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ARTICLEPRESENTATIONOF PAKISTAN
ECONOMY
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ARTICLE
How Can Islamic Finance Help to Solve
Economic Crisis?by Mr. Irfan Shahzad.
PUBLISHED IN PAKISTAN
TRIBUNE,MARCH 2012.
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INTRODUCTION
The downfall in the world financial system has
given rise to intense questions about its radical
flaws and its future prospects.
There is a great concern to bring aboutreformations in the current monetary system.
Deleveraging is the name given to such
downward spiral.
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Deleveraging: It is the forced reduction of
debt accumulated by the households and
the financial institutions such crisis leads to
low drive of prices in the market as moreassets are dumped in it.
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Once this hideous cycle starts it gets
such a momentum that even huge
monetary back up fails to hold it back.
The economic mangers, in addition to
their good governance, need to find out
new ways to tackle such situations arise
time to time.Islamic finance can help solve such
crisis.
PROBLEM
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1: Banks give out money as loan in excess without much
prudence in hope to get fixed interest from their customers who
take loans. By lending money the banks get an unrestrained
opportunity to earn money out of money. Hence, they treat
money as commodity, which should be treated as medium ofexchange for goods and services according to Islamic finance.
This accumulated money by the bank is further used in
procurement of more money by giving out more loans and
receiving money through interest.
CAUSES OF ECONOMIC
RECESSION
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2: Some people who take loans but their
business flop or they fail to make good
enough to pay back loan with interest so they
have to withdraw from their mortgage or lettheir property confiscated.
Loss of money leads to loss of purchasing
power. The market experiences an overall
reduction in economic activities when peoplelose purchasing power.
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3: Who take loan from banks and succeeded in
making profits out of their economic activities, they
charge the extra amount of interest, which they have
to pay to banks, through their products and services.In this way they get it from their customer. This gives
rise to Inflation.
Bank again succeeded in accumulating the money
bubble to exploit through it further. This leads tooverall recession in economic activities.
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4: In the last decade according to economists this wasthe result of the lack ofGood governance of current
financial system.
Prof John Gray of Oxford University calls it, Virtual
financial economy
that has enormous capability ofdisturbing the real finance as it was witnessed when
Barings the oldest of the Britain banks went default in
1995.
James Robertson said that money and finance
system is not fair. It is ecologically destructive and
economically inefficient. He raised concern about
generating money out of money; according to him
generation ofMoney should be against real goods
and services.
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SOLUTION
The solution lies in the Islamic system of finance.
Executive education in the fist place needs to be
oriented to learn how to put it in proper practice.
The money is not a commodity according to Islamic
finance, but a medium of exchange for goods andservices.
When loan is to be taken it can be given as
investment and creditor and the receiver of money
can share the potential profit and loss. This way bothparties will be partners in a joint venture and will
generate actual money out of exchange of goods
and services.
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CONCLUSION
Islamic banking is distinguished in two ways:
A) It concentrates on the real goods and services
B) Flow of money by profit and loss sharing,
It gives great stability to economy. Even if the
economy enters into the recession the system
based on profit and loss sharing helps
safeguards the financial operators fromaccumulation of money through interest, hence
minimize the threat of bankruptcy and default.
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