Banking Industry Meltdown; A 'Moral Imagination' perspective

Banks and other financial institutions presented these derivatives as attractive financial instruments to invest in, whereas they were not. Derivatives were used to save financial situation in many banks in a very unethical way. And main reason of failure was that the banks were over dependant on these financial instruments. And as it happens they tried to save their situation by using unethical ways.

The key problem and underlying issue with all examples given in the case is mishandling derivatives, and over dependence on them. Another main issue is that credit default swaps were repackaged and sold as mortgage debt. Apart from that each particular example has its own unethical behaviour exposure. They conduct a manipulation to deceive stakeholders. They are hiding debt and losess by creating off balance sheet and also by creating error accout in case of Barings Bank.

What are the available alternatives – also called “moral imagination” that we can learned from this case? According to Tawhidic Paradigm, everything in the universe is created by God. We are God’s vicegerents on the earth; it has been given us in trust. In this case, Banks are given trust by their customers to protect their saving or investment. 

Let’s take a look to Baring Bank’s case. The top management of Baring Bank give too much authority to Nick Lesson by letting him gamble in derivative with bank’s fund without proper audit. By not doing a good supervision to Nick Lesson, The Baring Bank has not hold its ‘amanah properly. So all the stakeholders of financial system should act khalifah and also ‘abdullah.

The current financial system mentioned in the case is too dependence on subprime loan and derivatives. In case of subprime mortgage, we have to know what we call securitization. Securitization is the process of packaging designated pools of assets with or without credit enhancement into securities, and the sale of these securities to the appropriate investors.

Recent excesses in conventional financial markets have shed light on Islamic finance as an alternative framework for securitization. Predatory lending, deteriorating underwriting standards, and a series of incentive problems that have infested the conventional securitization process belie fundamental Islamic principles of not extending beyond one’s means and the supremacy of public interest in social justice.

Moreover, any financial transaction under shariah law implies direct participation in asset performance and assigns to financiers clearly identifiable rights and obligations for which they are entitled to receive commensurate return in the form of state-contingent payments. Profits are earned in line with shariah prescriptions and cannot be guaranteed ex ante but accrue only if the investment itself yields income. Thus, investment is not guaranteed but secured, mitigating adverse selection and moral hazard of both lenders and borrowers

    What about the solution for derivative problem? Some Islamic scholars come up with the concept of Islamic derivative, eventough, this concept is still debatable. Dr Obiyatullah give  requisites for a Shariah Compliant Derivative Instrument such as    All Islamic financial instruments in general must meet a number of critiera in order to be considered halal (acceptable). At a primary level all financial instruments and transactions must be free of at least the following five items:   (i)  riba (usury), (ii) rishwah (corruption), (iii) maysir (gambling), (iv) gharar (unnecessary risk) and (v) jahl (ignorance).

Based on Maqashid Syari’ah concept, any financial transaction should follow what our guideline mentioned in this case, we have to refers to Fiqh Mu’amalah and also some other fields related to this case. We believe that Islamic financial system is better than conventional system.

More over we do agree with Prof Ahmad Kameel Mydin Meera who said that the reason why current or conventional system is vulnerable and also unjust is because of the fiat monetary system, fractional reserve system and also interest. By eliminating all those things, we are sure that Islamic financial system will be the best alternative to overcome all the problem in financial system and it will achieve Mashlahah for the ummah

All issues and problems that were encountered by these institutions were deeply rooted in unstable conventional financial system in the very first place. The system that was based on usury and financial slavery of nearly everyone should never be an option. Implementation of Islamic Finance would have been the only possible solution to prevent financial recession and its far reaching consequences.