The Global Financial Crisis by Hizb ut-Tahrir Britain

[Translated Meaning Quran Al Baqarah 2:219]

There is no doubt that the alcohol and gambling industries are enormous businesses in Western economies, but as the Quranic verse above highlights, they also bring great damage, and Islam prohibits both. Communities reel from the addicted bread winners that waste their family incomes in betting shops. Hospitals are full on any given evening with the results of the abuse of alcohol. Families and lives are regularly destroyed by the influence of these two great vices. That gambling has now become so pervasive in western society can be seen in the extent to which it dominates the financial markets. Rather than being a market for the efficient provision of capital between competing business, industry and investors it is now dominated by banks, investment funds, hedge funds and related groups that are seeking to deliver enhanced “investment” returns via increasingly complex “bets” and via leveraging (borrowings). As set out in the earlier parts of this paper many of these transactions are not based on real assets. When the scale of the gambling becomes so over-whelming that the losses of participants can bring down the whole system, then it is clear that this isa problem that is out of control. The Islamic Shariah recognised these dangers and established prohibition regardless of scale. It is simply too dangerous to contemplate.

Islam sets out clear rules for investment and transactions. Chief amongst these is the requirement that assets are owned and in possession before they are sold. The Prophet (peace be on him) forbade any kind of transaction which could lead to a quarrel or litigation due to some uncertainty “The Prohibition of al-Gharar (Transactions Involving Uncertainty)” or which involved an unspecific quantity to be exchanged or delivered. This includes the sort of transaction in which there is no guarantee that the seller can deliver the goods for which he receives payment. Additionally many commodities, including gold, silver, wheat and barley must be traded on the spot market, ie without delay in settlement. The Prophet (Peace be upon him) said: “The gold for gold, the silver for silver, the wheat for wheat, the barley for barley, the dates for dates, and the salt for salt, like for like, measure for measure and hand to hand (i.e. immediately) and if they differed sell as you wish if it was hand to hand”. (Authority of Ubada ibn as-Samit).

The wisdom of such a prohibition on delayed settlement of key commodities and currency becomes clear when we consider the way certain markets have been manipulated by the practice of short selling, where an asset which is not owned at the time is sold in a market (the asset is usually, but not always borrowed), in the anticipation that it will be later bought at a lower price and then settled for a profit. The opportunity for market manipulation via this practice is obvious. A good example of how short selling was used to destroy an economy came in the Asian financial crisis in the 1997 when hedge funds sold Malay and Indonesian currencies and stocks short via derivative contracts which were in such a high volume that the markets collapsed in price and the local populations suffered extreme losses. 24.

When sales can be made at enormous volume and without the assets for immediate settlement it is logical that the market price will drop, enabling large profits when the asset are bought back later to settle the transaction. Islam prohibits this type of trading outright. It is ironic that the short selling practice has now turned full circle and was used to great effect in forcing down the price of many financial institutions during this recent period. Many of which used this underhand tactic previously to attack other industry groups, commodities or currencies. It is also quite shocking that the US authorities saw fit to outlaw the practice, but only in respect of banking shares and for a period until January, 2009. Surely if the practice is wrong it should be wrong in all markets, for all assets, and without time limits, as Islamic law dictates.

Futures contracts which are not based on immediate settlement can also be used to manipulate prices. The Comex (Commodities Exchange in New York) which deals in future settlement of gold is tiny ($1.6 billion) compared to the overall physical market for gold yet its prices are often used to indicate current sentiment in the gold price as its prices are beamed around the world virtually instantaneously. Again the opportunity exists for determined short selling to depress the price, a matter which has been widely argued in the current crisis as the physical gold market price of coins and small bars is now significantly at a premium compared to the “paper” market written for “future” settlement. That most futures participants never take settlement but roll over their contracts further removes the real market from current “prices”. The advantage for governments under pressure such as the US administration, to see a low gold price in a time when they are attempting to re-establish some form of stability in markets and confidence in the US dollar is obvious. The administration is quite open in its use of intervention in markets. The Exchange Stabilization Fund (ESF) is a reserve fund of the US Treasury Department specifically used for exchange intervention, normally currency but is also available for gold and other instruments since a change in US law allowed the Secretary of the Treasury since 1970 to “deal in gold, foreign exchange and other instruments of credit and securities”. 25.

Credit Default Swaps (CDS) are a form of insurance. Islam encourages agreements of guarantee but forbids any form of compensation for them. Consequently the standard contract of insurance which entails compensation (premiums) from one party to another in return for a promise to pay some level of compensation should a particular act or acts occur in future is not acceptable in Islam. Not only is there uncertainty over the possibility of the future event occurring or not, but there is compensation involved in the contract. By greater reason the contracts for CDS not only involve these illegal elements, they also encourage gambling as many of the contracts were taken out by businesses which have no relationship whatsoever with the defined credit events that may or may not happen. Furthermore, that participants in this market can gain from short selling the companies subject to these contracts further highlights the corruption of these contracts.