Debt Crisis: Can Islamic Finance help?

Debt has become a major issue in many economies around the world, and the conventional financial system has struggled in finding solutions to the ongoing debt crisis. While most financial systems rely on debt as a way of fuelling economic growth, this heavy reliance on debt can lead to unsustainable levels of debt and financial instability. In recent years, the concept of Islamic finance has gained increased attention as a potential solution to the ongoing debt crisis.

Islamic finance is based on the principles of Islamic law [Shariah], which prohibits the charging of interest and encourages ethical and responsible financial practices. The focus of Islamic finance is on profit and loss-sharing, devoid of interest-based transactions. This system of finance is based on the belief that wealth should be created through legitimate business practices, rather than through exploitation or manipulation of the financial system.

The Islamic financial system encourages individuals and businesses to be mindful of their debt levels, and to avoid heavy debt as much as possible. The Prophet Muhammad (peace be upon him) used to regularly supplicate “Allah, I seek refuge with you from sin and heavy debts”. Thus, the Islamic faith encourages debt to be incurred only for the purpose of necessity. Interest-based loans and entities are prohibited in the Islamic financial system, and alternatives such as business partnership or trust financing – also known as ‘Mudarabah’ and joint-enterprise or partnership-structure, also known as ‘Musharakah’ – are offered as suitable alternatives.

In Ghana, the introduction of Islamic finance has been seen as a way to reduce the country’s debt burden. The existing conventional financial system in Ghana is heavily debt-oriented, but the introduction of Islamic finance offers alternative financing options that are devoid of interest; such as non-interest bonds known as Sukuk. The Islamic financial system also places checks and balances beyond individual actors, and requires both borrowers and lenders to engage in due diligence to prevent and mitigate debt crises.

While Islamic finance is not a panacea for the ongoing debt crisis, it is clear that this system of financing offers a fresh perspective on the role of debt in the economy. By encouraging responsible borrowing and lending practices, and by promoting ethical and sustainable financial practices, Islamic finance offers one of the potential solutions to the ongoing debt crisis.

With increasing consistency of the debt crises occurring in the conventional system of finance, we strongly propose the adoption of Islamic finance as one way to tackle debt-crisis now, avoid it in the long-term, and ultimately promote financial stability.

This article was culled from a research paper titled ‘GHANA’S DEBT RESTRUCTURING, AN ISLAMIC FINANCE VIEWPOINT’, published By The Research Team @ Islamic Finance Research Institute, Ghana [IFRIG]. You can find the full research paper @ www.ifrig.org publications

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