per cent per year in the United States during 2001–08. This phenomenal credit growth was at the cost of creditworthiness and erosion of underwriting standards. George Soros wrote, ‘when money is free, the rational lender will keep on lending until there is no one else to lend to’. Rapidly expanding money and credit combined with an ideologically-based fierce de-regulation movement which began in the early 1980s in industrial economies and continued throughout the next two decades. It put at high risk the financial stability of these countries and, as the result of rapid financial globalisation, the rest of the world as well.

Islamic finance is inherently stable

The sources of financial instability in the conventional system, i.e. interest, unbacked credit, abundance of liquidity and highly leveraged financial transactions, as well as opportunities for speculation are by and large absent in an Islamic financial system basically because of absence of interest-based debt contracts and the 100 per cent reserve requirement that protects the nations' payment system, thus ensuring the inherent stability of this system.

In the Quran and Sunnah, Islamic finance has always been conceived as existing within an institutional framework composed of rules of behaviour such as sanctity of contracts, strict rules of conduct for all market participants, including rules regarding distribution and redistribution of income, and wealth resulting from production and sale of goods and services which guarantee equitable and just distribution in the society as well as rules regarding governance, transparency, cooperation and social solidarity. In such a system, finance will be guided toward employment creating investment and wealth creation.

In Islamic finance there are no risk-free assets and all financial arrangements are based on risk and profit-and-loss sharing (PLS). Hence, all financial assets are contingent claims and there are no debt instruments with fixed or floating interest rates. Investment accounts could be conceived as non-speculative equity shares. The rate of return on financial assets is primarily determined by the return to the real sector, and therefore in a growing economy, Islamic banks will always experience net positive returns.

Financial intermediation in Islam is different from that in a conventional system. Banks do not contract interest bearing loans and do not create and destroy money. They participate directly in production and trade operations on a PLS basis. Banks do not act as simple lenders; they have to be directly involved in trade and investment operations, and assume direct ownership of real assets.
There is no credit creation out of thin air in Islamic finance. Under conventional fractional reserve banking, deposits at one bank can be instantaneously loaned out or used to purchase a financial asset and become
reserves and a basis for a new loan at a second bank. The credit multiplier is determined by the reserve requirement and could be high. In case of securitisation and over-leverage, the credit multiplier is theoretically infinite, leading to violent asset and product price fluctuations. Such a phenomenon does not exist in Islamic banking because of the 100 per cent reserve requirement. Deposits intended by their owner for investment purposes find their way directly as investment in trade and production activities to create new jobs as well as lead to additional flows of goods and services. New money flows arise from the proceeds of sales of goods and services. Money expansion is determined by the savings ratio in the economy and the money multiplier is very small, ensuring price stability. Investment is equal to savings, and aggregate supply of goods and services is always equal to aggregate demand. The liabilities of the financial institutions are covered by tangible real assets that are owned directly by the institution. They are not covered by financial assets. Risks for Islamic financial institutions are mitigated as they relate essentially to returns from investment operations and not to the capital of these institutions.

Architecturally, an Islamic banking system is composed of two tiers: amanah or safekeeping plus payments, transactions services, and transfer activities. In this tier, banks are required to keep 100 per cent reserves against deposits which remain highly liquid.

The second tier is composed of investment activities whereby deposits are longer-term savings and placed for the sole purpose of investment in trade, leasing, and productive activities in agriculture, industry, and services. The most important characteristic of this activity is that it is immune to unbacked expansion of credit. Returns to invested funds arise ex-post from the profits or losses of the operation, and are distributed to depositors as shareholders of equity capital.
The expansion of finance is fully determined by real growth in the economy and not by unstable speculative finance or money creation by financial institutions. Accordingly, an Islamic system would not be expected to experience deep boom and busts cycles. Moderate and brief booms and recession may be generated by good crops, productivity, technical change, or by adverse shocks. They cannot be generated by the financial system itself. Equilibrium in an Islamic economy thus structured will be stable and the rate of return to the financial sector will be fully aligned with the profit rate in the real sector of the economy.

