What Islam Says

Finance and Islam

2009-12-20T21:43:00.001-08:00

Global finance today dominates the world economy. Western economies are characterised with financial sectors which generate billions for the economy. Stock Markets, multinationals, companies raising billions, initial public offerings (IPO) and so on, all symbolise the apparent success of Capitalism. Finance is important in any economy for two fundamental reasons:1. Whatever is produced in any economy can only be brought and sold through the use of money.

2. Society is looking to increase its wealth through investing, the financial sector exists today primarily to bring those with money, and those who need it together.

Finance: Past and present

Capitalism has dominated the financial scene for over 300 hundred years, the initial development of the stock markets took place in Europe to fund expeditions to Latin America, where merchants went to gain riches. Most of the developments in finance have taken place in the post WW2 era.

The purpose of finance is to bring those with money and those that need it together in the market place. The first time the worlds largest economies got together to discuss global finance was at the Bretton Woods conference in 1944, this was the first attempt at unifying the terms of global finance. There were two important outcomes from the conference:

The pegging of the worlds currencies to the dollar which in turn was pegged to Gold and the blueprint to remove all barriers to finance so financial transactions could take place freely. Financial dealings increased twenty fold and reached astronomical proportions. When the US abandoned the dollar peg to Gold, this brought even more money into the financial markets. The explosion in finance meant more and more money was being invested in the financial markets, the need to keep pace with such a development required ever more money to fund such investments and with the absence of a peg to Gold this period witnessed an astronomical rise in the printing of money.

The deregulation drive during the Thatcher-Reagan era brought even more participants into the financial markets including individual investors looking for riches. This also saw the development of the derivative markets in the 1990’s where money was speculated on the movement in the shares of companies, currencies and interest rates. For the first time traders were allowed to speculate in a commodity without actually buying or selling the actual commodity.

Over a period of 300 hundred years the emergence of fiat currencies (i.e. currency without an intrinsic value), the role of compound interest and the development of limited liability company structures have shaped western finance.

Such developments have also been the sole reason why the West has come to be characterised with regular financial crises. The developments in finance since WW2 brought to an end industrial dominance and created duel economies. This is because the financial sector moved away from raising finance to fund business start-ups and projects to speculating on company share prices and the movement of currencies. In this way trading in the financial sector ceased to be about purchasing currency or buying shares in the hope of receiving a dividend to purchasing financial commodities in the hope they could be sold for a higher price.

Due to this it became possible for a company to be in financial difficulties but have a rising share price, or as was seen during the dot.com bubble, new start-up’s witnessed astronomical rises in their share prices even though they were forecasted not to make a profit for 20 years.

The financial sector dominated by the financial markets actually does not produce anything real. Speculators trade in shares, bonds, and currencies that move around from trader to trader, in the hope that slight price changes will yield profits. This process has led to speculation reaching levels unheralded in history, it also means the price of commodities could be moving in the complete opposite direction to the supply and demand situation of a commodity. A good example of this was the rise in oil prices in 2008. Oil prices in less than a year reached $150 a barrel. Throughout history Oil prices rarely went above $35 a barrel, this huge surge in price completely contradicted the fundamentals. No new oil fields were discovered, no new technology was invented that could extract or refine oil quicker. Mark Lewis from Energy Market Consultants explained at the time in a BBC interview “We really don’t know what the fundamentals are doing at any point in time; the markets are looking for signals from the fundamentals. Some of them are irrelevant, some of them are wrong, some of them are meaningless, but they affect prices nevertheless.” Sean Cronin, editor of Argus Global Markets explained at the time “When the New York oil price broke through $100 a barrel for the first time at the start of 2008, one of the factors cited as being behind it was the assassination of Benazir Bhutto in Pakistan on 27 December 2007, that didn’t strike us as making any sense at the time.”

