RECENTLY there was a flurry of news from Lebanon when a man entered a branch of the Federal Bank of Lebanon carrying a shotgun and a gas canister and threatened to kill customers and staff inside the bank and set himself on fire.
The incident ended when the man reportedly left the bank and turned himself in. Reports also say the bank gave him enough money to pay for his father's hospital expenses.
Interestingly, many Lebanese sympathised with the man even though he had threatened bank staff and other customers. What is more interesting is that the police have decided not to prosecute him.
The Lebanese police will have a hard time prosecuting the man because his motive was not to rob the bank but only to withdraw his savings of US$210,000 to pay for his bedridden father's hospital treatment. He had tried several times to do it peacefully but was not allowed by the bank. Finally, in desperation, he decided to act drastically.
This incident is one outcome of the severe economic crisis that has been going on in Lebanon since 2019. In that year, the value of the Lebanese currency plummeted, which in turn caused the inflation rate to soar and the country's economy to collapse. About three-quarters of Lebanon's population is now poor.
In the wake of this crisis, Lebanese banking authorities have imposed unofficial capital controls beginning in early 2019 by limiting currency withdrawals from banks and stopping the withdrawal of deposits in US dollars. Instead, depositors of dollars are only allowed to withdraw their savings after converting them into Lebanese pounds at a pitiful exchange rate - about 74 per cent lower than the market rate. This makes many Lebanese people so angry with the banking industry.
Some may ask if this situation can occur in other countries, including ours. The answer is yes. After all, since the beginning of the interest-based banking industry in Europe in the 18th century and the use of paper currency to replace gold and silver, banks were unable to allow all depositors to withdraw all their deposits at the same time.
The banking industry's primary business model is to lend money and profit from it, which is not allowed by Islam. In Islam, one is allowed to gain profit from actual trade or equity investments with risk elements and not from lending money.
Moreover, in pursuit of more profit, banks later gave loans in paper currency, which they could easily print and produce. The banks initially stated that paper currency was gold-backed. This system is called the `Gold Standard. But in reality, only a small proportion of the paper currency was backed by gold. If all the depositors wanted to convert all the paper money into gold simultaneously or withdraw all their deposits, the banks would be unable to accommodate the depositors' demand since the amount of gold in their possession was much smaller than the paper money. That is why there have been frequent banking crises in Europe since 1634. The most famous crisis at that time was the "Tulip Mania Financial Crisis".
But the greed of bank owners ensured that this system is maintained till today. Moreover, banks could give more loans and earn more profit when the 'Gold Standard' was officially dissolved in 1971 when the American authorities announced that they would no longer honour the promise to convert US dollars into gold.
The system has evolved further such that now, more than 95 per cent of the currency does not even exist physically but is merely electronic records created from thin air when commercial banks issue loans to their customers. So if a company or an individual takes out an RM1 million loan from a bank, then RM1 million of new Ringgit currency has been created electronically from nothing and does not even exist physically. As a result, all currencies worldwide, including our country, are no longer backed by any precious metal.
The central bank creates the physical paper and metal currency that some of us use to buy nasi lemak at roadside stalls. But the amount is tiny, less than five per cent of the total money supply in our financial system.
We all need to be aware of some adverse effects of this system. The first is that it is easy for banks to give loans since they do not need to have gold and silver or even cash to issue loans. All that is required is a banking license from the central bank. Because of that, our country's debt increases by more than RM 7 billion every month.
Another outcome is the high level of indebtedness in society. For example, in Malaysia, the total debts of the government, corporate, and household sectors are more than RM3 trillion. Worldwide, the total debt is more than USD 300 trillion. Imagine the amount of profit for the bank owner due to this debt.
Another outcome is inflation, which is the fall in the purchasing power of the currency over time over time. If the banks are allowed to give loans without any control, the problem of hyperinflation can occur, where prices will rise every few hours.
When employers are burdened with debt, salaries and wages tend to stagnate. A cost of living problem will occur when the inflation rate is higher than the increase in wages and salaries.
When a country is in a state of high indebtedness, any shock to the economy can produce an economic and financial crisis when households and business companies cannot pay their debts, which is happening in Lebanon right now. But this situation has also happened in other countries, including Greece and Argentina. Even the United States is not immune. The best example is the subprime crisis that occurred there in 2008.
Another outcome is a widening income gap between the poor and the rich. Those with low incomes are plagued with the problem of static wages and salaries because their employers want to reduce operating costs. However, the rich, especially the financial elites, will become more prosperous due to increased interest income.
