Saturday, July 25, 2009

Islamic Economics : Approaches to Bridging the Divergence

I. Introduction

Nowadays, people should not question whether Islamic economics ever exist; rather people (for Muslim individuals) should ask what their contribution towards the realization of Islamic economics is. Scholars in Islamic economics have work hard for the past few decades with their literatures, but yet the question still arises, is Islamic economics framework ready to be an alternative system to the current crisis? This is due to Islamic economics nowadays that much more represent by Islamic banking and finance rather than itself as a whole system. It is important to view Islamic economics from a 360 degrees perspective to evaluate and manipulate the particles that contains unique elements in it from its meaning, up to it concepts and practices that understood by the Muslim scholars from the peak success of economic when it lead by the Prophet and then the companions. This paper tends to explore some of the uniqueness of Islamic economics in its practices of maslahah approach, al-hisbah institution and also voluntary sector, it is in need to revive these particles inside Islamic economics correctly to help all Muslim countries towards achieving the Islamic economics goals.

II. Islamic economics

Islamic economics is defined differently by all renowned Muslim economists. But all the Muslim economist agreed that Islamic economics is a religious-based system of laws set forth according to the al-Quran and as-Sunnah and imbued people with the values of Islam (Hasanuzzaman, 1984, p.52; Mannan, 1986, p.18; Siddiqi, 1992,p.69; Chapra, 1996,p.33; Aslam, 2005).

Addas (2008) successfully differentiate secular and Islamic system in several aspects regards to methodology, worldviews, epistemology and sources of knowledge in economics of these two systems. Islamic system clearly covers all aspect of life and being inclusivity, obviously different than secular system where it tries to separate or not to include any religious aspect as well as being exclusivity in its structural frameworks. The secular system or this secularization process is very much a western European experience and may not be universally applicable, unlike Islamic economics system that argued the concept of ad-deen which means ‘whole way of life’ provides an all-encompassing ethos for man, including that of economics. Religion of Islam is seen as a source of ethics for economic behavior (Aslam, 2005).

Thus Islamic economics is totally different than secular system because it is clearly a system that encourages and preoccupied with the welfare of a community where every individual behaves altruistically and according to religious norms. It is based primarily on justice, benovelence, expediency, wisdom and welfare as well as ensuring the well being and success in this world and the life hereafter (Akhtar, 1981, p.26). Here where the system bridging the gap between religion and economics especially when the paradigm of knowledge is seen as human reason aided or rather guided, by revealed knowledge mainly the al-Quran and as-Sunnah.

The aims of Islamic economics system is mainly depends solely in its two dimensional utility function, in this worldly life and life of hereafter. This according what creates Homo islamicus individuals, an ideal person who is adhering to the guidance of Islam, brings distinctive moral and ethical dimension to the economic sphere of life. This is obviously different than the secular system that views human as a Homo economicus, the Economic Man or agent, represents a rational human being formalized in certain social science models, especially in economics, who acts in self-interest to achieve in a goal-oriented manner. (Kuran, 1995; Warde, 2000; Asutay, 2007). Moreover, Kay (2002) explains that Homo economicus as rational economic man that self interested, materialistic, and obsessed with calculating his worth.

In addition, the structural framework of Islamic economics does forbid unjust transactions, plus not only that but the religion of Islam also encourage risk sharing along with the availability of credit for primarily the purchase of real goods and services and restrictions on usury (riba), the sale of debt, short sales, excessive uncertainty (gharar), and gambling (maysir) where it is surely could help to inject a greater discipline into the economic system.

III. Maslahah approach

Maslahah is one of the sources in Islamic jurisprudence, it is usually defined as an interest that not supported by an individual text, but is upheld by the texts considered collectively. There are many verses in the Quran which grasp the essence of the maslahah. Maslahah is acknowledged by all four Sunni schools, in principle, that all genuine which do not conflict with the objective (maqasid) of the Lawgiver must be upheld (Kamali, 1998, p.267-281).

Goals of Islamic economy is interpreted differently by the muslim scholars, however majority of them hold view that Islamic economics objectives are to achieve social justice and economic development (of all well-being of God’s creatures), or so called establishment of a just social order (Chapra, 1996, Sanusi, 2008). The objectives not only cover worldly affairs but also the life in hereafter. Thus maslahah plays an important role that differentiating Islamic economics than others because it lays to an action taken to protect any one of the five basic objectives of the Shari’ah, namely protection of faith, life, progeny, property and reason. The preservations of objectives of Shari’ah parallel with the two major Islamic principles which are removing hardship (raf` al-haraj) and preventing harm (daf` aldarar).

These underlying principles according to Asid, Asutay and Khawaja (2008) changing the framework of how Islamic economics view on all economic theories such as the theory of consumption, the theory of distribution and the theory of production when it includes maslahah and “no-injury” (avoiding mafsadah) as the basic principles in the system.

Maslahah is about securing greater interest of the society could be is exercise when a situation arises where procuring one’s interest implies the loss of another, then greater interest should be pursued in preference to the lesser. On the other hand, anything regards to loss or injury the reverse will apply where the greater will be avoided by tolerating the lesser (Kamali, 1998, p. 267-281).

