Strengthening Financial Stability through Deposit Insurance Scheme
Columns
IKANYENG SEGONETSO
If a bank collapses today, beyond interventions that may include management takeover by the regulator and perhaps bail out by the government, what compelling mechanisms of recourse could be promulgated in the 21st century where banks can have a fair share of the bailout with little to no knock-on effect on the tax payers’ funds?
In the current regulatory environment, are depositors’ funds guaranteed in the likely event that a particular bank goes bust? Do regulators have unambiguous resolution framework that provides for reimbursement of depositors in the event of a bank failure? These are some of the hotly debated topics in recent times particularly after the global recession. The aftermath of the 2007/2008 global financial crisis has brought with it a plethora of regulations laced with a layer of fees particularly in the banking sector, a phenomenon that is supposedly aimed at minimizing idiosyncratic risks in the banking system, with the initial objective of protecting tax payers’ funds used to bail out banks in financial distress.
Since the 2007/2008 episode, regulators have not only focused their efforts on the asset and the liability side of the balance sheet, but also the equity portion. They have consistently dished out a menu of advanced rules in an attempt to overhaul measurement methodologies used to effectively proxy, with a higher precision, risk quantification on written assets of the banks with a further microscope on off-balance sheet activities.
Constant accounting and regulatory changes remain the biggest threat to the viability of the banking business, with the banking sector arguably leading the pack as one of the most regulated industries, perhaps only after the pharmaceutical industry. Whilst there has been talks and discussions around the implementation of IFRS 9(the accounting standard is expected to impair banks’ capital adequacy ratios by 60bps and an estimated 18% increase in provisions – topic for another day), the buzz word now in the South African financial markets, and indeed other emerging markets, is deposit insurance scheme (DIS). At a very high level, deposit insurance scheme refers to the complete set of legal, operational and financial arrangements that should be in place to facilitate efficient, transparent and fast protection and/or compensation of covered deposits in the event of a bank failure.
A little over five months ago, the South African Reserve Bank (SARB), National Treasury and their counterparts proposed an establishment of an explicit deposit insurance scheme for South Africa aimed at creating a safety net framework for deposit holders should the banks fail. This new development followed key findings from the World Bank’s Financial Sector Reform and Strengthening Initiative Programme as well as the reviews from International Monetary Fund’s Financial Sector Assessment Programme.
On this basis and in part from the review of South Africa’s resolution framework, and given the failure of several banks in South Africa, the National Treasury and the SARB have decided that the country needs an explicit and privately funded deposit insurance fund that can reimburse depositors in the event of a bank failure or that can assist in funding the chosen resolution option. As reported by the news portal IOL, Saambou was placed under curatorship in 2002 and African Bank (Abil), which did not take deposits, collapsed three years ago after R8.5bn black hole. IOL further states that the core challenges of Abil were that is granted too many loans to people who could not afford to pay them back. When borrowers failed to honor their obligations, the bank was left with a massive hole in the balance sheet. However, the South African Reserve Bank (SARB) stepped in to save the bank.
In May this year, the SARB published for public comment, a discussion paper specifically dealing with deposit insurance scheme for South Africa. A process to reach agreement on the funding mechanism of such a scheme is currently being undertaken by officials at the SARB in consultation with the banks, the general public, academics and the banking industry experts. The objective of the exercise is to set up a level playing field where deposit holders could comprehend features of protection afforded to them in the so called “explicit guarantee” and to quell expectations that government will always implicitly protect their deposits in the event of a banking crisis.
In the proposed DIS which is also applicable to all the banks, deposits up to a limit of R100 000 per individual, and up to R100 000 per all non-financial, non-government entities would be guaranteed. It would be applicable to all types of accounts through an aggregate, single customer view. Essentially this means that if an individual has R70 000 in a cheque account and R30 000 in a savings account at a certain bank, the entire collective amount up to a threshold of R100 000 would be covered under the scheme.
The same would apply for that individual’s accounts at another bank, and each respective bank they keep deposits with. In the likely event that a bank enters distress or gets liquidated through insolvency proceedings, depositors’ money would be guaranteed by the scheme. Again, the guarantee means that depositors can withdraw their money even if their bank fails. This assurance is intended to give the customers security about their savings so that in the event of rumors of a bank collapse, they do not run helter-skelter and withdraw their funds haphazardly.
