FINANCE Session 4 Macroprudential Policy Framework for Islamic Finance towards a whole Financial System Stability Dr Asad Zaman IIIE IIUI Nusa Dua Bali 30th amp 31st May 2013 ID: 334419
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3rd BANK INDONESIA INTERNATIONAL SEMINAR ON ISLAMIC
FINANCESession 4: Macroprudential Policy Framework for Islamic Finance towards a whole Financial System Stability Dr. Asad Zaman, IIIE, IIUI Nusa Dua – Bali, 30th & 31st May 2013
“A New Phase of the Islamic Finance: Capturing the Untapped Area to Improve the Quality of Economic DevelopmentSlide3
Three Dimensional Approach
Social Controls – Most ImportantStructural ControlsRegulatory Controls – Least ImportantSlide4
Social Controls
Develop Character & Social NormsCooperationCommunityResponsibilityService OrientationExample of Tokyo Lost & FindChildren are born with social instincts. Slide5
European Experiment Which Failed
Encourage Greed & Selfishness, Ambition.Cut-throat competition will lead, via survival of the fittest, to most efficient organizations. Regulation necessary to ensure “fair” competition – remaining within boundaries.DUAL model – Wise and Just Philosopher-Kings of Plato. Rule over ordinary humans. Slide6
Boesky: Greed is Good
Zuboff: “I spent a quarter-century as a professor at the Harvard Business School, including 15 years teaching in the MBA program. I have come to believe that much of what my colleagues and I taught has caused real suffering, suppressed wealth creation, destabilized the world economy, and accelerated the demise of the 20th century capitalism in which the U.S. played the leading role.Slide7
Islamic Approach: Revolutionary
Macro-Prudential: Allow greed but regulate it – Greg Smith resigns from Goldman-Sachs. Islamic approach; Focus on changing the culture of the finance industry. Make it service oriented, cooperation and community oriented, responsible. Slide8
Great Depression of 1929
Banks invested heavily in rising stocks.Stock market crashed.Millions lost life savings.Unemployment went from <3% to 25% for decades.Dust Bowl where nothing grew.WHY: Banks gambled with depositors money. Slide9
Structural Innovations
Differentiated Institutions of Islamic Societies:Dar-ul-Amanah: Keep money safe (value)Service Oriented Saving: Hajj,Transport,HousingWaqf: Spend money on othersInvestment Banks: Use money to earn – Earning must be JUSTIFIED via service provided to society. That is what makes it HALAL. Slide10
Post-Depression Regulation
Root Cause: Gambling with Other’s Money.Remedies did not address root causeSEC, FDIC, Regulation of Banks.No competition, regional banks, caps on interest payments, Glass-Steagall: Barrier between banks & finance. Commercial || Investment BanksSlide11
Greed raises head: 60’s 70’s
Regulatory environment remains same.Banks start using loopholes in Glass-Steagall.Can buy on behalf of customers.Can affiliate with companies whose PRINCIPAL business in not securities.NOW accounts offered high interest rates beyond regulatory cap. Regulations + Institutions + CharacterSlide12
De-Regulation & Crisis
Reagan - Garn - St. Germain Act of 1982FSLIC: 100K insurance for S&L.Free Entry, No Caps, No restrictions on Investment.Looters systematically stole more than 100 billion USD -- collaboration at highest levelsEye-Opener: Inside Job: The Looting of America’s S&L’s by Pizzo, Fricker & MuoloSlide13
Causes of 80’s S&L
CrisiesGreed – systematic looting.Profits WITHOUT value addition: prizedDe-Regulation – DONE purposefully by powerful.Huge Loss – Many people would have lost life savings, but for enormous bailout. Extreme cost to economy.Slide14
Subprime Mortgage Crisis
More or Less: Repeat of S&LGlass-Steagall Repealed: Gramm-Leach-BlileyMortgages bundled and sold.Insurance from too big to fail AIG.Created massive & complex dependencies built on fragile base of increasingly risky mortgages. Gambling with others money. Trading of Debt – Not permitted in Islam. Slide15
Lessons not learned
from CrisisDodd-Frank 848 vs. Glass Steagall 37 pagesRegulators do not want to regulate. 1% rule. LESSON: Reform social norms, institutions, and then regulate for violations of these norms.Regulations cannot function when social norms are wrong.