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Using Islamic finance may have saved Hertz from filing for bankruptcy protection

THEY say hard times bring out the best and worst in people. Long queues at Labour Department offices, soup kitchens and homeless shelters have become common sights after Covid-19 unleashed its wrath.

Covid-19 has shown us the frailty of the life we live and of the system that the capitalist ideology has built. This is exactly what our society has looked for as long as we can remember — a constant tug of war between the capitalist class and the working class.

The capitalist class represents the rich capital owners, owners of large corporations and of vast investment wealth.

It subjects the working population by buying labour at the labour market to service its capital through vehicles called corporations. Corporations have to borrow money since they cannot raise all the capital they need from issuing shares which means that another capitalist, the creditor, now has a staked interest in the corporations.

Banks, large money managers and other non-financial institutions participate in funding corporations through debt and equity. This combination of owner and creditor capitalist interests is put to the test during times like these.

Capitalism has created a hostile system where a corporation is threatened with the proceeding of its creditors against it if doesn't meet their demands.

Corporations scramble to save on any expenses they can to meet their debt payments and often resort to the easiest way to cut costs, laying off their workers.

With virtually no bargaining power, there's nothing workers can do when creditor interests are threatened.

Capitalists come first. They built the system and set the rules. Without employment, the economy comes to a virtual halt, which only exacerbates the predicament of creditors.

Consider Hertz, a car rental business which has run a very successful model for over 100 years withering due to the rise of unique and formidable compe-titors, such as Uber, and the ultimate foe of traditional business, technology.

There's one such adversary that Hertz could never hope to stand against: its creditors — large banks and other major corporations that have lent Hertz huge loans which it has failed to repay.

On the evening of May 22, Hertz filed for Chapter 11 bankruptcy protection for its United States business.

The typical procedure requires the reorganisation of assets and debts and the liquidation of certain non-inventory assets, perhaps at large losses, for the creditors to recuperate some of their capital.

The layoff of thousands of workers should come as no surprise. The failure of Hertz demonstrates a fundamental flaw of the capitalist system: its tendency to decimate perfectly good businesses and decades' worth of progress, all for the capitalist to recover a meagre portion of its investment.

Islamic finance attempts to relink the financial system to the real economy, strike a fine balance between asset-based and debt-based finance, and establish justice in the economic system through arrangements that do not allow the capitalist to wield such unfettered power.

Without profits, financiers are disincentivised to loan and in-stead opt to invest in ownership.

Consider if Hertz had instead issued sukuk. Sukuk are essentially bonds, but which are not standing debt obligations.

Instead, they represent an investment in the ownership of the issuing corporation's assets which pay dividends. Sukuk are issued to raise capital which the investor pays and receives certi-ficates backed by the underlying assets, held by a trustee in the interest of sukuk holders.

Any proceeding against the issuer in the case of a failure would not necessarily be in the interest of the sukuk holders, especially if the business model, like that of Hertz, has worked for over 100 years! They may instead opt to allow the business to recover in hopes that the value of their certificates also recovers. Hertz could have been saved in this way.

Hertz is only a prelude to the great economic chaos that's
predicted to ensue as an inevitable consequence of the forces of Covid-19 and capitalism. While Islamic finance practice is far from ideal due to the pressures from the hegemony of conventional finance, it does provide an ideal solution, theoretically.

After 400 years of a failed capitalist experiment, it's only sensible that an alternative such as Islamic finance is considered.

The writer is a researcher in Islamic finance. He holds a BBA in Finance from the University of Toronto, a BA in Islamic law, and an MSc in Islamic finance from the International Islamic University of Malaysia

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