Global meltdown and Islamic financial systems

The US subprime mortgage crisis-which was the precursor of the melt down– is directly linked to these  ‘weapons of mass destruction’. Mortgage originators collateralized the debt by mixing prime and sub prime debt. By selling the derivatives, they passed the entire risk of default to the ultimate purchaser. There was, therefore, less incentive for them to undertake careful underwriting.
The false sense of immunity this arrangement brings into system introduces a fault line as banks do not undertake a careful evaluation of their loan projects. This leads to an unhealthy expansion in the overall volume of credit, to excessive leverage, and to an unsustainable rise in asset prices, living beyond means, and speculative investment. Experts opine that the derivative market is still about $600 trillion, more than 10 times the size of the world economy
The Islamic finance system, on the other hand, primarily prevents a creditor from transferring the risk to someone else by selling the debt. It thus introduces greater discipline into the economy as it links credit expansion to the growth of the real economy. The Islamic system of finance is fundamentally opposed to growth of credit not linked to growth in real economy. It does not allow the creation of debt through direct lending and borrowing. It rather requires the creation of debt through the sale or lease of real assets. Consequently, in the Islamic system, the asset which is being sold or leased must be real and not notional; the seller must own and possess the goods being sold or leased; the transaction must be genuine with the full intention of giving and taking delivery; and the debt cannot be sold and thus the risk associated with it cannot be transferred to someone else.
These and other conditions set by the Islamic system ensure that most of speculative transactions are eliminated. By this, it is ensured that greater volume of financial resources for the real economic sectors are released. This in turn helps in expansion of employment and self-employment opportunities and the production of need-fulfilling goods and services.
It is high time that the world realizes the importance of this prudent financial system and sheds the bias it nurses for everything that bears a reference to Islam. Otherwise, the ‘casino capitalism’ will create more crises than it can solve.
Iqbal had long before warned about the cataclysm witnessed by the present day world:
Tumhari tehzeeb apne khanjar se aap khudkushi karegi
Jo shaakhe naazuk pe aashiana banega, na paidaar Hoga
Your culture will kill itself with its own dagger
Abodes on fragile branches will be fragile

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