The Stock Market Gamble

Since Sept 11th the world has experienced a dramatic change with the subsequent war on Afghanistan and the fight to uproot the idea of the return to Islam under the campaign of the war against terrorism. Not escaping this was the financial world of the capitalist nations, which have witnessed a tremendous loss to their world economy. The New York Stock Exchange (NYSE) as with the London's leading index (FTSE 100) slumped in the first few minutes of the September attacks following closely by all leading stock markets of the world. Other markets followed suit including the Tokyo’s Nikkei and the German Frankfurt Dax.

The crisis exploded a huge hole of confidence in all of the capitalist markets, with many people also tied up as "indirect" investors with shares in the form of pensions and other savings schemes, which are also linked into the stock markets framework. Anyone with a pension is likely to end up paying and losing out more than the global multinational offenders.

Speculation in these false paper economies is built largely upon market buoyancy and confidence, or in this case the lack of confidence in company investments, profits and false accounting practices. Share declines normally follow two patterns the first and less harmful is a sudden onset of panic an often-violent reaction to an event or trend that feels vicious at the time but tends to be short-lived. With the benefit of hindsight, these crashes are soothingly called corrections and work themselves out. The much more dangerous type is the prolonged depression or bear market. Here, shares may rarely fall spectacularly, and may give occasional signs of rallying, but little by little their value is bled away over the course of many months or even years, with little hope of an imminent recovery.

As for the Islamic perspective on this it is clear that the structure and pretence of the way companies are organised will always lead to false accounting and speculative markets, resulting in a tide of highs and lows for the western stock economies. As soon as confidence is undermined, whether for expected or unexpected reasons, then the market starts to flounder, and many shareholders rush to sell their shares simultaneously in order to cash in upon what they think they have gained from the rise in the value of the shares, so they all want to sell as soon as possible. Prices therefore start falling and consequently continues with the number of shareholders wanting to sell their stocks. A domino effect starts to form within the market normally resulting in heavy trading losses for all. This current prolonged bear market has led to both George Bush and Allan Greenspan making statements aimed a bolstering lagging confidence in the market.

The stock markets in the west could not have come into being had it not been for three basic systems distinct to the capitalist economies. Unlike the Islamic basis for structuring financial institutions the western organisations have 3 distinct characteristics, which include:
 

1). -The public limited companies system (and related stock market in which these shares are traded).

2) - The usurious banking system.

3) - The inconvertible paper money standard.

These three systems come together to split the capitalist economy further into two distinct forms or into two types of markets, the first represents the real economy where the production, marketing and real services take place, and the second is the financial economy, which some refer to as the parasite economy, where the contriving, buying and selling of various financial papers takes place. The distinguishing characteristic of the public company is that it has limited liability, hence if its business fails and losses are incurred, those who have rights upon the company would not be able to claim anything back from the investors, regardless of the amount of their capital or shareholding. They would only be able to claim back what is left in the company in terms of its capital and losses.

It is an established convention in the west that the public limited company yields people who have a vested interest in the company and the right to account it alone and not the investors. Thus the company’s liability is limited to what is left in the company itself and does not extend to what the investors have in terms of money.

Furthermore, the stock markets enable the controlling shareholders to sell their portion of shares without seeking anyone’s permission and without having to inform other investors. Hence, they could in fact wash their hands of any liability pertaining to the activities of the company, which they controlled and for which they run its affairs, thereby severing all ties with the loss making company.

The role of the usurious banking system in the stock market shifts between inflating and deflating trading and subsequent prices. So when the prices of some specific shares increase, banks tend to offer large amounts of money as loans to those who trade in those shares, thus multiplying the amount of cash they have at their disposal. Traders would in turn rush to buy more shares and the prices would continue increasing to an exaggerated level. However the situation could change overnight. The prices of some specific shares could fall for any reason, such as a malicious rumour or news of financial irregularities. This was certainly the result of the Enron and WorldCom scandals, which saw that once news had reached investors of their illegal practices all major leading world stock markets declined.

The inconvertible paper money of the stock market systems gives powers to banks to issue a currency to be circulated throughout the country in the shape of printed papers that have no intrinsic value. The government forces people in the country to accept this currency in fulfilling their financial commitments. If any of the citizens were to refuse this paper as settlement to a debt they were owed, the law and the courts would force them to accept it, or otherwise they would lose his claim and his rights.
 

