Ottoman Cash Waqfs: An Alternative Financial System.

• Author: Bulut, Mehmet
• Position: ARTICLE

Introduction

In our global world, the economic problems caused by the modern economic mind do not only affect the country where the crisis emerges. As the rate of integration in the global financial system increases, the rate of impact from crises also increases. Unfortunately, countries do not have alternatives to being in the global financial world. If they want to trade or take part in international organizations, it is imperative to be integrated into the network. Therefore, if a country wants to exist in the system, it has to bear all the negativities including financial crises.

Financial crises have many causes but perhaps the two most important reasons are the huge gap between the real money circulating on the market and the money that is considered as circulating, and the interest rate ideology which causes wealth to accumulate within certain peoples and groups. These fundamental problems are still obstacles to improving monetary distribution but despite this, institutions and states are not engaged in a "real" effort to tackle the financial problems caused by the system. The result is that capital owners have become the most important policymakers in the world, after the emergence of states with mercantilism in Europe in the 16th century, followed by capitalism which started with the Industrial Revolution. In a system where capital owners are so strong, it is naturally very difficult to combat the problems caused by interest, which is their main source of income.

This study aims to analyze the functioning of cash waqfs (CWs), which were able to meet both the charitable and financial needs of society for many years in the Ottoman period and to outline the solutions they can bring to present-day dilemmas. The Ottoman Empire, a Muslim state, solved social problems with mutual cooperation, solidarity, and assistance through the waqfs (charitable foundations), although they had not established an institution for zakat, giving a prescribed amount of your wealth in charity, a compulsory action of worship in Islam. (1) Therefore, the correct understanding of the Ottoman economic mind is also important for this analysis. The Ottoman Empire, for a long time, successfully resisted against institutions such as banks, the stock market, joint-stock companies, etc., that were produced by capitalism and the capitalist mind. One of the most important organizations for facilitating this successful resistance was the CWs. For this reason, the fundamentals which led to the success of CWs must be understood to enable us to produce solutions for modern financial problems. The CWs, which functioned properly within the framework of Islamic economics, in terms of their philosophy and functioning, became the pioneers of modern Islamic financial institutions. In this regard, the CWs can contribute to the development of Islamic finance today, which is an alternative solution to the current capitalist financial system. This study aims to show what the economic outlook and functioning of CWs can offer as an antidote to modern financial diseases.

Contemporary Financial Problems

To better understand the basis of modern financial problems, it is necessary to go to the era of mercantilism, which Adam Smith regarded as the forerunner of capitalism. This economic view advocates the idea that the power of countries is measured by the amount of gold and silver found in their treasuries. In other words, the richer country is the stronger one. The rationale of accumulation of wealth in certain individuals and institutions depends on the economic mind which emerged in this period. The amount of trade and the importance of trade increased, and while the need for money in the importing countries increased, precious metals such as gold and silver started to accumulate in the exporting countries. In this way, banking and financial institutions began to develop. In certain countries these developments led to the accumulation of gold and silver, of an amount which was already fixed in the market, while other countries became relatively poor. The countries that transferred the precious metals from undeveloped countries to Europe with their policy of colonization in doing so accumulated a huge amount of wealth which continued to rise with the Industrial Revolution. One of the institutions that emerged during this period was joint-stock companies. These companies, in which responsibilities correspond to their share, summarize the economic mind of the period. (2) Significantly, this economic mentality, which only aimed at increasing wealth, had begun to ignore basic human values. The modern economic system is the result of a philosophy based on material prosperity and the resulting financial problems are unfortunately affecting the whole world negatively. The mechanisms of creating money and an interest system with the desire of increasing wealth--where the financial system in based--are the main reasons for the financial crises. Hence, the solution of modern financial problems will not be possible only by financial measures but also by the redefinition of the structure of the economic mindset. The modern economic and social system, which imposes more individualization without socialization, also works against peoples' desire to help others. One of the ways to change this outlook is the waqf system which by its nature motivates people to help each other.

The Gap between Real Money and Bank (Fiduciary) Money

One of the most important problems of the modern financial system is the large gap between real money circulating on the market and the money that is supposed to circulate. The main reason for this anomaly is the money creation mechanism which is sustained by the debt-based financial system of banks. Banks can lend the money as a credit other than the money kept as a reserve at the central bank. The loan given is a deposit for other banks, which can then give credit from this deposit, except for the reserve ratio. At this point, the amount of cash that is available appears to increase in the balance sheets of banks. This process is a simple definition of money creation. So, it can be said that the central banks and commercial banks have a role in the money creation mechanism. (3) The process of this mechanism depends on the existence of interest in the system. The interest rate mechanism that makes money from money without any effort, continues to accumulate wealth in the hands of capital owners. As a result, income injustice increases. The interest payments make the rich richer and the poor poorer. (4) The interest income is paid to the capital owner continuously as rent on the capital which ultimately accumulates in certain persons or groups during this process.

The banks are the only financial intermediary institutions in the market because there are no suitable alternatives available. Since the targets within the capitalist system are to make a profit, the banks want to give out all the deposits they collect. The reserve ratio, which the central bank sets, determines how much of the deposits, that the banks have collected can be used as loans. When this rate is lowered, the amount of loans that the banks will give out from deposits increases. In this case, more money is generated than the tangible money (5) Figure 1 shows a simple example of money creation of banks at 10 percent reserve ratio set by the Central Bank of the Republic of Turkey (CBRT) when L100 is deposited.

The money creation mechanism creates a debt-based economy. A financial system in which borrowing with interest rate is more widespread than partnership models means that crises will emerge when the debts are not paid. As a result, the relationship between the real sector and the financial sector will deteriorate causing other problems in the economic system.

Disconnection between the Real Sector and the Financial Sector

The modern financial system, in which production-based financing and profit-loss sharing based partnership models are overlooked as they are not sufficiently profitable or dynamic, produces bubbles in the system and then financial crises occur. The latest financial crisis that the world witnessed, the 2007-2008 global financial crisis, was the result of the bubbles that were created by financial institutions whose appetite for profit destabilized the market. Although this crisis emerged in the United States, all the economies integrated into the global system were affected. The crisis spread in a short time through the domino effect and developing countries, like Mexico, South Africa, and Turkey, suffered especially. Although the pace of growth had slowed down, China and India were relatively less affected due to their production-based economies. (6)

In addition, the real sector and the financial sector have different approaches to capital. Capital is limited in the real economy because it depends on demand not supply. Buildings, equipment and other tools used for production are as valuable and important as capital in the real sector, because all of these directly contribute to the value-adding processes. As the volume of production increases, the producers need to use more capital. Even though the financial resources can be higher for investment, there will never be a high output in the financial system. Besides, the money that is saved for its own sake is worthless if it is not included in production. Savings are valuable only if they are to be used in production. Therefore, the excessive expansion of financial resources beyond the real needs of the real sector causes waste, even downsizing of the real sector. (7) The overgrowth of capital, not based on production, will prevent people from being involved in real production.

In addition, a financial sector that breaks off its relationship with the real sector becomes open to manipulation. Scandals, such as WorldCom, Enron, Madoff, Libor, and Olympus have cost billions of dollars to people...