Wednesday, January 30, 2008

The Indian stock market crash, an Islamic perspective

The following is the transcript of a circle given on this subject.

وَيْلٌ لِلْمُطَفِّفِينَ

“Woe to the defrauders” [TMQ 83:1]

• Today Inshallah I want to discuss with you some aspects of the problems and the turbulence to the stock markets that occurred in India due to problems in the US economy which has had a worldwide impact.

• Before I discuss this topic and go into some detail, I want to discuss the way that we should view this topic and approach it. We must approach this topic for the correct motive.

• Some Muslims may discuss this issue because they are just interested in the economic affairs or as just for academic reasons, e.g. some Muslims I know discuss the economic affairs merely to write essays for their courses. We should not approach this topic in this manner, the manner of an economics lesson or lecture.

• Other people may not see the relevance of discussing such a topic, they may say: “what’s the point of going into detail about the subject” or “You’re making Islam too complicated” Therefore they may sideline topics such as this and see it as irrelevant.

• As we are Muslims we can only approach this topic from the angle of Islam and the Islamic belief. And if we look to the Prophet (saw) he understood the economic situation at his time and he gave the judgement from Islam relating to it. Many of you may have heard that the Prophet (saw) critised the cheating in the market places, so he stated the ayah from Quran “Woe to the defrauders (cheaters)” So the Prophet (saw) criticised the economic situation and the economic practices of the Quraysh like their throwing of stones and cheating in the market places. This shows us that he must have understood the economy of the Quraysh in order to criticise it. Even when he (saw) established the Islamic state he looked at the economic situation not only in his state even in Makkah, the state of the Kuffar. One clear example that illustrates this is when the Quraysh had a famine and were in need of food, the Prophet (saw) sent them food. Obviously this must have impacted the Quraysh because the people who they belittled and boycotted now were sending them food. The point is that for the Prophet (saw) to send food, he must have firstly understood the economic situation of the Quraysh at that time.

• Similarly it is a must and wholly relavent for us as Muslims to understand the structure of the economies in the Western World and in the Islamic lands and to see their inability to solve peoples problems correctly. And we must also give the verdict from Islam relating to them and the Islamic alternative. This is the way that we should approach the subject of the problems in the stock markets.

The current crisis

Last year, the Indian market's benchmark stock index, the Sensex, soared 47 per cent, in the process drawing new investors to the world of stocks and bonds many with little or no experience in financial markets.

But since the start of the year, the index has plunged. On Tuesday 22nd January, the market sank so fast when it opened that the Bombay Stock Exchange automatically shut down for an hour. By the end of trading, the index had dropped a stunning 12 per cent in just two days.

The plunge wiped out more than Rs6 trillion from investors' wealth. The was on top of over Rs11 trillion loss suffered by investors in the six days before that.

Many gathered outside the Bombay Stock Exchange, gazing up at the screens flashing market numbers in stunned silence. No one had expected the impact from falls in regional markets to be so pronounced in India.

If there was an overwhelming sentiment at the Bombay Stock Exchange on Tuesday, it was this: utter confusion. Millions of retail investors have put their life savings in these markets, hoping to make a pretty profit.

A small group of traders demonstrated outside the exchange, blaming Indian financial authorities for not having done more to protect small investors.

The question they should ask is: If they believe that the Capitalist economic system which they follow is the best system, then why does this happen?

The capitalist economic system is unstable and liable to fluctuations, financial crashes and recessions.

• We have seen this in the past, the October 1987 crash, when the Dow Jones Index (Stock exchange) in New York dropped by 22% in a single day.

• The 1997 stock market collapse in the Far East which had a massive impact on Malaysia and Indonesia

• They also witnessed the failure of the capitalist system in the infamous ‘Wall St crash’ which occurred in America in October 1929 when the American stock market collapsed, e.g. by the end of the month share owners lost $40,000million. It led to a major economic depression known as ‘The Great Depression’, which lasted for 10yrs and resulted in widespread poverty, e.g. 32,000 companies became bankrupt and 5000 banks had to be closed down.