This is the reality of the stock markets in the west and in every country that follows and emulates the west within their markets. The stock markets are the breeding ground of the businessmen, for they do not produce any commodity that could be useful for people and there is no other incentive for the investors except a quick and easy profit. Stock markets are little more than casinos and represent a huge gambling hall. They are like webs sown by spiders, which can easily be shaken and torn apart. They represent the symbol of the capitalist greed and the attainment for material and financial benefit. Had it not been for the Capitalist economic systems, the use of public limited companies, the usurious banking system and the inconvertible paper money, these scrounging markets would not have existed and would not have been able to survive. This is the reality of the stock markets in the west and sadly a model that many of our Muslim nations look to adopt for their financial economies.

As for the public limited companies themselves, they contradict the rules of the company structure in Islam. This is so because the public company according to their definition states that it is a contract in which two or more persons undertake that each one of them participate in a financial agreement, by tendering a sum of money and thus sharing what this agreement yields in terms of profit or loss. In other words it means that there should be two or more parties in the contract. One party assumes the offer, in the form that they initiate the offer of the contract by declaring their agreement to enter into a partnership, while the other party expresses their acceptance by agreeing with consent and approval. If the contract is lacking the presence of a true offer and acceptance than Islam dictates that nothing can be contracted and thus this cannot be termed a legitimate contract in Islam. Dealing in stocks and shares intrinsically hides the parties involved and there is no true offer and acceptance on behalf of those buying/selling shares as there is no two way agreement (i.e. the purchaser does not need any agreement from the others in the company to buy shares). Accordingly the contract is invalid.

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 are unlawful according to the Shari‘ah. They are in fact certificates of bills, which contain mixed sums from a lawful capital and therefore unlawful profits made from unlawful transactions. 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. 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 in Islam.
 

Indeed Allah (Subhanahu Wa Ta'aala) said:

“Those who devour usury will not stand except as stands one whom Satan by his touch has driven to madness. That is because they say: Trade is like usury. But Allah has permitted trade and forbidden usury. Those who after receiving direction from their God desist shall be pardoned for the past their case is for Allah to judge; but those who repeat the offence are companions of the fire. They will abide therein forever.” [ 2:275]

As for the inconvertible paper money standard the money is termed as the medium which people agreed to have representing the value of goods and services, whether this was metallic or otherwise. It is the standard by which all the goods and services are measured. The metallic standard was widely used and prevalent long before Islam. When Islam came, the Messenger of Allah (Sallallahu Alaihi Wasallam) adopted the use of the Dinar and Dirham as currencies, and therefore he (sallallahu alaihi wa sallam) adopted the metallic monetary standard. He (Sallallahu Alaihi Wasallam) made them the exclusive currencies measure by which all the goods and services were measured.

Hence the only thing which will save the world from the corruption of this Capitalist economic system, the public company system, the usurious banking system and the inconvertible paper money standard is the abolishment of this corrupt Capitalist economic system including the abolishment of the public companies system. Inherently it is based on a gambler's promise and false speculative markets. As demonstrated by the September 11th attacks and the Enron scandal the market forces are simply sustained on economies that are built on false pretences and intangible material and financial practices which can shudder at the very thought of negative market speculation.

To save the world from this melancholy, the use of the usurious banking system and the inconvertible paper money standard must be removed with a subsequent return to the gold and silver monetary standards. This will put an end to the horrific inflation and the usurious bank loans facing the current capitalist nations. It will also put an end to the speculations that have caused these shocks in the money markets. The need for usurious banks will also come to an end, and therefore, the economic situation in the world will be stabilised and the financial crisis will disappear. The pretext for having money markets will also disappear and with it the economic crisis and uncertainly.

As recent events have shown including Sept 11th and the US company scandals the mere speculations of threat, unscrupulous dealing, or for that matter a lack of confidence is sufficient to send tremors into the capitalist nations. This is a certainly a tool the Khaleefah could adopt, simply by increasing oil prices or cutting supplies to the western nations would be sufficient to send their financial markets into turmoil and collapse. The Islamic state may even use natural resources as a means to negotiate with nations to create friendly terms with neutral countries against the likes of the US and Britain, with favourable trading terms a good carrot to strengthen their position vis-a vis the western capitalist super powers..

Indeed Allah (Subhanahu Wa Ta'aala) said:

“Therefore keep your duty to Allah and obey me. And obey not the command of the prodigals. Who spread corruption in the earth and do not reform ( Ash-Shu’ara:151-152)


Sadat
 

Further Reading

Economic Justice in Islam

Economic Effects of Money

Talk:How does Stock Market Work