Policy Perspectives

International Financial Stability:
The Role of Islamic Finance
Umer Chapra

Abstract
[A number of financial crises that visited the world over the last three to four decades have put the international financial system in question. This article reviews these crisis and reasons behind them. It also argues that the weaknesses of the prevailing interest-based financial system create a strong rationale for introducing a new system of the international finance. The article also dilates on the principles of Islamic banking which deter interest and introduce in its place the principle of risk/reward-sharing. Financing through the Islamic modes expands in tandem with the real economy and help curb excessive credit expansion which leads to lavishness and contributes to the instability in the international financial markets. The article also cites a strong rationale behind the prohibition of interest from major religions of the world. The paper concludes with solution based on Islamic principles. – Author]

Back