Risks in Islamic finance consist of credit risk, market risk, displaced commercial risk, operational risk, and governance risk. While the individual financial institutions engaged in investment activities face these risks, in and of themselves these are not systemic and do not impact the overall stability of the financial system, as this system is immune to speculative mania, liquidity expansion, and instability of returns. The latter is due to the fact that there is no value or maturity mismatching between assets and liabilities of the institutions. If asset prices decline, so will the liabilities, unlike what happens in a system dominated by interest-based debt contracts.

Many types of financial transactions and instruments are excluded from Islamic finance, particularly interest rate-based bonds, securities, finance based on securitisation of fictitious assets, speculative finance, hedge funds, and consumer finance that is not backed by real assets. In all of this type of finance, either the acquired assets are financial papers, or loans that are not backed by real assets and do not contribute to generate real activity and income.

In Islamic finance, the central bank has the sole monopoly for creating money. An interest rate cannot be used as a policy instrument. The central bank does not refinance banks as in conventional banking. The central bank has to apply a quantitative ceiling on money aggregates. Such policy when and where implemented has been effective in maintaining financial stability and precluding speculative booms and inflation. Money injection occurs through the central bank buying foreign exchange, gold, or non-interest bearing government debt, possibly indexed to gold, a commodities basket, or a portfolio of real assets created by the government.

Conclusion

History is replete with episodes of instability of the conventional financial system. Prominent economists have argued that such a system is inherently unstable and prone to severe financial crisis. They have considered the interest rate to be a cause of large fluctuations in asset and commodity prices, a source of financial instability and cumulative inflation, and detrimental to long-term economic growth. They have called for a separation of deposit and investment banking.

Islamic finance prohibits interest and speculation and engages directly in trade and investment operations. Unbacked expansion of credit is preempted, and banks cannot initiate and accentuate a speculative process. Credit is based on real savings. Hoarding for the sake of earning interest does not take place. Savings can only earn a return if directly invested in employment creating activities. Not only does hoarding earn no monetary reward, there is also a direct disincentive for doing so since whatever is hoarded is subject to zakat which will continuously erode its base. In such a system, no excess purchasing power can be created by a stroke of the pen. Money flows arise from sales of goods and services and transit through the banking system for payments or investment purposes. Islamic banks do not compete to issue loans to borrowers for liability management purposes arising from mismatched maturities between assets and liabilities; they compete only for real investment opportunities; their resources are reinvested in real activities. Given the stability of its financial system and resilience to monetary shocks, an Islamic economic system would experience sustained economic growth and avoid detrimental impacts on social justice since inflation cannot be used to tax creditors and wage earners in favour of debtors and speculators. Although reforms of the conventional system along the lines comparable to Islamic finance system were strongly advocated by some leading economists in the 1930s in the aftermath of the Great Depression, these reforms were not fully implemented. The intensity of recent financial instability has renewed calls for such reforms which many consider as the only path in the quest for stability. The chart below contrasts distinctive features of conventional and Islamic finance.

A Potential Model for Islamic Microfinance II: Resisting The Banking Temptation

Yahya Sheikho — Fri, 03 Apr 2009 01:40:04 -0000

When developing an Islamic financial model, the temptation is very strong to try to mimic what bankers already know. Indeed, that has been the history of Islamic banking and finance: start with the conventional practice that you forbid but want to mimic (e.g. an interest-bearing loan), break it down into its pieces (e.g. money now from A to B, more money later from B to A), and then reconstruct the pieces with some degrees of separation (e.g. goods sold for money now from C to A, goods sold on credit for more money later from A to B, and goods sold for money now from B to C -- this is tawarruq if the bank conducts all three transactions, or commodity murabaha if the bank only does the first two pieces and leaves it up to B to make the spot sale to C or another party D). This is the silly model marketed variously as commodity murabaha or tawarruq (including red arrows formally):
A comment to the previous post mentioned the practice of "chit funds" in the Indian-Pakistani subcontinent, wherein participants in a RoSCA who have not yet collected the pot bid for the pot at each stage of the cycle. This adds an explicit interest rate (discount pricing, similar to the way Treasury Bills are sold) to the implicit one imposed only by the order of collection.