It is obviously shown that the spirit of maslahah prefers the interest of society rather than the individual. Different than other systems, Islamic economics give the government a special role to play not likes any other system where the government cannot intervene the market or being a dictatorship by imposing centralized the decision making. As a comprehensive and al-wasatiyyah system, based on the maslahah principle, that in a situation of social loss there should be involvement of the government for fixing prices.

Among the explaination given by Asid, Asutay and Khawaja (2008) where they believes that according to maslahah principle:
“The state has the right to fix the floor price and secure resources, which are becoming economically obsolete. It is also the duty of the government to estimate the input-output coefficients for each of the vintages, which will guide the policy makers for the formulation of their policies regarding the degree of economic and physical obsolescence”(p. 64).

These are some of the example where the maslahah principle can be applied when the Qadi or the state could save the public from the harm, underutilization of resources, or any action that could deprive the poor as well as realization of the goals of Islamic economy to social justice and economic development (of all well-being of God’s creatures). Since the economy cover so many aspects of theories, the maslahah approach is seen as the problem solver as what mentioned by Ahmad (2003), where all the problems of imperfection economic approach could readily have avoided through Maslahah approach.

IV. al-hisbah Institution

Human characteristic that was most responsible for the credit crunch recently is human greed. This opinion is not only according to The Archbishop of Canterbury, Dr Rowan Williams but also agreed by most of the Muslim scholars like Nejatullah Siddiqi (2006), Umer Chapra (2008), Hussein Shehatah (2009) and so forth. Human greed come into picture when the absence of ethics and morality lead the investors, bankers, and people in the market becoming greed to maximize profit, wealth and consumption by any means in keeping with the mores of the prevailing secular and materialist culture. Thus the collapse of some important financial institutions like Lehman Brother, Merill Lynch, AIG and so forth lead the market towards awareness of the existence of corrupt regimes due to the lack ability of regulatory authorities. The U.S administration themselves believes that they have an inadequate regulatory structure when the Fed opted not to use their power to prevent the growth of the housing bubble which to believe the starting point that lead the whole financial system went frozen (Barker, 2009).

However, Islam as a comprehensive religion may have the solution through the idea of al-hisbah institution to suit current crisis face by most of the financial institutions. Hisbah literally means reward, calculation. Technically, it refers to an institution that existed through most of Islamic history for implementing what is proper and preventing what is improper (al-’Amr bil Ma’ruf wa al-nahy ’an al-Munkar). The main role of al-hisbah was the regulation and supervision of markets to ensure proper market conduct by all concerned (towards any malpractices or criminal activities (Siddiqi, 1996, Sanusi, 2008, Amalina, 2009).

As a moral as well as a socio-economic institution, al-hisbah plays an important role in Islamic economics system. Sanusi (2008) and Amalina (2009) both agreed that the institution of al-hisbah has been practiced by Muslim society since the early years of Islam, when the Prophet Muhammad (pbuh) has acted as the first muhtasib,or person that responsible for the maintenance of the institution of hisbah. However, in today’s world, the institution of hisbah has been separated into different institutions with different names lead by various peoples, even some of the institutions not lead by qualified muhtasib (Mohamed, 2009).

In addition, Sanusi (2008) believes that the classical economic role of muhtasib can be further expanded into current corporate affairs such as financial institution such as the banking sector. This kind of supervision could ensure that financial institutions performance and its operations are strictly on ethical basis. Besides that, he further suggests that the staffs in the financial institutions to be a whistle blower, by further expanding the concept of hisbah testimony where this action could help to develop social consciousness and responsibility to block the means to evil acts (Sanusi, 2008, p.256; Amalina, 2009, p.372). The act of whistle blower in the financial institutions by disclosing important information voluntarily is an appropriate act which abides by the Islamic jurisprudence called blocking the means (Sadd al-dhara’i ), Sanusi (2008) and al-Kashif (2009) both viewed that it is an obligation for every Muslim to prevent any act against morality and must also be vigilant against any future threats to public interest. In addition, al-Kashif (2009) further explains that the obligation not only confined to individuals but also institutions regardless it is public or private owned.

On the other hand, the current existence of Shari’ah Supervisory Board practice by the Islamic banks is deem to hold the spirit of al-hisbah when it is a board that supposed to direct, supervise and review the activities of the Islamic Financial Institution (IFI) to ensure it is Shari’ah compliance in all its activities and products offered. However, the scholars behind the scene that lead the Shari’ah Supervisory Board must be jurists in fiqh a-lmua’malat (Islamic commercial jurisprudence) or usul al-Fiqh (Islamic jurisprudence). The Shari’ah Supervisory Board may follow certain guidelines provide by the Central Bank to execute any rules and regulations or enforcement. Therefore this is a good example of how the spirit of al-hisbah works in the modern approach in financial institutions, especially the Islamic financial institutions (IFIs).

Through the existence of al-hisbah institution to supervise the financial institutions, this could help the financial industry from prohibited activities like carrying out illegal economic transactions, political corruption or social mischief. Among the problems that relates to financial institutions that should be supervise by the al-hisbah institution that categorize as financial crimes under Islamic law are such as fraud, bribery, money laundering, insider trading, usury, gambling and so forth (al-Kashif, 2009). Thus with the revival of al-hisbah institution, it could helps the Muslims to achieves Islamic economic goals as a whole as this is already proven during the Prophet time.