Some of the key features of the proposed deposit insurance scheme are as follows:
The scheme will be a separate legal entity with its own legislative framework and governance requirements, but it will be physically located in the SARB.
The scheme will cover bank deposits up to R100 000 per depositor per bank. If the scheme does not have sufficient funds to cover deposits, the SARB will provide a funding line to the scheme for emergency funding purposes. This emergency funding will be covered from liquidation proceeds and contributions by the remaining banks.
Where the owner of an account can be identified easily (for example, single accounts and joint accounts), the scheme will pay out depositors within 20 working days after a bank’s deposit accounts have been closed. It may take longer for the scheme to pay out the holders of accounts who cannot be identified easily (for example pooled accounts).
It will be compulsory for all the registered banks to belong to the scheme. The scheme would be consulted whenever the SARB receives an application for a new banking license.
The following rules are proposed with respect to deposit coverage:
Small and medium enterprises (SMEs) are generally covered. Because of the difficulty in distinguishing between SME and non-SME businesses, the recommendation is to cover all private non-financial business entities up to the coverage limit, regardless of the size of their deposits or their legal identity.
Foreign national’s deposits and foreign currency deposits held at domestic branches of South African banks will be covered
Deposits will be covered on a gross basis or net basis. Gross coverage ignores any amounts that the depositor may owe the bank, while net coverage entails deducting from the deposit the amounts borrowed from the bank.
Deposits at foreign branches and subsidiaries of South African banks abroad will not be covered Pooled accounts will be treated as a single account, except in the case of pooled accounts where professional practitioners hold deposits on behalf of clients.
In the case of a joint account, each account holder will be covered separately, up to the cover limit. The deposit balance will be split equally between the account holders, unless the underlying documentation specifies a different arrangement. The following deposits are excluded form coverage: deposits by banks, deposits by the non-bank private financial sector, including money market unit trusts, non-money market unit trusts, insurers, pension funds, fund managers and other private financial corporate sector institutions, deposits by government and quasi government related institutions, bearer deposit instruments such as negotiable certificate of deposit (NCDs) and promissory notes (PNs).
The SARB strongly believes the above structure would ensure that the cost of a bank failure, in particular, does not fall disproportionately on the most vulnerable consumers, or those who are least able to protect themselves through diversification, hedging, financial structuring or other sophisticated risk-management measures. It is widely believed that DIS is a necessary complement to prudential regulation and supervision on capital requirements chiefly because banks take on substantial risks when they are leveraged. In that sense, the banks are required to contribute to deposit insurance by paying their fair share in capitalizing the scheme without having to incur further costs, a phenomenon that may negate the intended purpose.
How can it be possible for banks to fund the scheme without necessarily incurring further costs? In a carefully designed strategy, the SARB proposed a partially pre-funded approach for the DIS, with the central bank providing the required liquidity in a payout and additional emergency funding in the event of shortfalls. According to their calculations, the pre-funded portion of the scheme would need to be about 5% of the deposits in the banking sector as it currently stands, which translates into a fund of circa R17 billion which the SARB intends to administer in-house.
How this is funded still needs consultation with players in the banking sector, but in order to alleviate this initial funding cost, the SARB is willing to consider lowering the cash reserve requirement (CRR) from the current 2.5% to 2.0% of liabilities, as adjusted, which will release circa R17 billion funding requirement for the DIS. Once this one-off adjustment is implemented, banks will be required to maintain a CRR of 2.0% and a separate DIS requirement of 5.0% of covered deposits.
A major concern with regards to DIS framework is that explicit deposit protection could result in excessive risk taking by institutions and depositors, otherwise referred to as moral hazard in which banks could engage is risky behavior knowing that there is insurance cover. Even though regulators could have a hard time singling out moral hazard, banks would remain subject to stringent regulation and supervision in which regulatory penalties would be expected to be imposed on banks that take on more risk.
