Derivatives Project

NEGATIVE EFFECTS OF THE CURRENT FINANCIAL

SYSTEM AND HOW ISLAMIC FINANCE TRY TO

ADDRESS THESE CHALLENGES .

Table of Contents
• Money creation process
• Level of debt in the financial system
• Role of derivatives
• Who benefits
• Who suffers
• How Islamic finance addresses these issues
Money Creation Process
• Fractional Reserve System
• Example:

A deposits $100 Bank Bank lends $90 to B

B deposits $90 Bank lends $81 to C the cycle

continues….
The level of Debt in the US
Financial System
• As of 20th October 21, US Debt stands at around
$28.8 trillion.
• 134% of the country’s GDP.
• Studies by the World Bank have concluded that a
Debt to GDP Ratio higher than 77% slows economic
growth.
• The last time it was less than that was in 1943, when
Total Debt was $137 billion.
• Approximate Share of debt on every national -
$87,006
The Role of Derivatives in
the Financial System
•Used in the role of hedging risk.

•Speculation.

•Portfolio diversification.

•Price discovery.
• Derivative markets are gigantic, notional amount outstanding of all

global OTC derivatives markets was around $1188 trillion in 2020.

• More than 10 times the size of the total world GDP.

• Gross market value of these contracts was very low at around $31.26

trillion.

• This enormous growth in the market happened after 1999 when the

Glass-Steagall Act was repealed.

Who Benefits from the current
Financial system?

•Big Corporations

•Banks

•Rich and the people in power

Who Suffers from the current
financial system?

•Daily wage earners

•Employees

•Borrowers
APPLICATION OF ISLAMIC
FINANCE IN GLOBAL
FINANCIAL SYSTEM
According to the Quran, a society where there is no justice
will ultimately head towards decline and destruction
(Quran, 57:25).

Current situation:

1. Inefficient Allocation of Resources

2. Unjust enrichment between the rich and poor

Principles of Islamic Finance

• Discourages unlimited wants on demand side and

encourages productivity on supply side

• Absolute prohibition of Riba or any predetermined,

guaranteed rate of return

• Prohibition of excessive risk-taking

• Compulsory Charity to reduce economic disparity

• Activities are Shariah-Compliant

Solution in Islamic Finance

1. Current account = Qard Basis / Saving account = Modarba Basis

2. Acts as a partner in sharing of Profit of Loss

3. Consumer financing on basis of Musharika basis. Derivatives are

also restructured as Salam.

4. Prohibition of Interest, promoting equality and financial Inclusion

 Solution in Islamic Finance

5. Fractional Reserve Banking

- Unbacked expansion of Credit, transfer of wealth from poor to rich

• Additional money is to be created which increases the indebtedness of

borrower, and confiscate real wealth of the poor

• Imbalanced distribution of Wealth

Creation of money by FRB is not only impermissible (haram) but also does
not allow the attainment of Shariah Objectives in contemporary Islamic
Finance
THANK YOU FOR LISTENING