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Understanding the Current U.S. Economic Crisis and it Impact on Muslims

Orginal Published in Islamic Horizons, Mar-Apr, 2009.

The State of U.S. Economy

On the verge of taking over the Presidency of the United States of America, Barack Obama described the U.S. economy as "very sick" with the situation "getting worse." This worry is best reflected in the fact that U.S. unemployment rate now stands at 7.2 percent, the highest level in the past fifteen years. In 2008, 2.6 million Americans lost their jobs, the highest number in over half a century. Although the U.S. remains the largest economy of the world with a GDP of over 14.3 trillion dollars, it is also reeling from record national debt of 10.6 trillion dollars with 28 percent of that debt being held by foreigners namely Japan, China, U.K., Brazil and the oil exporting countries of Saudi Arabia, UAE, Qatar, etc. In addition, the U.S. budget deficit, which is the difference between what the U.S. government brings in through taxes and what it spends, stands at nearly 455 billion dollars and is expected to be over one trillion dollars (some estimates projecting 2 trillion) in 2009. With the private sector spending slowing down the U.S. government is forced to deficit spend even more with the expectation that the spending will ease unemployment and stimulate a slowing economy. In the last quarter of 2008, the U.S. economy contracted by an annual rate of 5 percent and could shrink by the same amount this quarter. Adding to the grim news is the finding that U.S. manufacturing activity fell to its lowest level in nearly three decades. Compounding the worry is the concomitant fall in global manufacturing.

The Stock Market as a Leading Economic Indicator

Stock markets are regarded as a leading indicator of economic health. Investors in the U.S. stock market lost staggering amounts of money with some estimates putting those losses at $6 trillion. To truly gain an appreciation of how mind-boggling this loss is consider the following fact - between December 1996 and May 2007, the Dow Jones Industrial Average (DJIA is the most popular indicator of U.S. stock market health) had nearly doubled. A year and a half after that high-point the DJIA has lost half its value!. It took the market nearly a decade to double and only eighteen months to give back half its gains! See figure 2 to more details.


The news from around the globe is no better. In 2008, Germany's DAX 30 index lost 30 percent, Tokyo's Nikkei 225 index fell 35 percent, Shanghai's SSE plunged by 59 percent, Kuwait dropped 36 percent, UAE's DFM stocks shed 72 percent of their value and India's Sensex index dropping by 45 percent. Moscow saw the value of their shares decline by more than 70 percent. The Moscow stock exchange even had to be temporarily closed to prevent it from collapsing altogether. In November, a local court ordered the closure of Kuwait's stock exchange after investors complained that the government had not taken enough measures to stem heavy stock market losses, which had fallen 43 percent since June. No trading center has escaped the turbulence. Its impact keeps cascading from bank to bank, company to company, country to country.

Shariah Compliant Finance

In this financial carnage, the Shariah-based investment industry provides a silver lining. Currently it has assets globally worth U.S. $700 billion and is expected to double to $1.4 trillion by 2010. Shariah-based financial products are very much like the socially responsible investment sector, which in the U.S. has nearly 3 trillion dollars worth of financial assets under management. The Shariah-based financial products are far less leveraged (debt) than regular portfolios. During a period where the banking and financial sector has been among the worst performing sector of the market, this attitude towards not investing in interest-based assets and companies, have allowed Shariah based products to do well. In addition, Shariah-based products do not invest in businesses with significant interests in alcohol, tobacco, gambling, pornography and conventional banking. The fact that Islamic Banks are generally viewed as less risky than conventional western banks (partly due to the fact that Islamic banks are not as leveraged as their western counterparts), suggests that Islamic financial institutions are likely to grow as people (not necessarily only Muslims) look for less risky investments in this environment.”


In the U.S. there are 5 major Shariah compliant mutual funds. The Iman fund offered by Allied Asset Advisors, two Amana funds offered by Saturna Capital and two Azzad funds offered by Azzad Asset Management. Taken as a composite category, the Shariah based funds in general outperformed the three major bell-weather U.S. stock indexes (S&P 500, DJIA and NASDAQ). The two Amana funds in particular had stellar performance in 2008 dropping 15 percent less in value than the overall U.S. market. In 2007 all 5 funds outperformed U.S. market averages. This has attracted the attention of mainstream U.S. media. Speaking to the Washington Post Amana's manager, Nicholas Kaiser said, that the fund is attracting not only Muslims but also people of other faiths. About half of the 70,000 investors who buy the funds through financial advisers aren't Muslim. An additional 17,000 shareholders have bought the funds directly. In addition Amana Income Fund (AMANX) is now the top rated fund the large value category for both the past 5-year and 3-year performance. In each of the last 5 years

Year DJIA S&P 500 NASDQ
2007 6.43% 3.52% 9.81%
2008 -33.84% -38.49% -40.54%

Despite the success of Shariah based products, the general drag on the U.S. and world economy will also affect the Muslims. Moody's rating agency is reporting that the growth in Islamic banking assets will slow down sharply in 2009 to around 10-15 percent rate compared to the recent growth rate that averaged 20-30 percent. Like other investment houses, Shariah compliant portfolios will have to seek better ways to diversify their risks including seeking investments in Islamic-derivative products and bonds (sukuk), which are all in early stages of development.

