Causes a nd R emed ies of t he R ecent

Financial Crisis
from an Islamic Perspective

Justice Mufti
Muhammad Taqi Usmani

Turath Publishing
2014

God Almighty states:

We have allocated among them their
livelihood in the worldly life.
(Quran 43:32)

Con t e n ts
Preface
Post Crisis Reforms: Points to Ponder
1. Market Economy and Just Distribution
2. Profit Motive and Greed
3. The Nature of Money
4.Speculation
5. Necessary Ingredients of Trade
Short Sales
Sale of Debts
6.Transparency
7. How the Present Crisis emerged
8. Causes and Remedies
9. A Few Words about Islamic Financial Institutions

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Pr e face

he present financial crisis that convulsed the entire economic world

actually started in 2008, but its destructive effects are still frightening
the financial world. This crisis compelled the economists to admit that there
were some systemic errors in their economic life that need to be corrected. It
was in this backdrop that the World Economic Forum which is regarded as
the most prestigious forum in the field of fresh economic thinking, devoted
its annual session of 2010 to review the present financial system on the basis
of sound values. For that purpose I received a request from the Chairman of
the Forum to present a paper to suggest solutions to the Crisis on the basis of
Islamic principles. I took this opportunity to write this paper in an endeavor
to analyze the causes of this crisis and to suggest its permanent remedies from
Islamic perspective. The paper was presented to the annual conference of
the World Economic Forum that took place in Davos, Switzerland in January
2010. The World Economic Forum placed it in its official documents, posting on its website, while a summary of the article was officially launched in
a press conference.
Since this paper has discussed some basic Islamic values and principles
having universal application, the importance of which has become more
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The R ecent Global Financial Cr isis

pronounced in the context of the present crisis, I deemed it beneficial to

publish this article separately as well, which is presented in the form of this
booklet. This article was later published in Pakistan. Now Messrs Turath
publishers in London are publishing it after getting it edited by Shaikh Yousuf
DeLorenzo for which I am grateful to both of them. May Alah Taala make
it beneficial for the readers, and make them appreciate the true value of the
principles propounded by the Holy Quran and Sunnah of the Holy Prophet
Sayyiduna Muhammad fourteen centuries ago a fact that should lead a
genuine seeker of truth to the conclusion that man is always in need of divine
guidance even in certain matters of our material life that have been erroneously left to the mercy of pure rational theories contradicting each other, and
deemed to be outside the domain of divine guidance.
Muhammad Taqi Usmani

Post Cr isis R e for m s

Points to Ponder

odern economics is based on a purely materialistic and secular

approach that does not allow religious concepts to interfere with its
theories and concepts, on the premise that economy is outside the domain
of religion. It is, however, an interesting irony that while every US dollar note
displays the admission: In God we trust, when it comes to theories related to
earning dollars or to distributing or spending them, trust is placed exclusively
in human ideas; God is kept out of the picture, as something irrelevant to
economic activity.
It is perhaps for the first time that the World Economic Forum, in
response to the present financial crisis, has invited representatives of religion
to give their input to the initiative of rethinking the shape of the economic
establishment on the basis of values, principles and fresh ideas. This commendable initiative deserves the full support of all religious circles. As a humble student of the Islamic disciplines, and particularly of Islamic economic
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The R ecent Global Financial Cr isis

principles, I would like to highlight some basic points, derived from Islamic
economic precepts, that I believe to be essential for independent and fresh
consideration while seeking solutions to our economic problems.
Before proceeding further, it is necessary to clarify two points here:

1. When we speak of Islamic Finance or Islamic economic principles, it is generally assumed that these principles are emphasized
by Muslim scholars only to satisfy the religious requirements
of Muslims, or that they are meant only for Muslims to the exclusion of all others. This is an incorrect assumption. Although
Islam is represented by a set of beliefs without which it cannot
yield its spiritual fruits in full, the worldly benefits of its social,
political and economic principles are not restricted to Muslims;
they are meant for the common good of humanity at large.
2. What this article contends may appear radical in the present environment, dominated as it is by conventional economic thinking. However, if we are seeking a comprehensive reform of our
present system, one that has been proven by empirical evidence
to be faulty, we should not be apprehensive of suggestions leading to radical change, as long as these are based on sound arguments. The universal nature of the present crisis needs universal
change in our present financial system; a patchwork solution for
the repair of minor wear and tear is not what is called for. We
need an overhaul of our economic system that leads to its redesign on the basis of true values and sound principles that make it
equitable, well-balanced and inherently immune from turmoil.

What has encouraged me to present this article are the valuable remarks of
the Chairman of The World Economic Forum in its last annual meeting,
especially, the following words;

M u f t i M u h a m m a d Taq i U s m a n i

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Today we have reached a tipping point, which leaves us with only one
choice: change or face continued decline and misery.
Since change is necessary, no idea for global change should be beyond the
scope of impartial examination. This article cannot discuss all the details of
the reform needed in our present system; however, some fundamental points
are presented for serious consideration.

1. Market Economy and Just Distribution

One of the basic principles emphasized by the Holy Quran about the objectives of an economic system is that wealth produced in a society must be
distributed in a just and fair manner, so that it may not be concentrated in
the hands of a few people. The Holy Quran says:

so that it may not circulate only

between the rich among you. (59:7)
In any design for a system for economic activity, this fundamental objective must be given foremost importance. The modern market economy, on
the other hand, has been characterized by many economists as unjust in
its distribution of wealth. Although the planned economy suggested by its
opponents did not prove to be workable, the blame aimed at the market
economy was not misplaced. Proponents of the market economy should
have concerned themselves with the elimination of unjust distribution and
its causes. Unfortunately, when the concept of planned economy failed in
practice, the proponents of the market economy rejoiced the occasion as