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Call for a fundamental change to the existing global financial order

September 26, 2011 Leave a comment Go to comments

At the World Leaders Forum organized by Columbia University, Dr. Ahmad Mohamed Ali Al-Madani, President of Islamic Development Bank, shared insightful perspectives on the looming international financial crisis, the excessive reliance on debt as the achilles heel for the global financial order, and the way Islamic Finance can offer great ideas to completely overhaul the global financial system.

Five key principles that were defined as the cornerstone of a sound financial system are:
1. Increase share of equity and reduce share of debt in the total financing of economic activities
2. When the need of debt is justified, it should be extended on the basis of sound due dligence that includes logical risk-reward considerations
3. Credit should be confined primarily to transactions that are linked to the real sector to ensure that credit expansion moves more or less in tandem with the growth of the real economy
4. All financial institutions, not just banks, need to be properly regulated and supervised so that they remain healthy and do not become a source of systemic risk
5. Respite should be given to debtors who err in real distress beyond their control – the giving of respite in such circumstances along with necessary restructuring that Islamic Finance requires will help reduce risk of asset price reduction caused by forced liquidation/ acquisition of borrower’s assets

It is also important to note that the principles of Islamic Finance are not specific to the Islamic faith – they are part of all divine religions and also secular paradigms. The underlying principles of Islamic Finance have been described as ethical and universal.

This becomes all the more relevant in the current times as various forums (G20, IMF, World Bank, Central Banks, EU, etc.) are thinking about how to stop this financial contagion but are limited in their thinking to just merely making some tweaks in the existing order. Islamic Finance offers a radically different alternative that can mend this systemic epidemic. As the Economist noted, “the world needs new ways of thinking and the risk involved therein”, Islamic Finance offers basic principles for this very purpose.

Some western economists and finance experts have begun to understand the merits of the Islamic Finance system. A notable mention is the work done on “Limited-purpose banking” by Prof. Laurence Kotlikoff, Former Senior Economist on the President’s Council of Economic Advisors and currently an Economics Professor at Boston University. More on this subject in a separate post.

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  1. March 17, 2012 at 8:54 am

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