There are many other ways that one can explicitly add interest rates to the basic structure of a balanced RoSCA:

* Later rounds of the RoSCA, approved by jurists, as described in the previous posting, may be for larger pots. This gets around the problem of introducing interest payments within a single RoSCA cycle -- which is the focus both of commercial "chit funds" and much of the Economics literature (e.g. Besley, Coate, and Loury, American Economic Review, 2003). As I shall discuss below, I think that this focus on a single cycle of the RoSCA misses the main significance of investment in social capital: one is compelled to participate (as a later recipient) in a RoSCA when one is asked. Social capital is the availability of a pool of people willing to lend you at zero interest at some/any point in the future. One should focus on the repeated game rather than one stage.
* Participation in one or more RoSCA has been shown to increase with reported religiosity, as shown in Indonesias' participation in one or more arisan using probit and ordered probit estimation by Sowmya Varadharajan. This is very useful because an individual who cannot in one period fulfill their obligation in one RoSCA may start another of which they are the first recipient to meet liquidity problems. In other words, the social capital invested in one's circle of friends/family/... provides guaranty against default and dissolution of earlier RoSCAs. This can easily be used to manufacture banking products through staggered overlapping RoSCAs: the second recipient of the first RoSCA is simultaneously the first recipient of the second RoSCA, the third recipient is the first recipient of the third, and so on. This way, later recipients of the pot from earlier RoSCAs can receive explicit interest for the loans that they extended by receiving an interest free loan of equal or larger size. It would be very easy to mimic any amortization table using such structures (a simple spreadsheet would do).
* Unfortunately, the latter possibility makes these structures vulnerable to the creation of pyramid schemes. Indeed, in the different but related JAK system, it appears that a pyramid scheme did develop in the earlier experiment before the bank was licensed and regulated. There is an inherent pyramid scheme in every fractional reserve system (otherwise, what is the banking multiplier other than a pyramid scheme), and we have seen ample proof over the past few months to illustrate that our entire financial system is one gargantuan-sized pyramid scheme (as Krugman called it, the decade at Bernie's). Of course, one has to be particularly careful not to build pyramid schemes in the name of Islamic finance, especially given recent decades' experiences in Egypt, Albania, and other countries (in addition to numerous unfortunate web-based pyramid schemes in Malaysia and elsewhere). However, that is a regulatory concern that extends well beyond the specific problem with which we are currently concerned.

So, it is clear that we can deform RoSCAs the way that Islamic finance lawyers and consultants have subverted classical Islamic contracts (e.g. structuring loans cynically through the trust sale known as murabaha, which was simply negotiation of a profit margin instead of the final price, trusting the seller to reveal their cost -- i.e. negotiating markup over invoice, without any credit sale component). However, this would defeat the purpose of trying to reboot Islamic finance.

The idea is not to have as one's goal replication of the existing conventional finance. Indeed, my argument has been that if we can replicate a conventional practice, then we should use that replication as a form of juristic identification (تكييف فقهي), for example of mortgages, to permit the more efficient conventional practice in such cases. In cases where we or our target audience find a conventional practice to be forbidden Islamically, the objective should be to take an existing practice that is generally accepted by the Muslim public, and (credibly) approved by religious scholars who issued their opinions independently from institutions that make profits based on their religious opinions, and then to see if we can make the practice (e.g. RoSCAs) more efficient. In this quest, we should keep the structures as simple as possible, in order to avoid confusing religious scholars or potential customers.