In Botswana where banks are highly capitalized at a consolidated level and as characterized by less levered balance sheets, and low savings levels, DIS framework might not be an immediate need, but as Basel III regulations kick in, specifically regulatory framework that deals with funding and liquidity requirements (liquidity coverage ratios, net stable funding ratios, and leverage), DIS might be warranted. Transformation of the deposit franchise from wholesale contractual savings dominated by pension funds and fund managers to more behavioral savings on the part of retail consumers would further put pressure on the need for such a scheme as savings level go up and financial inclusion gets more pronounced.
One might argue that local banks can be bailed out by their parent holding companies offshore, however, such a resolution in a wind-up scenario could proof difficult for regulators, especially the validity of the legal recourse. For example, in the proposed DIS for South Africa, deposits at foreign branches and subsidiaries of South African banks abroad are not covered.
Additionally, establishment of more indigenous banks and the exponential growth of savings and credit co-operative societies (SACCOS) would require policy makers to set up and/or review the resolution framework to protect less financially sophisticated depositors in the event of a bank failure, thereby providing a reprieve on tax payers’ funds. As this DIS takes shape in South Africa and other emerging markets, there are so many important lessons to be learnt by regulators, the government, academics and banking sector experts in the discourse of strengthening financial stability.
Ikanyeng Segonetso writes from Johannesburg
Feedback: concerned_4life1@hotmail.com
Columns
THE KEY TO HAPPINESS
Speaking at a mental health breakfast seminar last week I emphasised to the HR managerial audience that you cannot yoga your way out of a toxic work culture. What I meant by that was that as HR practitioners we must avoid tending to look at the soft options to address mental health issues, distractions such as yoga and meditation. That’s like looking for your lost bunch of keys, then opening the front door with the spare under the mat. You’ve solved the immediate problem, but all the other keys are still missing. Don’t get me wrong; mindfulness practices, yoga exercise and taking time to smell the roses all have their place in mental wellness but it’s a bit like hacking away at the blight-ridden leaves of the tree instead of getting to the root cause of the problem.
Another point I stressed was that mental health at work shouldn’t be looked at from the individual lens – yet that’s what we do. We have counselling of employees, wellness webinars or talks but if you really want to sort out the mental health crisis that we face in our organisations you HAVE to view this more systemically and that means looking at the system and that starts with the leaders and managers.
Now. shining a light on management may not be welcomed by many. But leaders control the flow of work and set the goals and expectations that others need to live up to. Unrealistic expectations, excessive workloads and tight deadlines increase stress and force people to work longer hours … some of the things which contribute to poor mental health. Actually, we know from research exactly what contributes to a poor working environment – discrimination and inequality, excessive workloads, low job control and job insecurity – all of which pose a risk to mental health. The list goes on and is pretty exhaustive but here are the major ones: under-use of skills or being under-skilled for work; excessive workloads or work pace, understaffing; long, unsocial or inflexible hours; lack of control over job design or workload; organizational culture that enables negative behaviours; limited support from colleagues or authoritarian supervision; discrimination and exclusion; unclear job role; under- or over-promotion; job insecurity.
And to my point no amount of yoga is going to change that.
We can use the word ‘toxic’ to describe dysfunctional work environments and if our workplaces are toxic we have to look at the people who set the tone. Harder et al. (2014) define a toxic work environment as an environment that negatively impacts the viability of an organization. They specify: “It is reasonable to conclude that an organization can be considered toxic if it is ineffective as well as destructive to its employees”.
Micromanagement and/or failure to reward or recognize performance are the most obvious signs of toxic managers. These managers can be controlling, inflexible, rigid, close-minded, and lacking in self-awareness. And let’s face it managers like those I have just described are plentiful. Generally, however there is often a failure by higher management to address toxic leaders when they are considered to be high performing. This kind of situation can be one of the leading causes of unhappiness in teams. I have coached countless employees who talk about managers with bullying ways which everyone knows about, yet action is never taken. It’s problematic when we overlook unhealthy dynamics and behaviours because of high productivity or talent as it sends a clear message that the behaviour is acceptable and that others on the team will not be supported by leadership.
And how is the HR Manager viewed when they raise the unacceptable behaviour with the CEO – they are accused of not being a team player, looking for problems or failing to understand business dynamics and the need to get things done. Toxic management is a systemic problem caused when companies create cultures around high-performance and metrics vs. long-term, sustainable, healthy growth. In such instances the day-to-day dysfunction is often ignored for the sake of speed and output. While short-term gains are rewarded, executives fail to see the long-term impact of protecting a toxic, but high-performing, team or employee. Beyond this, managers promote unhealthy workplace behaviour when they recognize and reward high performers for going above and beyond, even when that means rewarding the road to burnout by praising a lack of professional boundaries (like working during their vacation and after hours).