The financial economy that doesn’t produce anything has become so sophisticated that various products have been created which allow an investment in a paper with no real asset represented. This side of the economy is valued more then the real economy, the size of the worldwide bond market is estimated at $45 trillion. The size of the world’s stock markets is estimated at $51 trillion. The world derivatives market has been estimated at $1000 trillion, more then 60 times the size of the US economy and 24 times the size of the entire world economy.

Disaster Capitalism

Western theories on finance have dominated the discipline of economics for over a century. Economic textbooks argue the ‘time value of money’ theory which states that the value of money (the quantity of goods that can be bought) is falling hence a mechanism is needed to fill the difference. Hence £100 will purchase a fixed amount of goods today, however a year later £100 will not get you the same amount of goods, interest rates in theory are equal to the difference. The ability to invest in investment products and financial markets allows one to hedge his/her wealth.

The fundamental problem with such Capitalist theory is that on many issues there is a wide discrepancy between theory and practice. Interest rates in today’s global economy in no way represent the change in the value of money. Interest rates in many economies across the world outstrip prices changes enormously. Such views of money have in fact created an economy which is not real. The global financial economy has turned into one big casino where traders bet on what will happen in the real economy.

Islam and the Financial Economy

The Islamic economy is built upon the real economy this is where the process of production of tangible goods and services, Islam has designated a role for finance in the economy - due to Islam’s focus on the real economy which is the wealth creating aspect of any economy finance in Islam is not an end in itself as there is no interest (Riba). Wealth in Islam is created through each stage of industry i.e. mining, refining, manufacturing and sales’ All of this adds value at each stage and creates wealth for the economy

“That is because they say: “Trading is only like Riba,” whereas Allah has permitted trading and forbidden Riba” [Surah al-Baqarah]

Finance in Islam is intrinsically tied to the real economy and is not an industry in itself. Due to this finance takes a shape in an Islamic economy very different to what is seen in Capitalist economies.

1. Money in Islam was designated by Prophet Muhammed (saw) as representative money, this

is where the notes and coins in the economy are representing a commodity. Through the actions of Prophet Muhammed (saw) in terms of collating tax, penalties and prices in the economy, money represents gold and silver. By restricting the legal tender to such metals inflation is contained as any increase in the supply of money requires additional metal, in this way the Islamic economy has restricted the central government from freely printing currency (paper money must be 100% backed by gold or silver). This brings the much needed stability to money which in turn brings stability to the overall economy.

2. The Bait-ul Mal - the central treasury plays a key role in an Islamic economy. It regulates Money supply by monitoring production and ensuring sufficient currency exists in the economy so that trade and transactions can take place. The role of the state has been clearly defined in the Islamic texts. It has been designated with the responsibility of ensuring the circulation of wealth and supervising the public properties.

3. The removal of interest has a huge impact in the economy. For many it is difficult to envisage economic life outside the capitalist framework which relies so much on interest. The absence of interest actually allows for more wealth creation. To appreciate this we need to understand the role played by interest in investment decisions. This is because the challenge all people face is one of investment. Simply put, people will only invest their money if the rate of return of a business venture measured against the risk of the venture is offset by the interest that can be gained from leaving the money in a bank account to accrue interest. Thus, if the risk of the rate of return on an investment is less than the rate of interest, then one would leave their wealth in a bank account rather then actually invest it. Hence the incentive would be to save the money rather then to use (invest) it. Interest in other words restricts investment and hence is an impediment to the distribution of wealth. By removing interest from the economy it incentivises wealth circulation in the economy through investing in real goods and business ventures. This brings added stability as all participants participate in the same sphere - the real economy.

4. Any individual wanting to begin a business venture needs finance. One could wait for years to accumulate the necessary profits to expand or start a new business or borrow the money today. For this purpose banks were created. Islam has permitted the creation of banks and views them as institutions that aid wealth circulation. This is because banks collect the population’s deposits and then invest the money across the economy in new business ventures. In this way banks become like venture capital bodies who invest in real business. With the absence of speculative financial markets banks only have one sphere to invest customer wealth, the real economy. The absence of interest in the Islamic banking industry as well as speculative and dubious financial markets is the discerning line between modern banks and Islamic banking. This means Islamic banks can only make money from investing wealth across the economy in projects and new start ups, the impact on the wider economy is huge as banks will stimulate the economy through such acts. Modern banking wealth finds its way primarily into the financial markets creating a speculative bubble if investments do not materialise.

