Prohibition of Speculation in the Islamic Finance

Being one of the most important principles of the Islamic financial system, the risk-sharing principle and the prohibition of speculative activities as a result of the support of real trade are important principles that not only people who believe in Islam, but also people from different cultures and worlds of thought emphasize and show as an alternative to financial crises. 

BLOG 01.11.2021, 10:39
Prohibition of Speculation in the Islamic Finance

In terms of economy, the concept of speculation means that any asset is bought at a low price and sold at a higher price by making future price predictions by tracking the market conditions. Even though some economists claim that the prices in the market reach the equilibrium point through speculators and thus act as a kind of market regulator, speculation is a fixed situation with past experience that speculators who do not really have a real trading purpose and are not subject to regular inspection can push the reasonable prices that will occur in the basic supply and demand in the market.  
Working as an economics correspondent at the BBC and having written the book called "the Almighty Dollar", Dharshini David further clarifies the subject by giving an example of speculative activities on the oil markets:

•    "Speculation is not a desire to buy or sell oil but to take action to make money from this trading. Speculators do not receive or ship barrels of oil, they simply buy and sell futures contracts, betting on them on the grounds whether they expect oil prices to fall or rise".

•    "The actual number of barrels traded is five percent less than the thousands of tradings traders see being computerized every minute, according to commodity exchange. Traders increase prices if they see too much demand in the market. The reverse happens if demand is low or there are plenty of sales products. In case speculators create an artificial demand, it will cause the prices to fluctuate as it will disrupt the balance in the market.  

In addition, according to the estimations of David Luttrell and Harvey Rosenblum working at the Federal Reserve of the United States, it is emphasized that the total loss experienced in the 2008 global financial crisis is around $6 trillion to $14 trillion. Even though there are undoubtedly many reasons for the crises, excessive and imprudent lending and the widespread use of leveraged transactions with no real value are among the most important causes of financial crises.

Loretta Napoleoni, an Italian researcher, emphasizes in her books and articles that Islamic finance is an alternative to crises:

•    "In the Islamic system, the risk is shared by every participant, but this is not the case in our western system. Another feature that differentiates us in our opinion is that speculation does not take place in the economy."

Niall Ferguson, the author of the book "The Ascent of Money", attributes the reasons behind the global financial crisis to the increase in activities in the derivatives market with excessive borrowing, through the questions addressed in the introduction to his book:

•    "How did so many American and European banks have such a highly leveraged balance sheet, in other words, how did they come to the point of borrowing and lending money far beyond their capital base?"

•    "How has the insurance industry, led by the giant American firm named American International Group (AIG) shifted from the traditional concept of risk to the derivatives market and become vulnerable to financial risks with high uncertainty?"

According to the2019 data of the Switzerland-based Bank for International Settlements (BIS), of which Turkey is a member, the nominal value of derivative products in circulation in the markets is estimated to be $640 trillion. However, looking at the real value of the relevant products in the market, we see that they only correspond to $12 trillion. Therefore, the groundwork has been laid for the emergence of financial bubbles in the market. 

As it is known in Participation Banking, the main purpose of making futures contracts is to protect importer or exporter legal customers from exchange rate fluctuations that may occur unexpectedly in their future commercial activities, and in this way, they can continue their business in a sustainable way.

In the words of Humayon Dar, Director General of Cambridge Institute of Islamic Finance

•    "A phenomenon that can bring Islam and the Western world together and bring non-Muslims closer to Muslims may be the Islamic Finance system."



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