Finally, if there is a crisis and many depositors want to withdraw their money in cash, a bank run will occur, where banks will not be able to fulfil their requests, as is happening in Lebanon now.
In conclusion, the financial system practised worldwide, including in Malaysia, will not be able to help create a fair and compassionate situation for the people. If this system is allowed to grow, more people will suffer. Intra and interracial conflicts will intensify. Political leaders may come and go, but the people's misery will continue unabated.
* Mohd Nazari Ismail is Honorary Professor at the Faculty of Business and Economics, University of Malaya
** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI
Prof Dr Mohd Nazari Ismail
Thu Sep 01 2022
Vehicles are seen outside the Federal Bank of Lebanon, after people who were held hostages exited the bank, in Hamra, Lebanon, August 11, 2022. - REUTERS filepix
ISIS Malaysia's perspective of Budget 2025
An excellent rakyat-centric budget under the overarching principle of a caring and humane economy.
Budget 2025: Record increase in STR, SARA aid initiatives
The government will provide a significant boost to the Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (SARA) initiatives next year.
Budget 2025: EPF contributions to be made mandatory for foreign workers – PM Anwar
The government plans to make it compulsory for all non-citizen workers to contribute to the Employees Provident Fund (EPF).
What policies to expect from Indonesia's new President Prabowo
Prabowo will be open to foreign investment, his aide has said, such as by offering investors management of airports and sea ports.
Budget 2025: Govt allocates RM470 mil to empower women's participation in PMKS
The Women's Leadership Apprenticeship Program will be intensified as an effort to produce more female corporate personalities.
Israel sends more troops into north Gaza, deepens raid
Residents of Jabalia in northern Gaza said Israeli tanks had reached the heart of the camp, using heavy air and ground fire.
Indonesia ramps up security ahead of Prabowo's inauguration
Prabowo Subianto will be sworn in as Indonesia's president on Sunday with Vice President-elect, Gibran Rakabuming Raka, also taking office.
Immediate allocation of RM150 mil for local authorities, DID to tackle flash floods
Datuk Seri Anwar Ibrahim said this allocation is intended to address the recent flash floods that hit the capital and several major towns.
Budget 2025: Sabah, Sarawak to continue receiving among highest allocations - PM
Sabah and Sarawak continues to be prioritised under Budget 2025, with allocations of RM6.7 billion and RM5.9 billion respectively.
NFOF will be operational in November 2024 with funding of RM1 bil
PM Anwar Ibrahim said NFOF will support venture capital fund managers to invest in startup companies with RM300 million set aside for 2025.
Minimum wage to increase to RM1,700 effective Feb 1, 2025
The Progressive Wage Policy would be fully enforced next year with an allocation of RM200 million, benefiting 50,000 workers.
Bursa Malaysia ends higher on Budget 2025 optimism
The benchmark index, which opened 1.85 points higher at 1,643.29, moved between 1,641.71 and 1,649.31 throughout the trading session.
Five important aspects relating to people’s lives in Budget 2025 - PM
The focus is on driving the MADANI Economy, speeding reforms, cutting red tape, raising wages, and tackling the cost of living.
Economic outlook: Govt plans to leverage, expand existing city transit system
The expansion aims to provide a more efficient and reliable public transportation network, reduce congestion, and improve accessibility.
Economic outlook: Budget 2025 to lay foundation for a digital-driven economy
The report said Budget 2025 will entail efforts to position Kuala Lumpur as a top 20 global startup hub by 2030 through the KL20 initiative.
Economic outlook: Corruption and lack of accountability hinder economic progress
Special Cabinet Committee on National governance is established to curb corruption, law reforms to modernise outdate regulations, MoF said.
National Wages Consultative Council will be strengthened
The govt will also incentivise hiring women returning from career breaks, offer job matching and improve care services facilities.
Economic outlook: Ensuring 11 years of compulsory education for all children
Budget 2025 will continue prioritising upskilling and retraining initiatives to equip workers with the latest skill sets necessary.
Consolidated public sector projected to record lower surplus of RM41.7 bil 2024
The MoF said the consolidated general government revenue is estimated to increase slightly to RM384.7 billion in 2024.
PM announces substantial Budget 2025 hastening Malaysia to become Asian economic powerhouse
Datuk Seri Anwar Ibrahim said it would create jobs and also tackle financial leakages to enhance public spending efficiency.