V. Voluntary sector

Voluntary sector is acknowledged in Islam and also other religions. Courtney (1994) sees a bigger picture of voluntary sector as something enormously powerful, motivating and distinctive about the voluntary sector that should be preserved and promoted. However, there are differences in understanding the term voluntary sector between Islam and other religion because Islam emphasize it more than any other religions when one of the pillars in Islam categorize it as an obligation action that should be exercised by all Muslims, thus some voluntary activities is seen as part of faith because it is included in the pillars of Islam. This is due to the important aspect of voluntary sector where it could play a major redistributive role by affecting a transfer of resources from the rich to the poor.

Siddiqi (1996) categorize voluntary activities in Islamic society onto several categories which are obligatory family support, zakah, ‘ushr, sadaqat al-fitr, gift or grants in cash, kind or usufruct, voluntary social service and also charitable endowments (waqf). Among the voluntary activities that could contribute directly to the development of an economy are the voluntary activities such as sadaqat, zakah, waqf and gift (hibah).

Sadaqat or gift (hibah) is an act of giving alms for the sake of Allah (fi sabilillah), the elements of sadaqat and gift (hibah) relates to micro dimension that combine beneficial and ihsan form of an individual or organization to others. Sadaqat and gift (hibah) are unilateral transfer that may be in cash, kind or usufruct of certain things. The system of Sadaqat or gift (hibah) ensures equitable distribution of wealth in the Muslim community and makes it certain that the wealth does not remain hoarded in idle channels. Circulation of wealth in productive channels is ensured by enhancing the purchasing power of the poor. Concentration of wealth in few hands is discouraged and the gap between the rich and the poor is bridged.

The Sadaqat or gift (hibah) may go to social institutions like mosque, orphanage, school, hospital and so forth. It also may sometimes go to individual or a family in an emergency that caused by war, famine, flood, epidemic and etcetera regardless in period of happiness or sadness. The sadaqat and gift (hibah) could help the state in response to an appeal funds since it is decentralized sector and not under the state or government controlled. These voluntary activities could also help to ensure the fulfillment of basic individual needs and essential social needs.

Besides that, according to Sareshwala (2008), zakah is universal in its scope can be seen in the manner in which it is collected and distributed. After providing for the needs of eligible kin, the zakah fund is designed to cover the needs of those who live in the community where zakah is collected and then to those eligible recipients living in the county, state, country, and finally the world at large. Through accumulation of surplus in zakah funds during prosperous years, the institution of zakah provides necessary contingency funds during depressed economic conditions when zakah revenues may not be sufficient to meet the required needs of the society. The levy of zakah, particularly on the idle portion of an individual’s wealth, induces the zakah payer to seek a return on his wealth at a rate at least as high as the rate of zakah, so as to be able to pay zakah without reducing his or her wealth. The institution of zakah in its fully operational would become a fountain of economic harmony and contentment since it could helps in eradicating the poverty as well as providing an economic safety net to the society.

Charitable endowments (waqf) is also a unique practices since the early days of Muslim society where it have some special features to be distinguish from private or public properties. Waqf concept turns the ownership of the property in the way of Allah, thus making it neither a state property nor a private property. It is permanent and irrevocable (Zuhayli, 2006). This act according to Siddiqi (1996) could “serve to mitigate the ill effect of inequality in the distribution of income and wealth” (p.147). Moreover, Goh Chok Tong (2007) realizes that waqf practice may able to stimulate the economy and provided additional fund to the state and therefore less demand for commercial or financial organizations in the form of corporation is needed for sake of boosting tax revenue. Therefore, waqf administration is changing nowadays where it is not restricted to religious building only but some revenue from waqf in several Muslim countries has been used to build hospitals, universities and commercial and office complexes. Such innovative financial uses from this voluntary sector help to unlock the economic potential of waqf (Goh Chok Tong, 2007).

Both voluntary sector namely zakah and waqf is widely used in generating the Islamic economy. However, these words cannot be used interchangeably, but the function of both of them for financing poverty projects are often used together or to complement each other. Islam has declared that the poor and destitute have due share in the wealth of the rich and the rich are bound to return the share of the poor without stint.

Last but not least, Zaman and Asutay (2009) agreed that the voluntary sector reflects justice, tazkiyah and rububiyah that included in the body of huquq ul ‘ibad (rights of the people) and nourish the voluntary sectors with ethics of care as part of huquq ul ‘ibad within huquq Ullah (rights of the Allah) within the tawhidi paradigm. The voluntary sector from Islamic perspective completes the essence of the doctrine of social obligatory duties (fard al-kifayah) as well as contributes to the development of an economy, directly or indirectly.

VI. Conclusion

In a nutshell, these approaches may seem trifling, but do play an important role for a state to suit in the Islamic economics system as a whole. It is in need to complement the juristic/fiqhi approach by the maqasid approach in order to deliver a meaningful agenda. With the passage of time the constraining influence of the detailed rules and regulations of fiqh seems to have all but extinguished the spark of maqasid-inspired thinking. The fiqhi approach, understanding maqasid shariah it highly important to grasp and dealing with the management side of other important sector in economics. There may be other important elements or particles that should be taken seriously besides what has been discuss in this paper, thus every aspect should be taken seriously without disparage any other aspect.