5. Although Islam is built upon the real economy and the financial sector is based upon providing finance for the real economy, Islam has allowed a few purely financial transactions. Islam has permitted currency exchange as this was a common practice amongst the people of Mecca and Madina and Muhammed (saw) did not object to it. Islam permitted some forward contracts - this is where payment is taken before the actual delivery of goods or before the final transfer of ownership of the goods. However the items that can be sold before ownership is undertaken must be of a defined nature where they can be counted, measured or weighed, this is due to what is established in the hadith of ibn Abbas, that the Messenger of Allah (SAW) said: “Whoever pays in advance in dates, let him pay in advance for a known price and a known weight for a known period.” And in another narration of ibn Abbas who said: The Messenger of Allah (SAW) said: “Whoever pays in advance in something then (it should be) in a known measure and a known weight for a known period” (narrated by Al-Bukhari). Islam has categorically prohibited purely financial transactions where one lends money in the hope of receiving more in repayment. All trade and transactions are linked to the real economy as they are built upon construction, manufacture, services, or the production of goods and so on.

6. The Islamic company structure also complements an economy without interest. This is because Islamic law does not allow companies to operate on the basis of limited liability, which allows one to only have a financial stake in a company which is restricted to the amount invested. In the event of bankruptcy a shareholder would only lose the initial capital of the company no matter how large the debts. The key feature in an Islamic company is all shareholders are responsible for company debts in proportion to their investment, rather than just their monetary amount. Islamic company shareholders also partake in the running of the business not merely just remain a shareholder in the hope that share prices rise. Stock markets exist primarily to cater for such investors, who do not directly participate in running or management of the company.

7. Whilst the Capitalist finance industry offers investors an array of products and many opportunities, it also brings much harm to the wider economy. This is because such debt based products are betting on the future and reliant upon a certain outcome, when this doesn’t occur the inevitable bust occurs. The Global, credit crunch was built upon future real estate prices continuing to rise, when this was not forthcoming it brought the global economy down, as many had invested in debt based products which themselves were dependent on rising house prices.

8. Western theorists have always argued that an economy without interest removes the incentive to invest. They argue there would be no investment unless there was a guaranteed rate of return. The Islamic economy however is dynamic enough to encourage investment without the need for interest. The prohibition of hoarding wealth has been addressed directly by Allah (swt), the Islamic creed has forbidden the hoarding of wealth. Hence spending is seen as an act of worship alongside the fulfilment of ones needs. At the same time the Islamic economy has designated a 2.5% tax (Zakat) on any wealth held for a year above a fixed threshold. Hence holding onto wealth aside from being rebuked by the Islamic texts faces taxation at the of the Islamic tax year - all this gives citizens in the Islamic economy the incentive to spend and invest, stimulating the economy.

Conclusions

The Islamic economy is intrinsically tied to the real economy, this means wealth is created at each stage of the production line, be it mining, refining, manufacturing, marketing or sales. Each of these sectors will need companies and finance to contribute towards the economy and it is here Islamic finance plays a role. Due to finance being tied to the real economy participants engage only in the real economy which creates stability as there is no way for national income to leave the economy - as such a parallel economy does not exist. The aim of the Islamic economy is to remove barriers to wealth circulation, Islam achieved this through the removal of the barriers that act as obstacles such as interest, speculative financial markets, income based taxation and fiat currency. Boom and bust will not exist in an Islamic economy as the Islamic economy is about ensuring wealth continually changes hands so all can profit from it, the aim of the Islamic economy is not perpetual economic growth, which has proven to be mission impossible.