The challenge for HR Managers is getting managers to be honest with themselves and their teams about the current work environment. Honesty is difficult, I’m afraid, especially with leaders who are overly sensitive, emotional, or cannot set healthy boundaries. But here’s the rub – no growth or change can occur if denial and defensiveness are used to protect egos. Being honest about these issues helps garner trust among employees, who already know the truth about what day-to-day dynamics are like at work. They will likely be grateful that cultural issues will finally be addressed. Conversely, if they aren’t addressed, retention failure is the cost of protecting egos of those in management.
Toxic workplace culture comes at a huge price: even before the Great Resignation, turnover related to toxic workplaces cost US employers almost $50 billion yearly! I wonder what it’s costing us here.
QUOTE
We can use the word ‘toxic’ to describe dysfunctional work environments and if our workplaces are toxic we have to look at the people who set the tone. Harder et al. (2014) define a toxic work environment as an environment that negatively impacts the viability of an organization. They specify: “It is reasonable to conclude that an organization can be considered toxic if it is ineffective as well as destructive to its employees”.
Columns
Heartache for Kelly Fisher
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o date, Princess Diana, General Atiku, had destroyed one marriage, come close to ruining another one in the offing, and now was poised to wreck yet another marriage that was already in the making. This was between Dodi Fayed and the American model Kelly Fisher.
If there was one common denominator about Diana and Dodi besides their having been born with a silver spoon in their mouths, General, it was that both were divorcees. Dodi’s matrimonial saga, however, was less problematic and acrimonious and lasted an infinitesimal 8 months. This was with yet another American model and film actress going by the name Susanne Gregard.
Dodi met Susanne in 1986, when she was only 26 years old. Like most glamourous women, she proved not to be that easy a catch and to readily incline her towards positively and expeditiously responding to his rather gallant advances, Dodi booked her as a model for the Fayed’s London mega store Harrods, where he had her travel every weekend by Concorde. They married at a rather private ceremony at Dodi’s Colorado residence in 1987 on New Year’s Day, without the blessings, bizarrely, of his all-powerful father. By September the same year, the marriage was, for reasons that were not publicised but likely due to the fact that his father had not sanctioned it, kaput.
It would take ten more years for Dodi to propose marriage to another woman, who happened to be Kelly Fisher this time around.
DODI HITCHES KELLY FISHER
Kelly and Dodi, General, met in Paris in July 1996, when Kelly was only 29 years old. In a sort of whirlwind romance, the duo fell in love, becoming a concretised item in December and formally getting engaged in February 1997.
Of course the relationship was not only about mutual love: the material element was a significant, if not vital, factor. Kelly was to give up her modelling job just so she could spend a lot more time with the new man in her life and for that she was to be handed out a compensatory reward amounting to $500,000. The engagement ring for one, which was a diamond and sapphire affair, set back Dodi in the order of $230,000. Once they had wedded, on August 9 that very year as per plan, they were to live in a $7 million 5-acre Malibu Beach mansion in California, which Dodi’s father had bought him for that and an entrepreneurial purpose. They were already even talking about embarking on making a family from the get-go: according to Kelly, Dodi wanted two boys at the very least.
Kelly naturally had the unambiguous blessings of her father-in-law as there was utterly nothing Dodi could do without the green light from the old man. When Mohamed Al Fayed was contemplating buying the Jonikal, the luxurious yacht, he invited Dodi and Kelly to inspect it too and hear their take on it.
If there was a tell-tale red flag about Dodi ab initio, General, it had to do with a $200,000 cheque he issued to Kelly as part payment of the pledged $500,000 and which was dishonoured by the bank. Throughout their 13-month-long romance, Dodi made good on only $60,000 of the promised sum. But love, as they say, General, is blind and Kelly did not care a jot about her beau’s financial indiscretions. It was enough that he was potentially a very wealthy man anyway being heir to his father’s humongous fortune.