Ibn Yusof
26 July 2009 / 4 Shabaan 1430
12.21 p.m

*Download full project paper (included the references used) here.

Thursday, July 16, 2009

Impact of the Financial Crisis on Retirement Security in U.S: A Lesson to Learn

By : Ezry Fahmy Bin Eddy Yusof


There is no doubt the United States pensions industry has been badly bruised by the global financial crisis. These are tough times in the United States, but if the current crisis continues to spread, it will surely deteriorate the employee’s retirement income. Certainly the road ahead isn’t easy, but it’s not an impossible one, there are still many possible avenues for individuals to diversify their portfolios to make sure they could achieve their retirement goals. Therefore this paper will first explain the connection that relates subprime mortgage crisis towards the retirement plans in the United States. Furthermore explain how the financial crisis affecting one of the popular retirement plans in United States, the 401(k) plan. Lastly, the author believes that some of the Islamic finance instruments could help the employees in achieving their retirement goals as well as helping the employees to exercising the fundamental principles in investment.

1.0 Introduction

A crisis that affects the entire financial system began in the mortgage financing sector of the financial system of the United States and spread rapidly to the global financial system. As mentioned by Abbas (2009), since U.S financial system is the epicentre of the crisis, therefore the analysis of recent crises has to start with the U.S. system’s financial structure and the conditions that led to the crisis. According to Baker (2008) the central elements that we call as the housing bubble lead the house prices peaked but began to turn down in the middle of 2006, this result a rapid rises in the default rates especially in the subprime market.

2.0 The world financial crisis

It is a worldwide financial fiasco involving the terms such as sub-prime mortgages, collateralized debt obligations (CDO), frozen credit markets and credit default swaps. First and foremost, it relates with two groups mainly the home owners and the investors; the home owners represent their mortgages while the investors represent their money. These mortgages represent houses and this money represents large institutions like pension funds, insurance companies, sovereign funds, mutual funds and etcetera. The financial system brought these people together, in addition with the banks and broker who commonly known as Wall Streets. Directly or indirectly, these banks on Wall Street are closely connected to these houses on Main Street (Baker, 2008).

2.1 Sub-prime mortgages

It happens when the home owners default on their mortgage, the lender gets the house and houses are always increasing in value. Since they are covered in the home owners default, lenders can start adding risk to new mortgages not requiring down payments, no proof of income, no documents at all and that is exactly what they did. So instead of lending to responsible home owners called prime mortgages, the lenders approved applications even the applicants can be considered as among those who are not creditworthiness (Baker, 2008). These are the turning point when it get involves the sub-prime mortgages.

Thus the sub-prime mortgages that are comprised of defaulters are like bombs that are waiting time to explode. The subprime mortgage crisis in the grip of which the U.S finds itself at present is also a reflection of excessive lending. When the mortgage broker connects the family with the lender and the mortgage, this way the family could get the house easier as well as the mortgage broker able to get his commission. The lender sells the mortgage to the investment banker who turns it into a CDO and sells slices to the investors and others. This way works out nicely because everyone selling off their risk to others and making millions.

Therefore, the home owners default on their mortgage which at this moment is owned by the banker. This means forecloses on one of his monthly payment turns into a house. It’s been reported that according to the Mortgage Bankers Association, roughly 4.2 million mortgages were overdue or in foreclosure at the end of 2007 (Chapra, 2008). Now when there are so many houses for sale in the market, creating more supply than there is demand and housing prices aren’t rising anymore, in fact, they plummet. This creates an interesting problem to the home owners who are still paying for their mortgages, since most of the house in their neighborhood up for sale, their house started to devalue. Home owners now realizes that they have to pay higher mortgage while their houses are worth lower than the actual price they are paying.

The home owners walk away or so called default, and default rates sweep the country and prices plummet. Now the investment bankers like Merrill Lynch, Lehman Brother Inc. are basically holding a box full of worthless houses. The investment banker tried to sell the CDO to the investors but they refuse to, because they already bought thousands of these CDO. On the other hand, the lender also tried to sell their mortgages but the bankers won’t buy it, thus the broker is out of work. These lead the whole financial system went frozen.

2.2 Other main causes

Besides number of causes that lead to the crisis, Chapra (2008) quoted the BIS in its 78th Annual Report by saying that the fundamental cause of today’s problems in the global economy is excessive and imprudent credit growth over a long period. The worrisome that lead to the crisis is already detected earlier because of the imbalances in the U.S economy when it’s public-sector budgetary deficits and the private-sector saving deficiency (Chapra, 2008).

Furthermore, some hold a view that human characteristic that was most responsible for the credit crunch is human greed. This opinion is not only according to The Archbishop of Canterbury, Dr Rowan Williams but also agreed by most of the Muslim scholars like Nejatullah Siddiqi (2006), Umer Chapra (2009), Hussein Shehatah (2009) and so forth. Human greed come into picture when the absence of ethics and morality lead the investors, bankers, and people in the market becoming greed to maximize profit, wealth and consumption by any means in keeping with the mores of the prevailing secular and materialist culture. Hence Muslim leaders from around the world are calling for world leaders to work together to prevent the burden of the financial crisis from falling on “the weak and the poor.”