Casino capitalism turns to printing money

2009-12-20T20:32:00.000-08:00

Following procedure the central bank of the UK, the Bank of England, sought permission from the UK Treasury to begin quantitative easing, and was duly given the go ahead by the chancellor

Despite the formalities there is no due process in creating money out of thin air. It would be printing money but for the fact that notes and coins only make up a small fraction of money supply in the economy in any case. Whilst unlikely to have any material impact on the deeply depressed UK economy, it demonstrates the abject failure of financial management on a colossal scale.

The creation of money by the central bank of the UK will directly destroy the value of all Sterling in circulation. This is an incredibly destructive step given that mere confidence underpins the value of the fiat money supply. The decision to create money by the UK Treasury and the Bank of England is yet another example of a capitalist model that is intellectually bankrupt!

This grossly misguided step to print money is the latest in a series of failed capitalist policies to revive the beleaguered economy. It could literally be the last throw of the dice in casino capitalism. In just over a year hundreds of billions of pounds have been pumped into the financial markets to increase so-called liquidity; numerous banks have been nationalized; interest rates cut to effectively zero; hundreds of billions tied up in guaranteeing value-less bank assets; taxes cut and public spending increased.

In spite of these unprecedented set of measures the economy is sliding further into depression: businesses are collapsing; unemployment is accelerating; and homelessness is rising. Meanwhile, the public debt is into several trillions and rising as more banks and industries in the economy run to the Government for bailouts.

The capitalist banking model, which precipitated the crisis, to lend (or create money) by 100 times or more the size of actual deposits was unsustainable. Based on such a loaded formula no bank is too big to fail. Now each measure deployed to deal with the crisis is more disparate and panicked then the last. This capitalist economic model, flawed in origin, is imploding.

Capitalism’s use of measures that contradict its ideology like nationalization, money creation and protectionism also demonstrates that capitalists can not be trusted to protect and safeguard peoples property and property rights. This is a clear indictment of an ideology that professes to champion free enterprise.

In contrast, in the Islamic economic system the Shariah laws clearly distinguishing the private, public and state property. The state can not usurp peoples private properties while public properties are for the benefit of all citizens. The money supply in Islam according to Shariah is always 100% backed by gold and silver and so money has in effect an intrinsic value which therefore ensures and safeguards the value of money in peoples’ pockets.

By the passing of each day the flaws in capitalism are progressively being exposed. It can be seen that the capitalist model offers no long term, sustainable solutions for humanity. The Muslim world should remove the intellectual yoke of failed capitalist economics and implement the sublime Shariah laws related to the economy via the political application of the Khilafah system.

What’s the future of capitalism?

2009-12-20T20:28:00.000-08:00

In the relatively short 200 year or so history of capitalism, the events of the past months have been truly unprecedented.

Century old financial institutions have collapsed overnight. Multibillion dollar financial markets have ceased to function. Banks, the life and blood of the modern economy, have lost their reason for being. Innovative financial assets acclaimed the new creators of wealth have been found to be fakes. The revered axioms proclaiming the perfection of capital markets have been shattered.

The case against capitalism doesn’t stop there. The response from capitalist governments has been far from laissez fair. Shareholder wealth has been usurped through widespread banking nationalisations while new legislation has been enacted to keep afloat lame duck firms and industries unable to compete in the global market place. Governments have resorted to wilfully destroy the value of their currency through ‘printing’ new money, which is backed by mere confidence. The placebo in the crisis has been further increases in the colossal debt burden to provoke grossly indebted consumers to spend more of what they don’t have to buy what they don’t need in the vain attempt to avert disaster.

Those who still blindly follow capitalism often argue that capitalism alone is responsible for the increase in global wealth, innovative products and new services in the last century – mass production for the mass market. While this is a nice soundbite, it’s simplistic and naive. Crucially, what’s the benefit of capitalism to humanity when over half the world’s population owns barely 1% of global wealth (UN report, 2006).

