Journal of Islamic Business and Management
Regime Uncertainty: Interest Rate Based Debt Financing System
Abbas Mirakhor and Mughees Shaukat
Published Online: December 2012
Evidence has been mounting (over the centuries) that the interest based debt financing regime is under ever increasing distress. All of the earlier crises whatever label they carried - exchange rate crisis or banking crisis – have been debt crises in essence. At the present, empirical research suggests that the debt-to-GDP ratio of the richest members of the G-20 threatens to touch 120% mark by 2014. Moreover there is also evidence that out of securities worth $200 trillion in the global economy, no less than three-fourth represent interest based debt. It is difficult to see how this massive debt volume can be validated by the underlying productive capacity of the global economy. This picture becomes more alarming when it is realized that the growth of the global economy is anemic at best while the interest rate on debt is sure to exceed the rate of growth of global GDP for the foreseeable future. This paper argues that the survival of the interest based debt regime is becoming less tenable, as is the process of financialization that has accompanied the growth of global finance over the last four decades. It further argues that Islamic finance, with its core characteristic of risk sharing, may well be a viable alternative to the present interest based debt financing regime.
Regime Uncertainty; Ambiguity; Complexity; Black Swans; Debt Stress; Islamic Finance; Risk-Sharing.