3.0 Retirement plans of the individuals available in U.S

For many individuals, social security is the primary sources of retirement income. Keown (1998) states that 95 percent of all Americans are covered by Social Security and the size of the social security benefits is differ between one to another depends on the number of years earning, the average level of earning and an adjustment for inflation. Pension funds in the private and the government sectors collect pension contribution and invest them according to goals of the employees for their funds (Encyclopaedia of Business and Finance, 2007). U.S retirement plans for an individual can be classified into several categories which are defined benefit plans (employer funded pensions) and defined contribution plans (employer sponsored retirement plans) to those who work in private or public sector. There are also retirement plans for the self-employed and small business employees.

3.1 Defined benefit plans

Under defined benefit plan, employees receive a promised payout at retirement. Generally these plans are non-contributory retirement plans where the employer provides all the funds and the employee need not contribute, while contributory retirement plans in which the employee with the help of the employer, provides the funds for the plan. The advantage that defined benefit plans offer is that the employer bears the investment risk associated with the plan, which means the retirees still promised the same amount regardless of what the stock and bond markets do (Keown, 1998; Kapoor, et al., 2007). However, besides this traditional defined benefit plans, many companies started to switched to cash-balance plans where employees are credited with a percentage of their pay, plus a predetermined rate of interest rate (Keown, 1998).

3.2 Defined contribution plans

The other pensions plan namely defined contribution plan, this kind of pension plan bring either the employer alone or the employees and the employer together contribute directly to an individual account set aside specifically to the employees (Keown, 1998). This plans also sometimes called individual account plans. Generally defined contributions plans take one of the several basic forms, including profit-sharing plans, money purchase plans, thrift and saving plans, or employee stock ownership, and salary reduction or 401(k) plans (Keown, 1998; Kapoor et al., 2007).

In this plans, what the employees get is depends on how well the retirement account performs. Most of the defined contribution plans allowed the employees to choose how they would like the account to be invested. These kinds of plans involve no risk for the employer, thus employer pass the responsibility to the employees and don’t really care because their responsibility ends with their contribution.

3.3 Other retirement plans

In addition, the retirement plans for the self-employed and small business employees consists of three basic types of plans which are simplified employee pension plan (SEP-IRA), savings incentive match plan for employees (SIMPLE plan) and self-employed retirement plan (Keogh plan). Besides that U.S also provides individual retirement account (IRA) as another method to fund retirement, there are three types of IRAs which are traditional IRAs, Roth IRAs, and Cloverdell Education Savings Accounts (Keown, 1998).

However, despite of many retirement plans in the U.S, Weller (2009) statement are parallel with research done by Retirement Confidence Survey in answering how much have American workers saved for retirement? The result shown that many Americans have little money put away in savings and investments, “53 percent report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000. Twenty percent say they have less than $1,000 in savings”. Thus older workers tend to have more saved than younger workers, but overall savings levels tend to be modest.

4.0 Implication of world financial crisis on the retirement plans of the individuals

Poerio and Chapman (2009) reported that U.S pension plans have lost as much as 2 trillion in the current volatile market. Falling stock prices really affected the pension funds since majority of the pension funds are held in form of equities (Weller, 2008; Kansas, 2009; Mundell, 2009; Poerio and Chapman, 2009).

It is believed by Weller (2008) that the pension funds of Americans already bad before the crisis hit, he says that “retirement security has been growing concern for Americans for many years due to limited retirement plan coverage, little retirement wealth, and increasing risk exposure of the individual” (p.2). This means too few people in the Americans people are covered by a retirement savings plan at work. The spiral effect of the crisis not only impact the houses prices, but also affecting the American pension’s fund. Weller (2008) also sees that most of the American treats their home as their primary source of household wealth. Thus when the crisis hit, the declines in house price quickly decimate their wealth.

According to Munnel, Aubry, and Muldoon (2008), the financial crisis crystallized the differences between the traditional defined benefit plans and the defined contribution plan such as the 401(k) retirement plan since the 401(k) is where the individuals bear the risk, thus when the stock market collapse, they take immediate hit towards their retirement plan. Those who in this plans am about to retire less, or had to be re-employed after their retirement. Kansas (2009) feels the underscoring the anxieties that faced by the employees that about to retire and the younger employee who wonder whether is it still worthwhile to invest in stocks, the 401 (k) system puts too much burden to the people that it was suppose to help.

Amid the crisis, the public is worried about their retirement security in terms of their ability to afford a comfortable retirement. The April 2008 Gallop poll also concludes that the increasing of worries among the Americans in several matters such as will they have enough money for their retirement, will they able to pay their medical cost if serious illness or accident happens, and will they able to maintain their current standard living. This is why the public viewed retirement as a more important issue for Congress rather than the mortgage crisis, taxes or even education. The rising cost of necessities explains why both the retirement age and younger concerned about their retirement security (Weller, 2009). If this continues, surely people will tap their retirement plan even before the recession is over.