The remakers of man-made capitalism have already begun to argue for a new type of capitalism – a less selfish capitalism. Some see a greater role for the state in corporate life while others argue for more regulation. The remaking of a more compassionate capitalism is not new - lest we forget the abhorrent conditions in which armies of women and young children toiled in the sweatshop factories of the Industrial Revolution in nineteenth century Britain. The callers of the remaking capitalism then were appeased with health and safety legislation, labour laws, trade union recognition and ultimately the welfare state. The cracks in capitalism were paved over only to remerge during a subsequent crisis.

However, what’s different between today’s crisis and previous ones is the price of capital - the interest rate - has been reduced to nothing. This is most symbolic. The interest rate is the raison d’etre of the capitalist. With the cost of capital being effectively zero there is no benefit for capitalists or moneylenders – undermining their very existence.

There is little doubt that this crisis is a low ebb in the progressive decline of capitalism. Capitalism’s intellectual yoke is no more. The death knell of capitalism is near and will come when the Islamic economic system is implemented, demonstrating a viable and just alternative for humanity.

Seek the abode of the hereafter with what God has given you, without forgetting your portion of the world. And do good as God has been good to you. And do not seek to cause mischief on earth. God does not love mischief makers. [Surat al-Qasas: 77]

Virtual Economy : Root Cause Analysis of The Current Financial Crisis

2009-12-20T20:11:00.000-08:00

Virtual Economy : Root Cause Analysis of The Current Financial Crisis

In a statement made to a congressional committee on April 3, 2008, the Chairman of the Federal Reserve Bernanke said that "if Bear Stearns had been allowed to fail, it would have led to a "chaotic unwinding" of Bearn Stearns investments held by individuals and other financial institutions. Moreover, the adverse impact of a default would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability"[1].

In an article published by Newsweek, October 11, 2008, Daniel Gross writes [3]: "Back in 2002, Apple's stock was trading far below the level of cash on its books, ascribing a value of zero to its brands and products, compared with several billion at the height of the boom".

Both statements refer to the existence of two views of the economy: a real economy which is reflected by the level of cash on corporate books, and an inflated, exaggerated view which is reflected in the current stock values of the market. The second view of the economy will be referred to as a virtual economy in this article. Virtual economy, in this context, differs from what is being called virtual economy commerce [2], where customers trade in a virtual imaginary product with certain specifications and an imaginary value. However, this will not be the subject of this study.

The second type of virtual economy (VE) is the one that is important and is strongly related to the failure of the financial capitalist system as is being witnessed today. VE allows the economy to appear much larger than its real size. This economy is based on the assumption that the real money will not be tapped into and therefore, it is possible to deal with an assumed larger (virtual) value for the money.

A good example of this scenario is the case with Donald Trump. He ran projects worth billions of dollars, while being more than 50 million dollars in debt. He was about to file for personal bankruptcy in 1989 when he was pressed to pay some of his debts.

A parallel concept to virtual economy exists in computer systems, where the concept of virtual memory is used. Virtual memory is a special type of organisation which allows the memory in the system to appear much larger than the real size of the memory. With this type of organisation, it is possible to execute program applications which require much larger memory than the system actually has. Virtual memory organisation in computer systems remains a smart way of running applications. However, there are some cases where an application may break the limits of virtual memory and cause the system to thrash, i.e. to fail. This happens when an application insists on using more than the size of real memory instantly, at one given time.

In a similar manner, virtual economy (organisation) provides two views of the economy. One is the real value of commodities and services in a given economy which corresponds to the real economic growth and production. The second view of the economy represents the imaginary value of stock prices and the accumulation of interest (usury) in the banks. A virtual economy system, similar to a virtual memory systems, is bound to crash (thrash) at any point when the instant demand for finance at any given time exceeds the real value of the real economy. The current financial crisis in the US and the world at large is a striking example of a virtual economy crashing (or thrashing).

