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Why Economists (and Economies) Should Love Islamic Finance لماذا يجب على الاقتصاديين (والاقتصاديات) أن يحبوا التمويل الإسلامي

Author

Listed:
  • Willem H. Buiter

    (Global Chief Economist of Citigroup, University of Bristol)

  • Ebrahim Rahbari

    (Director in the European and Global Economics Teams of Citi Research in London)

Abstract

The world has too much debt and too little equity.( ) This circumstance cost it dearly; glaringly during the great financial crisis (GFC) between late 2007 and 2010 and the European sovereign debt and banking crises that started in 2010. The prevalence of debt financing and the decades over which debt, both public and private, increased in nominal terms, as well as in real terms and relative to some reasonable metric of ability to service debt, such as income (personal, corporate or national), owe much to the fact that debt can be perceived as safe to the owner, while offering leverage to the lender. The fact that this is a logical impossibility was ignored or willfully concealed by a wide variety of financial intermediaries, governments, regulators, supervisors, analysts as well as many borrowers and lenders. During periods of optimism, confidence and trust, like the Great Moderation from the early 1980s till 2008, rational appraisal of risk went out of the window for many ultimate savers and investors, and financial intermediation fed the fires of excessive risk-taking, through excessive leverage, through badly structured reward contracts and regulatory arbitrage. --

Suggested Citation

  • Willem H. Buiter & Ebrahim Rahbari, 2015. "Why Economists (and Economies) Should Love Islamic Finance لماذا يجب على الاقتصاديين (والاقتصاديات) أن يحبوا التمويل الإسلامي," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 28(1), pages 129-150, January.
    • Handle: RePEc:abd:kauiea:v:28:y:2015:i:1:no:5:p:129-150
    DOI: 10.4197/Islec.28-1.5
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    References listed on IDEAS

    as
    1. Jensen, Michael C. & Meckling, William H., 2008. "Theory of the firm: managerial behavior, agency costs and ownership structure," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 48(2), April.
    2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    3. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(4), pages 647-663.
    4. Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, vol. 68(1), pages 119-134, January.
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    Cited by:

    1. Gerald R Steele, 2022. "Islamic and Western banking: A Chicago perspective," Economic Affairs, Wiley Blackwell, vol. 42(1), pages 179-185, February.

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