My proposal (to discuss in the next post) is to organize the leveraging of social capital inherent in RoSCAs using a hybrid of the mutual banking structure of JAK (which is conducive to development into a credit union model) and the theory of takaful (literally: mutual cooperation, but the term is used for non-commutative forms of insurance marketed by Islamic finance providers, albeit not structured properly as mutual insurance).

posted by Mahmoud El-Gamal at 8:05 AM

Islamic Counseling Services Where to Get Help

Yahya Sheikho — Fri, 03 Apr 2009 01:22:14 -0000

When facing problems -- either marital trouble, financial difficulties, or otherwise -- many Muslims are reluctant to seek professional counseling. Some people consider it degrading or inappropriate to speak of one's troubles to others.

Nothing could be further from the truth. Islam teaches us to give good advice to others, and to offer guidance and support when needed. Friends, family, and Islamic leaders may be good listeners but are probably not trained to offer professional guidance and support.

Professional counselors, psychologists, and psychiatrists offer mental health services which can help save a person's happiness, marriage, or life. Muslims should not feel reluctant to seek support if they feel that they cannot cope. These organizations can help; do not be afraid or ashamed to reach out for help.

* Sakinah Muslim Counseling Services - UK
* Sakina Center - Online Counseling for Muslim Youth via Facebook
* MCA Bay Area Counseling Services - San Francisco, California, in person or by phone
* IslamOnline Cyber Counselor - Online Advice/Q&A
* IHW Personal & Family Counseling - Michigan (Shia)
* Idriss Mosque Counseling Services - Seattle, Washington
* Zentrum fur Islamische Frauenforschung (ZIF) - Germany
* Center for Islamic Counseling & Guidance- Jonesboro, Georgia
* Muslim Family Services - Detroit, Michigan

Need Immediate Physical Protection? See this list of services and shelters for battered/homeless Muslim women.

Europe, Be Happy and Embrace Muslims

Yahya Sheikho — Tue, 24 Mar 2009 15:47:44 -0000

By Khedr Abd Al-Mo'ti Khedr
Khedr Abd Al-Mo'ti Khedr
Khedr Abd Al-Mo'ti Khedr

Thank God whose blessings insure all good for the launch of the EU Muslim family campaign under the slogan "a stable family forms a stable community." We shall pray for the best father, grandfather, husband, brother-in-law, and the last of the prophets and messengers: Prophet Mohammed, may God's blessings be upon him.

This fortunate campaign is led by the Federation of Islamic Organizations in Europe (FIOE) in coordination with all its institutions in more than 30 European countries. The FOIE, in supporting the campaign financially and intellectually, massed all its scholars, preachers, spiritual guides, and intellectuals with full capacity and strong enthusiasm to awaken people and correct illusions. Various activities have been prepared to approach individuals and families in the West. This campaign, in my view, will be very fruitful for the whole European community as well as being a fundamental fortification especially for the Muslim family. Thanks to this campaign, both Muslim and non-Muslim communities will soon co-live in an atmosphere of security and prosperity due to two reasons.

Reforming the EU Muslim Family

The first reason is the reformation of the Muslim family, which is now part and parcel of the European community. Such reformation will definitely lead to a wide amelioration in the European society. To elaborate, a stable community can be seen in many shapes such as a good husband-wife relationship and effective parenting. Any society has to guarantee a healthy environment for upbringing children.

There is an educational theory that a child has to have some fun and joy during his / her first seven years. Within those years, the child might be guided without deterrent punishment so that he/she could acquire decency and have, their parents, as a good example to follow. Then, the following seven years the child directly learns regulations, laws, and disciplines. After this phase, the young boy will be able to show responsibility and can support his family as well as his country. This theory is mostly conforms to our God's, Most Glorious and Most Merciful, verse: (My Lord! Bestow on them thy Mercy as they cherished me in childhood) (Al-Israa, 24). Many institutions suffering from raising family problems will benefit from this campaign. The Muslim family has many hanging issues in different fields such as social affairs, police, legislation, education, etc. All these problems will be tackled by the campaign in conferences, forums, field visits, and researches.