KELLY CONSIGNED TO “BOAT CAGE”
In that summer of the year 1997, General, Dodi and Kelly were to while away quality time on the French Rivierra as well as the Jonikal after Paris. Then Dodi’s dad weighed in and put a damper on this prospect in a telephone call to Dodi on July 14. “Dodi said he was going to London and he’d be back and then we were going to San Tropez,” Kelly told the interviewer in a later TV programme. “That evening he didn’t call me and I finally got him on his portable phone. I said, ‘Dodi where are you?’ and he said he was in London. I said, ‘Ok, I’ll call you right back at your apartment’. He said, ‘No, no, don’t call me back’. So I said, ‘Dodi where are you?’ and he admitted he was in the south of France. His father had asked him to come down and not bring me, I know now.”
Since Dodi could no longer hide from Kelly and she on her part just could not desist from badgering him, he had no option but to dispatch a private Fayed jet to pick her up so that she join him forthwith in St. Tropez. This was on July 16.
Arriving in St. Tropez, Kelly, General, did not lodge at the Fayed’s seaside villa as was her expectation but was somewhat stashed in the Fayed’s maritime fleet, first in the Sakara, and later in the Cujo, which was moored only yards from the Fayed villa. It was in the Cujo Kelly spent the next two nights with Dodi. “She (Kelly) felt there was something strange going on as Dodi spent large parts of the day at the family’s villa, Castel St. Helene, but asked her to stay on the boat,” writes Martyn Gregory in The Diana Conspiracy Exposed. “Dodi was sleeping with Kelly at night and was courting Diana by day. His deception was assisted by Kelly Fisher’s modelling assignment on 18-20 July in Nice. The Fayed’s were happy to lend her the Cujo and its crew for three days to take her there.”
Dodi’s behaviour clearly was curious, General. “Dodi would say, ‘I’m going to the house and I’ll be back in half an hour’,” Kelly told Gregory. “And he’d come back three or four hours later. I was furious. I’m sitting on the boat, stuck. And he was having lunch with everyone. So he had me in my little boat cage, and I now know he was seducing Diana. So he had me, and then he would go and try and seduce her, and then he’d come back the next day and it would happen again. I was livid by this point, and I just didn’t understand what was going on. When he was with me, he was so wonderful. He said he loved me, and we talked to my mother, and we were talking about moving into the house in California.”
But as is typical of the rather romantically gullible tenderer sex, General, Kelly rationalised her man’s stratagems. “I just thought they maybe didn’t want a commoner around the Princess … Dodi kept leaving me behind with the excuse that the Princess didn’t like to meet new people.” During one of those nights, General, Dodi even had unprotected sexual relations with Kelly whilst cooing in her ear that, “I love you so much and I want you to have my baby.”
KELLY USHERED ONTO THE JONIKAL AT LONG LAST
On July 20, General, Diana returned to England and it was only then that Dodi allowed Kelly to come aboard the Jonikal. According to Debbie Gribble, who was the Jonikal’s chief stewardess, Kelly was kind of grumpy. “I had no idea at the time who she was, but I felt she acted very spoiled,” she says in Trevor Rees-Jones’ The Bodyguard’s Story. “I remember vividly that she snapped, ‘I want to eat right now. I don’t want a drink, I just want to eat now’. It was quite obvious that she was upset, angry or annoyed about something.”
Kelly’s irascible manner of course was understandable, General, given the games Dodi had been playing with her since she pitched up in St. Tropez. Granted, what happened to Kelly was very much antithetical to Dodi’s typically well-mannered nature, but the fact of the matter was that she simply was peripheral to the larger agenda, of which Dodi’s father was the one calling the shots.
On July 23, Dodi and Kelly flew to Paris, where they parted as Kelly had some engagements lined up in Los Angeles. Dodi promised to join her there on August 4 to celebrate with her her parents’ marriage anniversary. Dodi, however, General, did not make good on his promise: though he did candidly own up to the fact that he was at that point in time again with Diana, he also fibbed that he was not alone with her but was partying with her along with Elton John and George Michael. But in a August 6 phone call, he did undertake to Kelly that he would be joining her in LA in a few days’ time. In the event, anyway, General, Kelly continued to ready herself for her big day, which was slated for August 9 – until she saw “The Kiss”.