Impact on American Muslims

The impact of economic crisis on American Muslims is varied. Acknowledging the paucity of actual data that measures the attitudes of American Muslims to the current economic crisis, the analysis will thus be anecdotal and correlation based. According to a study by Allied Media Corporation (www.allied-media.com/AM/) American Muslims make up about 2 percent of the U.S. population but they tend to be more educated 6 in 10 American Muslims having Bachelor's degree or higher (compared to 4 in 10 Americans with a Bachelor’s degree or higher). American Muslims also tend to be younger. 67 percent of adult American Muslims are under 40 years old while 33 percent the adult American population is under 40 years old. Finally, American Muslims on average earn above the U.S. average income. Among the top three professions for American Muslims are engineering, medicine and information technology.
Top 10 Occupations of American Muslims
Rank Occupation Percent
1 Student 20.2
2 Engineer 12.4
3 Physician/Dentist 10.8
4 Homemaker 10.0
5 Programmer 7.0
6 Corporate Manager 6.4
7 Teacher 6.4
8 Small Business Owner 4.4
9 Researcher 4.1
10 Admin. Assistant 2.8
Total 84.5
Source: Cornell University April 2002

The job losses for 2008 were across the board with construction, housing and the financial sectors being hit the hardest. Manufacturing, which has been declining for years is seeing even bigger job losses as companies struggle to get loans and consumers cut back on their expenditure. However, in this gloom the silver lining comes from the health care, mining and education sector. Thus, given the preponderance of health care and information technologist in the Muslim community, the economic crisis will have a lesser impact on this strata of the community. On the other hand, with manufacturing slowing down, American Muslim engineers will feel the impact like the rest of the country.

American Muslims students will face the adverse impact of the economic crisis from as financial aid in the form of scholarships and graduate assistantships will be significantly cut-back as more and more states are facing budget crisis (in Florida for example the state is facing a over 2 billion dollar shortfall). Also given the high percentage of American Muslim households being single earner families (homemaker ranking #4 as an occupation), the impact of a job loss on American Muslim families could be devastating. American Muslim charitable institutions need to plan for such contingencies.

On the investment side, more American Muslims are choosing shariah compliant investment products as seen from the increase in the fund flows into mutual funds like Amana. In all major Islamic conferences, Amana, Iman and Azzad are quite ubiquitous, indicating greater demands from the community. These funds are also advertising heavily in American Muslim publications like Islamic Horizons, Message etc. Given the stellar performance of the shariah compliant sector in the last 3-5 years (see Table of "Islamic" funds and Index averages above), the investments of the American Muslim community fared above the national averages.

Finally, fewer American Muslims were the victims of the housing bubble, partly due to the fact that the speculative nature of the housing boom is viewed as being against shariah principles and also partly due to the fact that many Muslims prefer to take mortgages from shariah compliant outfits like Guidance, American Finance House Lariba, which generally eschew mortgages for investment purposes.

Conclusions

American Muslims like the rest of their fellow Americans will bear the brunt of the financial and economic crisis that is gripping the country and now circling the globe. However, given the preponderance of certain professions like health care within the community, American Muslims in general will have a softer landing. Also, American Muslims can significantly benefit from the economic stimulus package that President Obama is seeking, which is heavily geared towards projects related to infrastructure development. Given the high concentration of engineers in the American Muslim community, this augurs well for the community as infrastructure projects will need engineers.

The current economic crisis reminds us in no uncertain terms how the fate of different communities and societies are increasingly dependent on the well being of others. In an increasingly globalized world, it is hard to separate the happiness of one group from that of others. The underpinning of any sound economic system has to be geared towards the idea of common good, which is deftly articulated in Adam Smith's Theory of Moral Sentiment, "All members of human society stand in need of each other’s assistance, and are likewise exposed to mutual injuries. Where the necessary assistance is reciprocally afforded from love, from gratitude, from friendship and esteem, the society flourishes and is happy. All the different members of it are bound together by the agreeable bonds of love, affection and are, as it were, drawn to one common center of mutual good offices.”

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