Exploring New Role Models

The second reason, which reveals the importance of the EU Muslim family campaign, is that the European family will be able to find a model role for its members to guide them through the way, that is the model of its stable Muslim family in the neighborhood. The most wonderful way to approach our goal for all families is to adopt the holistic methodology that will lead us all to stability and happiness. That divine path softens the dry materialistic life which cannot guarantee man's happiness despite its strength and discipline. Neither did the scientific progress secure a life-loving human being free from fears, and selfishness. As the British philosopher Bertrand Russell says, "Though man won his battle against nature thanks to knowledge, he lost his war against himself where knowledge did him no good." He also admits that religion can handle such war.

The EU family campaign, seeking both Muslim and non-Muslim families in Europe, has carried the wholly congenital righteous lamb. Obviously, it tackles all the problems facing teenagers and matrimonial conflicts, as well as defending the rights of the European woman when she gets married to a Muslim man. This campaign encourages the couple to have patience with each other - we shall explain this in the following paragraph.

Raising Generations

In order to illustrate this, we must say that human beings sometimes ignorantly adopt wrong concepts for a life time. This cannot be changed easily but with patience, understanding, and counseling. According to this theory, both husband and wife should tackle all negative issues in their life. Any couple should help each other to raise a good generation that respects its identity and its origins of both parents. This generation should be aware of the social hierarchy inside the family and respect it.

The EU family campaign aims at achieving integration and settlement without prejudice or ingratitude. Additionally, it is a reminder for all who forgot the real goal of a Muslim in life so that money and kids will not turn into a plague for them. Many Muslim families' faiths have been tested during their journey, especially the early immigrants. Their children, for example, have strayed from the right path despite their luxurious life. This comes as a proof of our Lord saying (Let not their wealth nor their (following in) sons dazzle thee: in reality Allah's Plan is to punish them with these things in this life) (Al Tawba, 25) Another verse assuring that concept is "truly the flimsiest of houses is the spider's house," an approved scientific fact. This great image from our Holy Book shows how a family that is not deeply based on the Islamic principles would meet the same fate of a spider's house; to be crashed and destroyed. The family weakness comes from a materialistic father and an unfaithful wife. Then follows the impious children. All these reasons confirm the goals of the family campaign.

Learning many sciences and achieving academic excellences is the main road towards fortification. European Muslims should also use their countries' language together with their mother tongue, not to forget it. Most important of all is to learn the Arabic language, that of the Holy Qur’an. Applying all these pieces of advice, we will ensure having good offspring with all useful knowledge, languages, and tempers.

Also a Campaign for Women

It’s a fortification campaign for women as well; a campaign that will synchronize with the European celebration of Woman's Day on March 8th. This campaign aims at wiping out the bad image of women in the developing countries, then resetting their roles in the European countries by giving good and righteous Muslim examples. Thus woman will be honored and appreciated and her role in family, society, and life will be stressed.

This initiative is considered a comprehensive methodology to reform all family affairs introduced by the EU family campaign in Europe. However, none can deny the importance of materialism for people and countries.

With God's blessings, we launch the EU family campaign in Europe, we call all the honest and sincere intellectuals and media men, not only in the FOIE but in all free and moderate institutions in Europe, to get involved in this campaign, each with whatever they can do and what they are destined to.
* Khedr Abd Al-Mo'ti Khedr is a member of the European Assembly for Imams and Spiritual Guides.

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YouTube - Palestine Pre-1947

Yahya Sheikho — Mon, 23 Mar 2009 22:18:04 -0000

http://www.youtube.com/watch?v=vjEBQ_bE7uA
The old lie that palestine was dry desert waiting for a people is just that--a lie. This clip for all people to see the Beauty of the Palestinian People before they were ethnically cleansed and murdered and made into refugees by the State of Israe.
Music Joaquin Rodrigo, lyrics Helmut Lotti, sung by Lotti

Welcome to the SignLabs.org Directory: a database of Muslim sign language interpreters

Yahya Sheikho — Mon, 23 Mar 2009 12:45:26 -0000

http://www.signlabs.org/directory/