4.1 The fragility of the 401(k) plans

A 401(k) plan is a popular defined contribution plan in the U.S and can be defined as a tax-deferred retirement savings plan in which employees of private corporations may contribute a portion of their wages up to a maximum amount set by law. Moreover, employers may contribute a full or partially matching amount, and may limit the proportion of the annual salary contributed (Keown, 1998).

The fragility of the 401(k) plans, as the sole supplement to social security has been highlighted even before the financial crisis. Why the researchers concentrate into this plan mainly because most employees (the Americans) today have 401(k) as their primary or only plan (Munnel, 2009). In some cases, the companies force the employees to invest their 401(k) contributions to the employer’s stock in order for the employee to participate in an employer’s retirement plan (Madura, 2006). This action is not only unethical but also leaves the employee’s present and future wealth expose if the firm’s financial condition deteriorates.

The crisis dropped the 401(k) value up to 30 percent. This result due to people that losing their jobs and lead to a fewer contribution and more hardship withdrawals (Mundell, 2009). As mentioned by U.S Bureau of Labour Statistic, about 3.6 million people losing their jobs during the financial crisis. People without jobs could not contribute to 401(k) plans, while those with jobs are turning their 401(k) plans for help.

Besides that, Mundell (2009), Kansas (2009), Sallisbry and Buser (2009) realizes that companies that under pressure are suspending their matching contributions. In addition, some companies that are eliminating or curtailing the employer match entirely in the 401(k) plans which are General Motors, Cushman & Wakefield, Eastman Kodak, Vail Resorts, Saks, Sears Holding, Motorola, UPS, Hewlett-Packard, and National Public Radio (Kansas, 2009).

4.2 The needs to reconstruct U.S retirement security

“Don’t invest in something you don’t know” said billionaire, Warren Edward Buffett (Bianco, 1999). These words of wisdom reflects the consequences of what happens towards recent 401(k) litigation when participants suing the plan fiduciaries on the grounds that the participants were not adequately warn of the risk of the investing in certain stocks, or the employer inadequately monitored the investment performance of the funds available for the investment (Poerio and Chapman, 2009).

Obviously, the recent financial crisis has accelerated a re-examination of U.S retirement income system. It is inconsistent policy approach to try to introduce beneficial features from traditional defined benefit into 401(k) plan, while at the same time pursuing the same approaches that are harmful to the same defined benefit plans that are used as model for retirement savings. What the congress should do is to consider both strengthening the existing defined benefits plans and also try to improve the existing 401(k) plan. This suggestion parallel with what stated by Weller (2009) where he thinks that the public policy should strengthen the existing defined benefit plans that already do a good job of offering retirement security to American families, and policymakers should adopt policies that will allows plans that lack of important criteria to incorporate features that will bring them to closer to the ideal retirement plans. He before that stated that an ideal retirement plans should covers all these criteria which are broad-based coverage, secure money for retirement, portability of benefits, shared financing, lifetime benefits, spousal and disability benefits, professional management of assets, and lastly low costs and fees (Weller, 2009). This may sound idealistic, but it is not possible to build such retirement plans. Mundell (2009) and Weller (2009) both agreed that shore up the retirement current retirement income system, besides avoiding the further reductions in a Social Security, it is in need of introducing a new tier of retirement income.

If the Congress and the administration did not take this matter seriously, they will most likely see how American’s workers’ retirement security continue worsen since it has been declining for many years. Therefore, it is a must to improve retirement security by building a better defined contribution plan and strengthening defined benefits plan. Policymakers should take a pragmatic approach by considering all efficient policy options to rise retirement saving among the Americans.

5.0 Other possible avenues to prevent the deterioration of the retirement income

The retirement planning is a requirement, it’s also reflects good wealth management that are encourage in Islam. There are many other possible avenues that individuals can involves in to avoid the deterioration of their retirement income, ponder the retirement in advance so that the retirees won't feel rushed into making last-minute decisions when it's time to quit.

5.1 Understanding the fundamental principles in investment

The most important fundamental principles that could guide an individual in investment are by understanding the concept of asset allocation, diversification, and rebalancing. Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in individuals portfolio is differ from one person to another, depend largely on one’s time horizon and ability to tolerate risk. On the other hand, the practice of spreading money among different investments to reduce risk is known as diversification, the investors may be able to limit their losses and reduce the fluctuations of investment returns without sacrificing too much potential gain. The last important fundamental principles that investor should know is rebalancing, rebalancing basically means to bring the entire portfolio back to the investor original asset allocation mix in order to meet the investment goals, through rebalancing the investor could manage the portfolio so that it does not overemphasize one or more asset categories, and the investor could have a return portfolio with a comfortable level of risk (Keown, 1998; Kapoor, et al., 2007).

These above mentioned knowledge in investment is essential especially in the time of financial crisis. Many Muslim economist and renowned scholars like Chapra (2009) believes that Islamic finance is the best alternative towards the current economic crisis. This is due to the framework of Islamic economics that encourage risk sharing along with the availability of credit for primarily the purchase of real goods and services and restrictions on the sale of debt, short sales, excessive uncertainty (gharar), and gambling (maysir) that surely could help to inject a greater discipline into the economic system. Thus, the year 2009 is a milestone for Islamic banking where it passed the test of the crisis and proved its resilience and choosing Islamic products or type of investment may be the right choice. Even the Vatican's official newspaper, L'Osservatore Romano reported that the basic rules of Islamic finance could relieve suffering markets and particularly international financial systems (World Bulletin, 2009).

