Islamic finance provides way out of economic crisis
The last few months witnessed the most remarkable period of global financial market turmoil followed by the most astounding government intervention in the world since the Great Depression. There were unprecedented coordinated actions by central banks around the world to cut interest rates, guarantee bank deposits and raise guarantee limits in a bid to address the financial market turmoil.
In the capitalist financial system, which is based on credit and fiat money, money is a commodity that can be freely traded. Banks and financial institutions are able to sell money easily to the consumer market with methods such as subprime housing loans, personal financing and credit cards, leading to a global debt trap and bankruptcies.
The ease with which money is sold leads to inflation. Authorities will then raise interest rates to address inflation, and the corporate sector will be negatively affected as the cost of borrowing rises.
This then leads to a recession, culminating in redundancies and job cuts. Thus, in a fiat money regime, the vicious cycle of inflation and recession will always prevail.
Islamic finance is more than just about making a profit. Every investment proposition should be tested against the “Maqasid al-Shariah” (objectives of the Shariah), where the primary objective is the realization of benefit to people, concerning affairs both in this world and the hereafter.
Islam seeks to realize greater justice in human society. The financial system may be able to promote justice if, in addition to being strong and stable, it satisfies at least two conditions based on moral values:
The financier should also share the risk of financing to avoid shifting the entire loss to the entrepreneur and making unjustifiable profit without taking any risk.
An equitable share of financial resources mobilized by financial institutions should be made available for social welfare projects, such as helping eliminate poverty, expanding employment and reducing income inequalities.
Islamic Finance Resource 