The phenomenon of a virtual economy, where the money in transactions appears much larger than the real money, began to surface at the level of state economies at the end of the 19th century when financial markets began to take shape in New York. This phenomenon grew to be an integral part of capitalist economies, especially in the US and in Europe due to three major reasons, namely: stock markets, interest based economy, and the removal of gold as a basis for the monetary systems. At the political front, the cold war between the capitalist and socialist camps in the 2nd half of the 20th century further strengthened the virtual economies in the west. We will examine these three factors in some detail in the next few sections.

1. Stock Markets and the Virtual Economy
Stock market activities at the start of the 20th century created a new phenomenon in the economy, where the wealth associated with stock values grew at a much higher rate than the wealth associated with the real economy. When the stock market collapsed in New York in 1929, economists attributed the crash to the great difference between the inflated values of stocks and the values of the real assets of the economy.

The Economist magazine reported on 2/11/1929 that "there is warrant for hoping that the deflation of the exaggerated balloon of American stock values will be for the good of the world." To understand this aspect it has been found that the prices of financial market increased during the preceding period from 1925 to 1929 by 120%, while economic growth for the same period did not exceed 17%. And when the market collapsed, it lost over 93% from its value, which means that the market returned to its real value which was obviously much lower than what the stock market indicated. The same scenario repeated itself in 1987 when the market collapsed again, and as observers again noted financial market had been grossly inflated compared with the real size of the economy, such that the difference between the virtual economy and the real economy was more than 200%. And by the end of the twentieth century the virtual economy was again three times the size of the real market value and this scenario came to be known as the Internet (or DOT COM) Bubble.

The result is that the nominal values of stocks do not reflect the reality of economic production. It is possible to increase the value of the shares of a given company without any real increase in production or profit achieved by that company; this was the case with Amazon, where its stock value exceeded $300 at a time when the company had not achieved any profits. Enron is another example, where the rising value of their stock was based on false information about fictitious profits.

These kind of financial activities, transactions and dealings create two faces for the economy: a real face linked to the economic growth and production which indicates the real strength of the economy. And an imaginary side, that reflects the image seen and observed by the local and global community. When the difference between the two sides is small, there does not appear to be a serious problem in the economy. When the difference, however, is vast as is the case now, in 1987 and in 1929 it is dangerous and may lead to devastating consequences for many years, as happened with the Asian Tiger economies in the late 1990's.

The capitalist countries are aware of the magnitude of the problem, and its seriousness, and keep developing plans and alternatives to prevent or delay an inevitable devastating collapse, to mitigate the effects of the collapse, or to exit quickly in case a collapse happens. A good example of such plans is the recent bail out of the Bear Stern Bank, which almost collapsed after the drastic decline of its stock prices. (The most recent bailout of more than a trillion dollars in US and Europe occurred few months after this article was written).
The direct cause of a stock market collapse is the attempt made by some investors to transfer what they own from fictitious money to real money. As an example, let's assume that the real money is 10% of the total virtual money. This means the amount that can be turned into real money, is no more than 10% of total capital, and the rest is equal to none. So when the owners of the shares notice that a major investor started selling his possessions (to convert them to real money), they panic and start selling their possessions hoping to cash in some real money before the collapse. Then a collapse takes place and brings everything to the foundation (real money).

Let's work through the example more thoroughly. Assume that there are 1000 shares in a company. Also, assume that each share is worth $100. So the total stock value of the company is $100,000. For the sake of argument, assume that the real value of the company is $10,000. In other words, the real value of the company is 10% of the virtual value. Now assume that a major investor sells 50 stocks at $100 and cashes $5000. If the rest of the share holders start selling their shares hoping to get real money from the company, they will be able to get no more than $5000 at best, which translates into $5 per share. Now if one more person was able to sell 50 shares at say $50 and cashes $2500, then the rest of the crowd will have to share the remaining $2500 at $2.5 a share. Eventually when all $10,000 are gone, the share will go to zero. This is how the stock values of Enron and Martha Stewart companies collapsed.