Abide by the fundamental principles that already explained, to avoid the deterioration of the retirement income through the practice of assets allocation, diversification and rebalancing is a must in an individual’s investment portfolios, in order to meet the retirement investment goals. Among the other possible avenues that are available as alternatives that could be think of are several Islamic products such as Islamic bonds or also known as Sukuk, Islamic Real Estate Investment Trusts (Islamic REITs), investment-linked takaful, and gold investment,

5.1.1 Islamic Bonds (Sukuk)

Since there are many Islamic banks started growing in the U.S, Islamic products should be the best alternative for the investors especially if it is regards to long term investment. Among the best choices are Islamic bonds or so called Sukuk, it is now one of the world fastest growing capital market products today. As what reported by the Islamic Finance Information Service, the average growth rate stands at 40% with the total volume issued amounting to USD82 billion in 2007. Sukuk are trust certificates or participation securities that grant investors a share of the asset along with the cash flow and risks that commensurate from such ownership.

Dawood (2009) also believes that U.S will become a leading target for sukuk issuers, and as familiarity with the asset class increases, the investor base will broaden. Thus sukuk is a better portfolio to be included in since it is one way of a long term investment that can be exercised by the retirees to make sure the availability of extra income during retirement period.

5.1.2 Islamic Real Estate Investment Trusts (Islamic REITs)

Real estate investment trusts (REITs) are collective investment vehicles that are typically in the form of trust funds which pool money from investors to buy, manage and sell real estate. Returns in Islamic REITs are generated from rental income plus any capital appreciation that comes from holding the real estate assets over an investment period (Rosly, 2007). Unit holders will receive their returns in the form of dividends or distribution and capital gains for the holding period.

Islamic REITs extend the lives of portfolios based on equity-oriented strategies, but provide even greater benefits. Moreover, specific types of investment in real estate, either directly or in securitized fashion (a diversified real estate fund), could provide steady retirement income while not running afoul of Shariah law.

5.1.3 Investment-linked takaful

Takaful (Islamic insurance) is a concept whereby a group of participants mutually guarantee each other against loss or damage. Each participant fulfils his or her obligation by contributing a certain amount of donation or known as tabarru into a fund, which is managed by a third party which is the takaful operator (Rosly, 2007). Moreover, an investment-linked takaful is one kind of family takaful plan that combines investment and takaful cover. With the monthly contribution, it gives the contributor a takaful coverage, which includes death and disability benefits, and also an investment in a variety of Shariah approved investment funds of the contributor’s choice (Nurdianawati, 2009).

Some of the advantages of holding a family takaful policy are that the participants can select the maturity date, profit sharing is according to the agreed ratio, and the policy can be terminated at any time. There are also exists some flexibility to change the premium paid, the period and the number of instalments in one year, and there is additionally exemption from income tax (Billah, 2003). Therefore, this could help the retirees to have an extra income when it comes to maturity period as well as gives them medical assurance especially during after their retirement period

5.1.4 Gold investment

Gold is largely seen as a safe haven from the volatile markets threatening to wreak havoc almost every other investment instrument known to men. Gold has always been the best means of storing wealth. The consistently stable purchasing power of Gold creates a strong foundation to ensure protection from currency speculation and the instability of paper currencies. Sykora (2009) reported that a portfolio manager of Tocqueville Gold Fund, saying that when investors don’t feel they can safely place their money into financial assets, gold is usually come to the top of the list of investment. Gold’s ‘perfect storm’ rages on especially when there has been a tremendous increase in the desire to hold physical gold such as coins or bars (Sykora, 2009).

Among the methods that can be use to invest in gold are by investing in gold bullions or coins, investing directly in the stock of gold mining company, or even to gold-related funds where it is invest partly in gold and the rest in related instruments but it is very volatile. Besides that, if the investors don’t have storage space for physical gold, investing and trading on physical gold stored in a vault is an alternative where some banks provide a gold passbook accounts. Those who want even more diversification into gold companies, an exchange-traded fund (ETF) will provide the cheapest way to buy into the gold bullion market. Lastly, gold structured products are themselves in the form of forwards or gold linked bonds and structured notes (Ming, 2009).

6.0 Conclusion

In a nutshell, for many people, the ideal retirement destination is the ultimate goals. The goal should be to accumulate the highest value of investments by retirement age. People may just question how much it would be consider being enough at the age of retirement and the amount is differ from one person to the other. But due to the impact of the world financial crisis, most of the people that nearing their retirement period may need to be re-employed or are forced to rely on grown up children. Therefore, to ensure this is not happen, it is important to plan for the retirement if the retirees want to be independent in the golden years. The choices for investments that available in the market are so wide, with careful research; all of the planning will surely pay off.
*Download full project paper (included the references used) here.
Ibn Yusof
16 July 2009 / 23 Rejab 1430

Wednesday, July 1, 2009

Mass Media: A Two-Edged Sword

Bermula dengan kelas Leadership and Management apabila kumpulan saya terpaksa membuat pembentangan berkenaan “Thinking Skills From Islamic Perspective”. Selepas itu, peluang yang diberikan untuk membuat pembentangan di Islamic Information Services (IIS) tatkala Enrichment Class menyebabkan saya sekali lagi memilih tajuk yang sama Cuma sahaja tajuk diubah kepada “Fikrah Islamiyyah”dan beberapa contoh dalam pembentangan berlaku sedikit penambah baikkan dengan memasukkan isu-isu semasa.

