Islamic Economics Institute

Working Paper Series

The economic and financial crisis (2009-date) is the hottest economic and political topic making news headlines around the Globe. Several reasons for the crisis have been presented and discussed in the literature. It has given rise to many controversies both in areas of economic theory and policy. All of these controversies hover around the role of debt in the economy, especially in the public sector.
Taking debt has always been a controversial issue. The decision has historically been viewed differently in different cultures. Perceptions about the extent of its benefits and harms have also varied in various economic situations. In the last fifty years, debt-taking has been on the rise due to an increasingly tolerant view by economists, commending its advantages and dismissing its well known macroeconomic disadvantages. This school of thought considers that leveraging is a useful way of increasing wealth. Debt can open up many opportunities for individuals, corporations and governments to meet their needs or capture opportunities that their present incomes cannot afford and can also increase national income by putting idle resources into use.

Another school has since long advocated that debt (except in very exceptional cases) leads to many long term problems such as heavy debt servicing burden, debt-addiction, 2 Sovereign Debt Crises Viewed from Islamic Perspective higher interest rates, crowding out and creation of false expectations leading to speculation and economic “bubbles” in various sectors, which ultimately burst and cause huge loss of wealth, recession and socio political unrest.

Perhaps both of these are extreme views. However, the 2008 debt crisis has raised a number of questions about the tolerant view and many of those who took liberal stands with respect to debt were forced to reconsider their opinions. The public debate about the Euro Zone debt crisis is part of a worldwide overhang of debt. Global financial crisis (2007-date), the worst since the Great Depression, is having a deep impact on the economic and social thinking about the role of debt and the risks involved. It is also generally agreed that the root cause of the Euro Zone crisis is ‘excessive’ debt. Many governments have fallen in Europe, partly due to their election platforms on the issue of public debt problem and proposed solutions. The very existence of Euro Zone is at stake. We believe that the world is ready, per force, to consider alternative solution.

  1. Sovereign Debt Crises with Special Reference to Euro Zone

  2. Maqasid Dimensions of Finance in a Complex World: Methodological Comparison between Islamic and Conventional Economic Literature

  3. Islamic Finance and Financial Stability

  4. Experiments in the Teaching of Islamic Economics

Our understanding of Islamic rulings about debt inspires us to suggest that those rulings can be of an immense help in determining the proper role of debt and help avoiding situations like the debt crisis of 2007-09 and the ongoing Euro Zone economic crisis (2009-date). This paper makes an effort to determine the role of debt in wealth creation and its appropriate limits. It endeavors to derive some principles from Islamic teachings that can help solving the problems created from excessive debt. In section 2 we discuss the role of debt and its limits for household, corporate and public sectors. In section 3 we explain the anatomy of a financial and economic crisis based on historical experience. Section 4 gives a brief account of the rescue operations being undertaken by governments and central banking authorities. In section 5, we present components of a nonconventional approach for solving the problem. Six principles for handling debt derived Islamic teachings are expounded. Last section lists conclusions of the paper in the form of eight axioms on debt and economic stability that emerge from the analysis presented in this paper and other literature on Islamic economics and finance.

(1) Sovereign Debt Crises with Special Reference to Euro Zone
(2) Maqasid Dimensions of Finance in a Complex World: Methodological Comparison between Islamic and Conventional Economic Literature
(3) Islamic Finance and Financial Stability
(4) Experiments in the Teaching of Islamic Economics
(5)  Management of nonprofit organization:Instructional design  
(6)  Dialogue about the definition of Islamic economics  


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