THE KISS THAT NEVER WAS
“The Kiss”, General, first featured in London’s Sunday Mirror on August 10 under that very headline. In truth, General, it was not a definitive, point-blank kiss: it was a fuzzy image of Diana and Dodi embracing on the Jonikal. A friend of Kelly faxed her the newspaper pictures in the middle of the night and Kelly was at once stunned and convulsed with rage.
But although Kelly was shocked, General, she was not exactly surprised as two or three days prior, British tabloids had already begun rhapsodising on a brewing love affair between Dodi and Diana. That day, Kelly had picked up a phone to demand an immediate explanation from her fiancé. “I started calling him in London because at this time I was expecting his arrival in a day. I called his private line, but there was no answer. So then I called the secretary and asked to speak to him she wouldn’t put me on. So Mohamed got on and in so many horrible words told me to never call back again. I said, ‘He’s my fiancé, what are you talking about?’ He hung up on me and I called back and the secretary said don’t ever call here again, your calls are no longer to be put through. It was so horrible.”
Kelly did at long last manage to reach Dodi but he was quick to protest that, “I can’t talk to you on the phone. I will talk to you in LA.” Perhaps Dodi, General, just at that stage was unable to muster sufficient Dutch courage to thrash out the matter with Kelly but a more credible reason he would not talk had to do with his father’s obsessive bugging of every communication device Dodi used and every inch of every property he owned. The following is what David Icke has to say on the subject in his iconic book The Biggest Secret:
“Ironically, Diana used to have Kensington Palace swept for listening devices and now she was in the clutches of a man for whom bugging was an obsession. The Al Fayed villa in San Tropez was bugged, as were all Fayed properties. Everything Diana said could be heard. Bob Loftus, the former Head of Security at Harrods, said that the bugging there was ‘a very extensive operation’ and was also always under the direction of Al Fayed. Henry Porter, the London Editor of the magazine Vanity Fair, had spent two years investigating Al Fayed and he said they came across his almost obsessive use of eavesdropping devices to tape telephone calls, bug rooms, and film people.”
Through mutual friends, General, Porter warned Diana about Al Fayed’s background and activities ‘because we thought this was quite dangerous for her for obvious reasons’ but Diana apparently felt she could handle it and although she knew Al Fayed could ‘sometimes be a rogue’, he was no threat to her, she thought. “He is rather more than a rogue and rather more often than ‘sometimes,” she apparently told friends. “I know he’s naughty, but that’s all.” The TV programme Dispatches said they had written evidence that Al Fayed bugged the Ritz Hotel and given his background and the deals that are hatched at the Ritz, it would be uncharacteristic if he did not. Kelly Fisher said that the whole time she was on Fayed property, she just assumed everything was bugged. It was known, she said, and Dodi had told her the bugging was so pervasive.
KELLY SUES, ALBEIT VAINLY SO
To his credit, General, Dodi was sufficiently concerned about what had transpired in St. Tropez to fly to LA and do his utmost to appease Kelly but Kelly simply was not interested as to her it was obvious enough that Diana was the new woman in his life.
On August 14, Kelly held a press conference in LA, where she announced that she was taking legal action against Dodi for breach of matrimonial contract. Her asking compensation price was £340,000. Of course the suit, General, lapsed automatically with the demise of Dodi in that Paris underpass on August 31, 1997.
Although Kelly did produce evidence of her engagement to Dodi in the form of a pricey and spectacular engagement ring, General, Mohamed Al Fayed was adamant that she never was engaged to his son and that she was no more than a gold digger.
But it is all water under the bridge now, General: Kelly is happily married to a pilot and the couple has a daughter. Her hubby may not be half as rich as Dodi potentially was but she is fully fulfilled anyway. Happiness, General, comes in all shades and does not necessarily stem from a colossal bank balance or other such trappings of affluence.
Pic Cap
THE SHORT-LIVED TRIANGLE: For about a month or so, Dodi Al Fayed juggled Princess Diana and American model Kelly Fisher, who sported Dodi’s engagement ring. Of course one of the two had to give and naturally it could not be Diana, who entered the lists in the eleventh hour but was the more precious by virtue of her royal pedigree and surpassing international stature.
