Innovation and authenticity in Islamic Finance: M. Umer Chapra

Innovation and authenticity in Islamic Finance: M. Umer Chapra

This paper—delivered at the Eighth Harvard University Forum on Islamic Finance in April 2008—tries to determine the primary cause or causes of the financial crises that have plagued almost every country around the world over the last three decades. Of particular significance are the 1998 LTCM breakdown and the current subprime mortgage crisis in the United States. It argues that one of the major causes of these crises is the lack of adequate market discipline in the financial system. This leads to excessive lending, high leverage and ultimately the crisis. Risk-sharing, which Islamic finance wishes to introduce, can help instill greater discipline in the system and curb lax lending. Effective operation of such a system in Muslim countries will, however, not be possible without the establishment of a number of shared institutions that do not exist at present. It is also necessary to adopt a number of specific measures to make credit available to small- and micro-entrepreneurs in order to make the existing financial system more equitable.

Read the paper here

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