• They also witnessed in the past how the German capitalist economy collapsed during the Weimar Republic before the Second world war in 1923, e.g. the fall of the German currency – in January 1921 the currency rate was 64 German Marks to $1 American Dollar, in November 1923 only 2 years after it was 4.2 trillion marks to the dollar. People had to take wheel barrows of notes just to buy a loaf of bread, the paper which the money was printed on became more worth than the currency, people even burned money to stay warm.

If we look to any financial papers on any day of the week we can see that they realise that their system is weak and prone to massive problems.

The true reality of Stock Markets

The problems in the stock markets worry even the Western Nations although their economies have existed for many years and their stock markets have existed for a long time and even though they are the leading nations in the world. Allah (swt) gives an analogy in the Quran about those who take Awliya besides Allah, that their house is like Bait al Ankabut (House of the spider) which looks very nice but is the weakest kind of house.

• I want to take a deeper look into the reality of the stock markets so that we can see how the collapse occurs and how the Western Nations use the stock markets in the campaign to economically colonise the Muslim world.

1. Stock markets are financial markets where people buy and sell shares of companies. But these markets are completely different to real markets in which people may sell fruit or clothes.

2. When a Company floats on the stock market or becomes a Public Limited Company (PLC), basically this means that they issue shares. The reason that they issue shares is to gain revenue (money) for them to use, e.g. Company X worth $10million, if it going floats on the stock exchange shares in the company will be issued for public to buy. The valuation of the company could become $50 million over night even though the ground reality of the company has not changed.

3. The reason that people buy shares is basically to make money because the shares market goes up and down. So people buy shares when they think prices will go up and sell shares when prices go down. It is all based on greed and confidence in the companies, therefore it is similar to gambling in a casino.

4. Most of the people who buy shares in these companies don’t do it because they care for the company and have no loyalty to it and its staff because they don’t have any liability or any major link to the company,. Its not like a normal business partnership, e.g. if 2 people are partners in a company selling cars, so they both own 50% of the company, if the business makes a profit they would get an equal share, if the company made a loss both of them would make a loss.

5. The only real link that a shareholder gets is that they have the right to vote to elect a board of directors (People in charge of the company). But these votes are not like in normal elections, where each person gets a vote. The votes are allocated according to the number of shares a person has, e.g. if a person (say Rajesh) owns just over half the shares in a company and he wants to elect (Anil) on the Board of Directors of the company, even though all the other shareholders no matter how much they numbered – 100,000 or 200,000 – There vote would not count (Rajesh) would have the decisive vote.

- Businessmen usually do not even need half the shares even 5 or 10% of the shares are sometimes enough for them to control a company.

- So businessmen and the people who own large amounts of shares effectively control the company and therefore can manage the company and gear it in a manner that would increase it share prices. The normal shareholders have no say in the affairs of the company and are just owners of the pieces of paper, which are called share certificates, which they buy and sell.

- We know that only the major businessmen and capitalists have the capital to own large amounts of shares, e.g. ¾ of the major stockholders in the companies – ABC, CBS and NBC the 3 major television and radio networks in America are owned by banks such as Chase Manhattan, Morgan Guaranty Trust, Citibank and the Bank of America.

6. Furthermore the shareholders in these companies can buy and sell their shares without anyone’s permission. What they look for is to make an instant profit, so if the value of shares increased they would sell all or part of their shares and if it decreased they would buy their shares back.

• So I have briefly explained the reality of the stock markets, now let us apply that on what occurred in the collapse in 1997 of the stock markets in the south-east Asia.

• Firstly we have to realise that the markets in South-East Asia are much frailer and weaker than the Western markets because the Western markets have been established for many years and are much larger. Competition in these markets is also less than in the Western countries.

• So it is easier for the Western Capitalists and speculators to dominate these markets.

They enter these countries like Indonesia and buy local shares in the local companies.
Instead of waiting for the share prices to rise they use styles to increase the prices of shares such as :
- Hyping the company whose shares they just brought.
- And leaking the news that they have invested heavily in these companies.
- These leads to the local people rushing to buy shares in that company which in turn leads to the share prices rising
- Once the Capitalists have reached their profit level they sell their shares to the locals making a quick profit.
- Sometimes a number of Capitalist investment funds work together as one group in the market because their aim in making profit is the same, this leads to collapse in the market when they decide to sell all at once. When they sell all their shares its like a sinking ship no one wants to remain on it, so this leads to a collapse in the local currency and causes major problems for the local banks which gave the locals credit.