NEXT WEEK: FURTHER BONDING BETWEEN DIANA AND DODI
Columns
EXTRAVAGANCE One of The Scourges in Society.
Extravagance in recent times has moved from being the practice of some rich and wealthy people of society in general and has regrettably, filtered to all levels of the society. Some of those who have the means are reckless and flaunt their wealth, and consequently, those of us who do not, borrow money to squander it in order to meet their families’ wants of luxuries and unnecessary items. Unfortunately this is a characteristic of human nature.
Adding to those feelings of inadequacy we have countless commercials to whet the consumer’s appetite/desire to buy whatever is advertised, and make him believe that if he does not have those products he will be unhappy, ineffective, worthless and out of tune with the fashion and trend of the times. This practice has reached a stage where many a bread winner resorts to taking loans (from cash loans or banks) with high rates of interest, putting himself in unnecessary debt to buy among other things, furniture, means of transport, dress, food and fancy accommodation, – just to win peoples’ admiration.
Islam and most religions discourage their followers towards wanton consumption. They encourage them to live a life of moderation and to dispense with luxury items so they will not be enslaved by them. Many people today blindly and irresponsibly abandon themselves to excesses and the squandering of wealth in order to ‘keep up with the Joneses’.
The Qur’aan makes it clear that allowing free rein to extravagance and exceeding the limits of moderation is an inherent characteristic in man. Allah says, “If Allah were to enlarge the provision for his servants, they would indeed transgress beyond all bounds.” [Holy Qur’aan 42: 27]
Prophet Muhammad (PBUH) said, “Observe the middle course whereby you will attain your objective (that is paradise).” – Moderation is the opposite of extravagance.
Every individual is meant to earn in a dignified manner and then spend in a very wise and careful manner. One should never try to impress upon others by living beyond one’s means. Extravagance is forbidden in Islam, Allah says, “Do not be extravagant; surely He does not love those who are extravagant!” [Holy Qur’aan 7: 31]
The Qur’aan regards wasteful buying of food, extravagant eating that sometimes leads to throwing away of leftovers as absolutely forbidden. Allah says, “Eat of the fruits in their season, but render the dues that are proper on the day that the harvest is gathered. And waste not by excess, for Allah loves not the wasters.” [Holy Qur’aan 6: 141]
Demonstrating wastefulness in dress, means of transport, furniture and any other thing is also forbidden. Allah says, “O children of Adam! Wear your apparel of adornment at every time and place of worship, and eat and drink but do not be extravagant; surely He does not love those who are extravagant!” [Holy Qur’aan 7: 31]
Yet extravagance and the squandering of wealth continue to grow in society, while there are many helpless and deprived peoples who have no food or shelter. Just look around you here in Botswana.
Have you noticed how people squander their wealth on ‘must have’ things like designer label clothes, fancy brand whiskey, fancy top of the range cars, fancy society parties or even costly weddings, just to make a statement? How can we prevent the squandering of such wealth?
How can one go on spending in a reckless manner possibly even on things that have been made forbidden while witnessing the suffering of fellow humans whereby thousands of people starve to death each year. Islam has not forbidden a person to acquire wealth, make it grow and make use of it. In fact Islam encourages one to do so. It is resorting to forbidden ways to acquiring and of squandering that wealth that Islam has clearly declared forbidden. On the Day of Judgment every individual will be asked about his wealth, where he obtained it and how he spent it.
In fact, those who do not have any conscience about their wasteful habits may one day be subjected to Allah’s punishment that may deprive them of such wealth overnight and impoverish them. Many a family has been brought to the brink of poverty after leading a life of affluence. Similarly, many nations have lived a life of extravagance and their people indulged in such excesses only to be later inflicted by trials and tribulations to such a point that they wished they would only have a little of what they used to possess!
With the festive season and the new year holidays having passed us, for many of us meant ‘one’ thing – spend, spend, spend. With the festivities and the celebrations over only then will the reality set in for many of us that we have overspent, deep in debt with nothing to show for it and that the following months are going to be challenging ones.
Therefore, we should not exceed the bounds when Almighty bestows His bounties upon us. Rather we should show gratefulness to Him by using His bestowments and favours in ways that prove our total obedience to Him and by observing moderation in spending. For this will be better for us in this life and the hereafter.