How Can Islamic Finance Help to Solve the Economic Crisis?

When considering the macroeconomic problems of the United States, we often get wound up in our supposedly “tried and true” strategies for correcting our problems. However, it would not hurt to think outside the box a bit, and consider the ways in which another perspective, specifically Islamic finance, can strengthen the economic foundation of our country.

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Bank Loan Treatment

In Unstructured Finance’s article, “How Can Islamic Finance Help to Solve Economic Crisis,” the way that American banks handle loans is addressed. In sum, banks treat money as something to be sold, as opposed to the agent through which goods and products are exchanged.

By making money a commodity, the word that the article uses, the economy suffers. Of course, this does not necessarily mean that all loans should be forgiven or further granted. If that were the case, no one would own a home! Instead, banks should simply change the way they think about loaning money.

Other Loans

Now, this rule can apply to other types of loans as well. For example, young people take out tens, and even hundreds, of thousands of dollars to attend college or graduate school. Once again, if these loans are completely taken away, then many people are not going to be able to attend college.

Instead though, the government should find ways to reduce the amount of loans provided, whether that is through encouraging more work-study programs or through lowering tuition at state schools, to prevent students from entering the workforce with great debt on their backs.

Profits and Losses

In the Islamic system, consumers and lenders are equal share-holders in both profits and losses. Ilm Gate published an article entitled, “The End of Prosperity: Can Islamic Finance Help?”

The author of this article, Mohammed Shoaib Omar, writes that,

Although debt-financing cannot be ruled out, the solution lies in a shift to equity-based financing, posited on profit and loss sharing, which is the primary characteristic of Islamic Finance. In this equitable manner, economic effort would be directed at providing useful goods and services, instead of simply making money out of money.

When both parties are responsible for the losses and gains, better solutions are able to be surmised.

A Different Perspective

When it comes down to it, sometimes an economic system just needs a different perspective to come in. Trying to analyze your own country’s problems is often overwhelming, because you do not necessarily see where the flaws lie as part of the system.

By attempting to implement at least some of the components of the Islamic financial system, the United States could better analyze their own problems.

Author Jason Harter is a financiall professional who is about to obtain his masters in finance and study on this topic because of several MBA Scholarships
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