Models of Islamic banking: the role of debt and equity contracts
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2015
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Lewis, M.
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Journal of King Abdulaziz University, Islamic Economics, 2015; 28(1):163-177
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In itself, debt is innocuous. In accounting terms, it simply signifies an inter-personal or inter-entity relationship that is a liability of one party, the debtor, and an asset to the other, the creditor. Admittedly, Muslims have distinctive views on the acceptability of interest-bearing debt. Yet, one does not need to be a Muslim economist to attribute interest-based debt financing a major role in the global financial crisis and its aftermath (in fact in most financial crises in the past). Speaking in Hong Kong on 19 March 2012, IMF Deputy Director Zhu Min observed that if one adds together the household debts, the corporate debts, the financial sector debts and the government debts, the total debts among the developed countries vary between 300 per cent and 600 per cent of GDP. Dr. Zhu went on to add that debts are ‘way too high’ and that in this respect the world economy is not experiencing a classic financial crisis but a ‘deleveraging process’, moreover one in which economies are seeking to engineer growth while also deleveraging (Garvey, 2012). In the ‘great slump’ of the 1930s, the United States underwent ‘debt deflation’, in the words of Irving Fisher (1933), with the epicentre being the United States and its banking system. In the current situation, the epicentre of the crisis and downturn was again the United States and its banking system, but the pain of ‘too high’ debt has been borne across the developed world (Iley and Lewis, 2013).
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Copyright 2015 King Abdulaziz University