Qur’anic Guidance and American Financial Enterprise

Abstract

This chapter presents a paradigm of failure for American financial enterprises. The core of the paradigm is the assumption of debt under conditions of poor quality income with which to pay the debt. This creates a condition of “fracture criticality” for the company, a condition where a small negative occurrence can trigger collapse of the enterprise for lack of resiliency. Too much debt and too little reliable income creates the potential fracture of the enterprise. The aspects of poorly assumed debt which lead to critical vulnerability are too much and too short term. In the financial crisis of 2008, the prominent American firms which failed were Bear Stearns, Lehman Brothers and AIG. Previously, Enron had failed from similar causes. Additional components of the paradigm of failure were: executive compensation incentives, and weak boards of directors which ignored their fiduciary responsibilities of loyalty to the long term interest of the company and due care in assuming debt and taking risks. Failure under this paradigm could have been avoided if Qur’anic guidance in governance had been followed. First, good stewardship under the standard of Khalifa would have avoided the excessive assumption of debt, short-term debt, poor quality collateral for the debt, permissive compensation focusing on short term returns, and breaches of fiduciary duty. The fiduciary obligations of Khalifa are reinforced by holding corporate power as an amanah, a trust. Third, use of itjahad and shura would have turned corporate boards towards more study of risks and taking into account a wider range of knowledge and opinion as to prudent conduct. Finally, awareness of the Qur’anic vision of fitra or a moral nature would have enhanced the taking of measures to offset abuse of agency authority by selfish agents.