A large number of banks have gone bankrupts due to loan losses or credit losses.But where does the money vanish ? Let me make it simple for my readers. Suppose if you put $1000 in a bank. As per the rule (with a little difference here and there, the bank cannot trade with your entire money, so it has to keep atleast 10 % ) The bank will keep $100 and it will lend out the remaining $900. Then I will apply for a loan and get $ 900.. But that is your money, right ? I may not pick up the money so it remain there in my account, but in the bank's ledger the amount is now $1,900 !!! Then Robert applies for a loan, so he get from my $900, so he get $ 810, but he too does not require it now so he sticks it inthe bank. There fore in the Bank's ledger it is now 1710... and this goes on till your money is counted as $10,000 in the ledger but actually it is only $1000.
It means there is no new wealth actually, unless every single money is paid back with interest. But we all know that not loans are paid back, and this is a global financial epedemic of not repaying your loans. And in the current crisis, many many loans aren’t being paid back – which means that dollars are out there that shouldn’t be out there – they are supposed to be representing wealth, but that wealth doesn’t exist, and never will, so the result is the inflation of the currency. This problem is created because of the “easy money” (banks can lend out almost an endless supply, so they do), so investors and loan recipients take unreasonable risks, and end up creating a buying/selling craze (like the recent housing bubble). An even worse result is that once the banks teeter on the brink of failure, the government swoops in and bails them out (which the banks knew the government would do – which is why they played games with our money) – with your money. Our money.
Conventional banks are the biggest culprits of present money crises. Look at another example. You are a middle class person who dreams of buying a house. So you put your wealth in fixed deposit for a few years hoping the wealth to grow and you can afford to buy a house. There are hundreds of depositers likes you. What does the bank do with your money ? After all it has to pay big fat heavy salaries to its caravanic staff. So they will approach a builder. The builder is running short of money to errect his structure. So he has two options.
1. To sell his products quickly with a little margin like other products (grains, vegetables...)
2. Take a loan from the bank and complete the project without selling his product at a lesser price. This is more beneficial for him. There fore he takes a loan from the bank which was actually your money. So he waits for customers who can pay him more. Now you cannot buy that house because it is expensive, more than your savings plus interest.
So the bank comes to you again offering you EMI, Easy Money Installment. You are told that you will have to pay easily for next 220 months and own our house. And you fall for that. So your deposit is now mortgaged as a guarentee. In the end, the builder becomes richer and you have to slought for 220 months to own that flat which is actually bought by your own money via a housing loan and interest.
One day you come to know that there are hundreds of defaulters who have not repaid the loans, so the bank does not have money to pay salary and the rent of huge offices and other bills. This is what has happened in global economy where besides individuals and companies, even nations and states are on the verge of bankruptsy...
Author: Nisaar Nadiadwala speaks and writes on socio-educational issues from Islamic perspective. He can be reached at firstname.lastname@example.org