Dear Ali Sakti,
“Green shoots” is the term that is being increasingly bandied about by analysts, policymakers and investors, who have seemingly developed 20/20 vision in spotting a nascent economic recovery. In clutching at these straws of good news, let’s not neglect the realities: up to 239 million people will be jobless by year-end; 200 million workers are at risk of joining the ranks of people living on less than US$2 a day; the cost of hunger is estimated in some countries to be as high as 11% of gross domestic product (GDP); and the number of people on the brink of starvation is set to reach a record high of 1.02 billion or one-sixth of the global population.
This week’s United Nations conference on the world financial and economic crisis noted that the problems go beyond the conduct of monetary policy and regulation of the financial sector; they involve deeper inadequacies in areas such as corporate governance and competition policies. Many of these failings, in turn, have been supported by a flawed understanding of the functioning of markets. It also alleges that globalization was based on the flawed hypothesis that unfettered markets are quickly self-correcting and efficient.
The conference has, of course, produced a lengthy list of measures essential for global recovery, many of which will never reach the implementation stage. There is no mention of Islamic finance, but its practitioners need not rely on such talk shops; the world’s social and economic demands and inequities — as well as the financial difficulties of governments — can be eased considerably with the careful planning and implementation of development projects which make use of Islamic finance. In other words, let’s practice Islamic finance viably to meet the objectives it was created for, rather than focus only on the arena that conventional finance has defined, purely to use money to make money.
Is this feasible? A recent report relates how India can make use of Islamic finance to beat its debt trap, which came about because its GDP growth rate fell to 6.7% in 2008-09 against 9% in 2007-08, and its debt servicing rose to 58.83% of total expenditure or 15.87% of the GDP. Even the interest payments were 21.39% of the Indian government’s total expenditure and 5.77% of the GDP.
The report found that Islamic finance can reduce the fiscal deficit even if revenue receipts decline and expenditures increase. That’s because Islamic financial products can replace the debt-based investments for infrastructure with funds mobilized through equity-based government securities. The government, says the report, can issue sovereign Sukuk to mobilize non-debt funds for the consolidation of public finance. Countries can set up Islamic infrastructure funds using sovereign and even corporate Sukuk (for development projects initiated by the private sector) to bring about development in a cost-effective manner.
UN Secretary-General Ban Ki-moon pointed out that the developed world could mobilize more than US$18 trillion to keep its financial sector afloat, but was tardy in meeting its pledge to provide US$18 billion to developing African nations. This is the real world, but it provides Islamic finance practitioners with vast opportunities to do good for those in need in a win-win manner.