The danger of the virtual economy is that it creates a state of delusion in the economy, which can deceive senior economists and politicians, and drives them to undertake projects larger than their real wealth. There could be a temporary positive effect from this delusion, especially when competing with others for large projects. America has benefited greatly while in a conflict with the Soviet Union during the cold war era, where the Soviet Union used real money to finance its projects, and America used the virtual economy for its own projects. But when a state is exposed to a financial or political crisis larger than the size of its real economy, the illusion may push the state into a losing gamble. The current wars in Iraq, Afghanistan, Somalia and the devastating effects of hurricanes in the US must have contributed to the recent financial crisis in the west. Some countries may sometimes intentionally create real crisis for other countries that depend on the virtual economy, in an attempt to push them to the limits of their real economies. Note also that a sudden collapse of the virtual economy brings the economy to levels much lower than the real value of the economy.

2- The Usury and the Virtual economy
The objective of the financial policy in the capitalist economy, as stated by the bylaws of the Federal Reserve Bank in the USA, is to maintain the highest return on production and labour and to sustain price stability. This objective will be achieved through a mechanism that controls the value of usury (interest rate). During a recession in the economy, the state reduces the value of usury in order to encourage borrowing and increase the demands on goods and services. Conversely, the value of usury would be increased to curb inflation. The point here is to recognize the importance of usury for the capitalist economy as the most important tool to control the ups and downs of the economy. This explains the wide spread of financial institutions that offer loans to individuals, companies, institutions and even governments themselves.

Within this usury based economy, the money flows in two directions. In one direction, the money flows from the investors towards the bank in a form of deposit payments. The other direction is from the banks to the investors in a form of loan payments. Except for cases where the inflation rate is higher than the interest rate during the repayment period, the amount of money going towards the bank is steadily more than the amount of money going towards the investors. If the real money is the money which the investors deal with to increase production and to maintain price stability as required by the fiscal policy, this money will certainly be less than the money that accumulates in the banks. This is the main reason for the difference between the real money and the virtual money. And there are two cases that lead to this phenomenon.

The first case is when the bank performs the lending process. Let's assume that the bank provided a loan of 100 million dollars with 5% usury for 1 year. Let's assume also that the inflation during this period was 2%, the real interest rate becomes 3%. Now presume as well that the borrowed money (100 million) was spent on profitable projects and the total profit was 2%. Now the total value to be paid back to the bank = 103 million dollars, while the real money which is the sum of the initial money and the profit is equal to $102 million. This means that (1) $million accumulates in the bank account which does not correspond to actual value in reality. This surplus is the usury which is described in the Qur'an (That, which ye lay out by usury for increase through the property of (other) people, will have no increase with Allah). Note that the biggest borrowers in the world are governments which borrow money to pay for their operations and not for profit production. Consequently, the accumulated pure usury will be much higher than the ratio of (1%) in the above example. That is why usury money can reach during a specific period of time hundreds of billions of dollars and up to twice the amount of real money. It is worthwhile to know that the real economic growth rate in the US was no more than 3.5% during the last (30) years, while the actual interest rate was more than (8%). This means that virtual money over (30) years was (135%) of the actual value of money. So if the actual value of the US economy was 5 trillion dollars, the value of usury excess of the true value will be $6.75 trillion dollars. This makes the virtual money value (11.75) trillion dollars.

The second case that leads to an increase in the virtual money is when investors deposit their money in the banks for investment in usury. If investors deposit in the bank (100) million with (5%) interest after taking into account inflation, and for a period of (10) years. The value of the money invested becomes (150) million. For the bank not to lose money, it in turn invests the (100) million. Let's say the bank gains (7%) by investing its money ($ 170 million); if (5%) of that investment was part of productive investment by the bank and the rest was pure usury, we will have (20) million usurious money which has no real value in reality. The reality is that most banks do not invest their money in production processes, but rather by investing in other banks and by recycling the loans to other borrowers. This makes the virtual money increase repeatedly and multiple times.
Either way, the resultant quantity of the money accumulated in the banks is much more than the quantity of the initial real money that represents the (real) production. However, what encourages and motivates the continuation of the increase in virtual money is the absence of the urgent need to withdraw large amount of funds from many banks at once. When one of these banks gets exposed to pressure from investors and depositors to withdraw amounts of money (Run On The Bank) that exceed the amount of the real money, the bank soon collapses for the lack of ability to meet customer needs, as happened with the Bank of Boston in the early eighties of the last century. If the Government does not intervene to save the bank and back it up by its funds, a collapse of the bank becomes imminent. When the problem becomes severe and has the potential of affecting several financial institutions, the big countries such as the US begin to print and pump money that could match the amount of the virtual money. This leads to massive inflation, decline in prices and weak production and may lead to a huge financial disaster. Sometimes a disaster may occur by withdrawing large amounts of investors' money at the same time from the banks (similar to the real estate and credit crisis in the US - this occurred few months after writing this article).