• This is what occurred and is still occurring in South-East Asia, in Indonesia a Muslim country which has got the largest Muslim population in the world 80% of the companies went bankrupt, people became unemployed and the Indonesian rupiah became worthless, many people are even stealing to survive…these are the effects of these stock markets!

• The Western Nations know this and they are the ones who legitimise and even promote such activity. When the spokesman for the US State Department was asked about the intervention of one of the game-player Capitalists who was involved in South-East Asia named George Soros, he said: “George Soros is a highly respected individual in the US who has done a lot of good things for many countries around the world.”

• What gives more power to these Western Capitalists to intervene in the markets is the usury (interest) based banking system. It allows them to take massive loans so that they can buy much more amount of shares than they have money.

• The banks get deposits from people, e.g. when you go to your bank you deposit money. They consider these deposits to be their own and lend them the capitalists and businessmen. If we everybody demanded there money back from the banks straight away, they would not be able to give it because they lend most of the money out.

• The banks lend the money at different rates of interest, obviously they are biased to the companies which they own or have major stakes in, like the example I gave earlier of banks owning companies in America like ABC and NBC. We can clearly see this bias in America where the interest rate changes from 5.8% on loans given to capitalists and major companies to 20% on loans given to purchase a car.

• So the banks loan this money to the dealers of shares much more than the dealers have in cash. E.g. with 500Rs of their own money they can buy 5000Rs worth of shares by borrowing the money from the banks.

• This is the reality of capitalist economics. We should realise that anything based on Kufr will fail and not peoples problems in a correct manner. Even the Kuffar acknowledge their failure, e.g. In my Economics Exams I had a whole exam paper on market failure, about how the capitalist system has failed in many areas, when I asked my economics teacher what the alternative was he said: “Capitalism is the best of the worst.”

The Islamic viewpoint

The public limited company system gives the public company a distinct quality of limited liability, aimed at protecting major capitalists and businessmen in case the company fails and incurs losses, in which case, those who have claims against it would not be able to demand from its investors any compensation no matter how large the personal assets of the investors are. The financial claims are only confined to what is left in the company in terms of assets.This system is contradictory to Shari'ah in every aspect.

The Shari'ah rule obliges all to repay debts in full to the rightful owners, and it is forbidden to cut anything from them.

Al-Bukhari reported on the authority of Abu Hurayrah that the Messenger of Allah (saw) said: "He who takes money from people with the intention of paying it back Allah will pay on his behalf, and he who takes it with the intention to waste it Allah will waste him."

Ahmed also reported on the authority of Abu Hurayrah who said: The Messenger of Allah (saw) said: "You shall return the rights to their rightful owners on the Day of Judgement, even the ewe with no horns will get even with the ewe with horns by butting it back."

Hence, the Messenger of Allah (saw) has confirmed the obligation of fulfiling one's rights in full in temporal life, and if one does not he will do so on the Day of Judgement. This serves as a warning for those who devour people's rights.

The Shari'ah has made it an unjust act for the rich to delay the settlement of their debts.

Al-Bukhari reported on the authority of Abu Hurayrah who said: The Messenger of Allah (saw) said: "The delay by the rich is unjust."

If the delay in settling the debt is unjust, what would the devouring of the rights and the non settlement of the debts be?

Indeed it would be a greater injustice and would entail a graver punishment. The Messenger of Allah (swt) has taught us that the best people are those who are best when it comes to settling their debts, for Al-Bukhari reported that the Messenger of Allah (saw) said: "Truly the best from amongst you are those who are best in settling debts."

Therefore to restrict the settlement of debts to those who have claims against the company, only after clearance of the public company's losses, is forbidden. Rather they should be given all that is owed to them in terms of rights or debts in full from the assets of the investors.

This is as far as granting the public companies a limited liability. As for the public limited companies themselves, they contradict the rules of companies in Islam. This is so because the public company according to their definition : "A contract in which two or more persons undertake that each one of them participate in a financial project, by tendering a sum of money, thus sharing what this project yields in terms of profit or loss."