Saya kemudiannya merasakan idea tersebut perlu dikongsi dengan para pembaca blog, justeru saya menghasilkan artikel “Apabila dunia dihujani dusta” dan “Televisyen: Senjata Moden Perang Pemikiran” menggunakan beberapa idea yang telahpun dibentangkan kepada para pelajar IIS. Demi memastikan idea tersebut dapat disebar luaskan, Seminar Kebangsaan 2009 Media dan Pemikiran Islam USIM (MIST09) yang dianjurkan oleh Universiti Sains Islam Malaysia ini saya rasakan mampu untuk mengetengahkan idea saya yang telah melalui beberapa fasa pembentangan untuk dikongsikan bersama para akedemik dan mereka yang terlibat di dalam industri media secara langsung dan tidak lansung.

Dua abstrak bertajuk “Media Massa dan Serangan Pemikiran” dan “Penilaian dan Penyampaian Maklumat oleh Media dari Perspektif Islam” yang dihantar kepada pihak komiti MIST09 telah diluluskan, kedua-dua abstrak itu dikembangkan daripada idea dalam dua buah artikel yang disebut di atas dan akhirnya Berjaya disiapkan pada masanya. Kerjasama dengan Ustaz Razak yang merupakan seorang penulis bebes dan pengkhususan dalam bidang hadis dilihat penting bagi mengelak wujud paradigma yang berkerut jika pelajar ekonomi seperti saya membicarakan tentang perihal kesan media kepada akidah dan penilaian serta penyampaian maklumat mengikut kaedah emas hadis dan sebagainya. Kedua-dua kertas kerja itu diharap dapat membantu pihak media untuk lebih berwaspada dalam hal ehwal yang melibatkan akidah muslim yang semakin terhakis khususnya di Malaysia.

Dikongsikan bersama abstrak yang telah diluluskan dan akan saya pindahkan ke dalam bentuk PDF kelak untuk para pembaca muat turun insyaAllah:

Abstrak:Media massa dan serangan pemikiran

Media massa merupakan bukti kemajuan peradaban yang dianggap memainkan peranan yang penting dalam kehidupan seharian. Selaku medium penting dalam arus pembangunan kini, media sewajarnya digunakan sebagai pencerahan untuk menggilap pemikiran umat Islam. Walaupun diselangi dengan maklumat dan program yang bermanfaat seperti program-program agama, pendidikan, dan pengetahuan, tetapi peratusan program-program sebegini adalah sangat kecil berbanding program-program hiburan yang berlawanan dengan norma-norma agama. Pola fikir umat Islam kini diserabutkan dengan percampuran antara kebenaran dan kebatilan dalam maklumat dan program-program yang dihidangkan oleh media massa, terutamanya perihal penularan prinsip Machiavelli dan juga lambakan ideologi yang bercanggah dengan akidah dan syariat Islam dalam media massa dilihat semakin membimbangkan. Kertas kerja ini bercadang untuk melihat fenomena dan jenis-jenis serangan pemikiran melalui media massa dalam aspek akidah dan syariat Islam khususnya di Malaysia serta mencadangkan solusinya dari perspektif Islam yang boleh dilaksanakan bagi memantapkan fungsi media massa.

Kata Kunci: Media massa, Machiavelli, akidah dan syariat Islam,

Abstrak: Penerimaan dan penyampaian maklumat oleh media
dari perspektif Islam

Kesempurnaan ajaran Islam sebagai cara hidup merangkumi kesemua aspek dalam kehidupan seharian. Ajaran Islam yang berteraskan Al-Quran dan As-sunnah merupakan rujukan utama dalam pensyariatan Islam. Kedua sumber utama ini mengajar umat manusia dalam menjalani hidup bermasyarakat. Adapun kehidupan bermasyarakat tidak lekang daripada isu, gosip hinggakan adu domba antara manusia. Maklumat-maklumat yang bersangkutan dengan kehormatan orang lain menjadi komoditi perdagangan oleh media massa untuk meraup keuntungan dunia. Media pula selaku medium yang menerima dan menyampaikan maklumat seharusnya dibatasi dengan disiplin ilmu yang kukuh agar maklumat yang tersebar adalah adil dan telus. Kertas kerja ini bercadang untuk menelusuri kaedah penerimaan dan penyampaian maklumat oleh media dari perspektif Islam melalui neraca Al-Quran dan As-Sunnah yang boleh dimanfaatkan oleh media massa dalam usaha untuk menerima dan menyebarkan apa jua jenis maklumat agar ianya selari dengan ajaran Islam.

Ibn Yusof
1 July 2009 / 7 Rajab 1430
8.14 p.m