3- Breaking away from the Gold Standard
The virtual economy would have not become a genuine trend, if the main currency (i.e. Dollar) remained linked to the gold standard as per the Bretton Woods Agreement in 1944. The agreement established a clear base of exchange into gold within a fluctuation rate of not more than (1%); it also set the bases on how to convert currencies into gold. The existence of such a law can not permit any State economy to appear much larger than its real size. That would cost its stockpile of gold to deplete. There will not be sufficient gold to match the fictitious numbers of the virtual economy. But when the US turned against the Bretton Woods Agreement (in the early 1970's) and broke the link between the dollar and the gold standard, it freed its economy from the rein of the market prices without any restrictions. The US was not satisfied with breaking the linkage between the dollar and the gold, but it also broke the link between the value of its currency and the economy. It made it possible for money to grow more rapidly and at much higher rates than the growth of the economy. It was this separation between money and gold on one hand, and between money and economic growth on the other that enabled the existence of the virtual economy and its tendency to grow at an alarming rate. (Recently the Prime Minister of Britain Gordon Brown called for the reconstruction of the Bretton Woods agreement - Report on Business.com Oct. 14-2008)

4- Conclusions
Is the presence of a virtual economy a matter of strength or weakness for the State? There is no doubt that the presence of a virtual economy leads to the emergence of the state as a powerful state with an ability to manoeuvre, threaten and impact other countries. A virtual economy and strength may allow one country to destroy the economies of other countries especially if those countries rely on a real economy or have less ability than the attacking state. America is still using the virtual economy to influence Europe, Japan, China and others. However, the virtual economy is like an Achilles' heel for these States. While it appears as a point of strength, it also could be a potential point of destruction for the state. When a state is exposed to real crisis, whether caused by disasters or wars, the crisis would drain up what is equivalent of the real economy of that State which in turn may lead to the bankruptcy of the State economy.

Today, the major capitalist countries in Europe and the US have built their enormous economies on the basis of the virtual economy. Most importantly, these countries cannot go back to rebuilding a more realistic economy. The financial politics are based on usury and exorbitant wealth, and the steady increase of the money has become the only goal of their economic and financial policies. And from here we cannot imagine rebuilding the economy in the capitalist countries to become closer to reality, and therefore they will remain vulnerable to destruction and collapse.

And Allah سبحانه وتعالى says:
الَّذِينَ يَأْكُلُونَ الرِّبَا لاَ يَقُومُونَ إِلاَّ كَمَا يَقُومُ الَّذِي يَتَخَبَّطُهُ الشَّيْطَانُ مِنَ الْمَسِّ ذَلِكَ بِأَنَّهُمْ قَالُواْ إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا وَأَحَلَّ اللّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا فَمَن جَاءهُ مَوْعِظَةٌ مِّن رَّبِّهِ فَانتَهَىَ فَلَهُ مَا سَلَفَ وَأَمْرُهُ إِلَى اللّهِ وَمَنْ عَادَ فَأُوْلَـئِكَ أَصْحَابُ النَّارِ هُمْ فِيهَا خَالِدُونَ

"Those who devour usury will not stand except as stands one whom the Evil One by his touch hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, 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)." [Quran Chapter 2; verse 275]