According to this definition and according to the reality pertaining to the founding of the public company or the Joint-Stock Company, it becomes clear that it is not a contract between two people or more according to the Islamic Shari'ah rules, because the contract according to Shari'ah is based on offer and acceptance between two parties. In other words it means that there should be two parties in the contract. One party assumes the offer, i.e. he initiates the offer of the contract by saying: "I enter into partnership with you" or words to this effect; and the other party expresses acceptance by saying: "I accept" or "I consent" or words to this effect. If the contract is lacking the presence of two parties and the presence of offer and acceptance, nothing can be contracted and nothing can be called a legitimate contract.

The reality of the public company contradicts the reality of the company in Islam. The company in Islam is: "A contract between two or more parties, who agree to undertake a financial venture with the aim of making a profit." It is therefore a contract between two or more parties; thus it could not be unilateral. An agreement should rather take place between two or more parties. The contract itself should be based on the undertaking of a financial transaction with the aim of making a profit. It is not fitting for the contract to be based on the mere payment of money. It is also not fitting for the aim to be just for the sake of entering into a partnership. Hence, undertaking the financial venture is the basis in the company contract.

In the public companies, partnership is concluded by the mere presence of partners in capital only. The public company assumes its activities without the presence of a physical partner. According to Shari'ah, the partner in capital, has no right to run the company, nor does he have the right to work in the company as a partner. The running of the company and working in the company is confined to the physical partner only.

As for the shares of such companies, these are financial papers representing a share in the company at the time of purchase or at the time of evaluation. They do not represent the capital of the company at the time of establishment. The share is an integral part of the company's entity and it is not part of its capital. The value of the shares is not unique nor is it stable. It rather varies according to the profits and losses of the company. They are not unique and fixed at all times, but they are constantly fluctuating.

As for the Shari'ah rule pertaining to the dealing in these shares and in securities, whether buying or selling, it is forbidden. This is because these shares are those of a company that is unlawful according to Shari'ah. They are in fact certificates of bills which contain mixed sums from a lawful capital and unlawful profits made from an unlawful transaction. Each bill represents the value of a share, and this share represents part of the assets that belong to the unlawful company.These assets have been mixed with an unlawful transaction which Shari'ah has prohibited. Thus, it is illicit money, whose buying and selling becomes unlawful, and dealing in such money is also illicit. This is also the case for bonds, in which money is invested with interest, and so is the case for bank shares and similar, since they all contain sums of illicit money; thus their buying and selling is unlawful, because the money contained in them is illicit

Therefore these problems which we discussed inshallah will not exist under the Islamic state, and therefore when Islam returns Inshallah it will bring the world under its just systems and abolish the oppressive system of Capitalism on this earth.

Today through floating on the stock exchange companies are able to generate huge amounts of wealth and thus easily able to become monopolies, duopolies or oligopolies which dominate the market destroying any small competitors – this in the end is bad for the consumer. Even the capitalists teach that competition is good for the market and call monopolies a ‘market failure’ then why is it that there are so many monopolies in their economies? E.g. Soft drinks – Coca-Cola, Pepsi & Cadbury’s Schweppes dominate the market. Operating Systems – Microsoft.

Islam allows companies to exist which are partnerships between body and capital, there are 5 types of company structures in Islam. However as Islam prohibits PLC’s, this means that companies will have capital only from private wealth and therefore it is likely they will only be small to medium sized companies in the market. Not the multi-billion dollar corporations that exist today. This is good for the market place as competition increases quality and reduces price. Furthermore Islam’s prohibition of patenting and copyrighting will further add to this. We must study the Islamic economic system and explain to the people how it is the true alternative to the economic problems we face today.

Abu Nadra reported: We were with the company of Jabir Ibn Abdillah...Jabir Ibn Abdillah kept quite for a while and then reported Allah's Messenger (saw) having said: "There would be a Caliph in the last (period) of my Ummah who would freely give handfuls of wealth to the people without counting it." I said to Abu Nadra and Abu al-Ala: Do you mean Umar Ibn Abd al-Aziz? They said: NO. [Sahih Muslim, English version, v4, chapter MCCV, p1508, Tradition #6961. Sahih Muslim, Arabic version, Kitab al-Fitan, v4, p2234, Tradition #67]

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