Evidence has been mounting that the interest-based debt financing regime is under increasing distress. Evidence also suggests that the financial crises, whatever title they carried - exchange rate crisis or banking crisis – have been debt related crises in essence. At present, data suggest that the debt-to-GDP ratio of the richest members of the G-20 is expected to reach 120% mark by 2014. There is also evidence that out of securities worth US$ 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 considering the anemic state of global economic growth. There is great uncertainty with regard to interest rates. Although policy-driven interest rates are at near-zero level, there is no assurance that they will not rise as the risk and inflation premia become significant. Hence, a more serious financial crisis may be in the offing and a general collapse of asset prices may occur. 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. The above has resulted in an unprecedented increase in economic risks; generating (adverse) non-linearities in system’s behavior. Such a behavior is nothing but a demonstration of the verse, “Allah obliterates riba ….” of the Qur’an. As a result, the search is on for a paradigm shift towards a less volatile and more resilient financing regime. The paper proposes risk sharing based Islāmic financing as suitable alternative and also demonstrates empirically its better growth and stability characteristics by using advanced dynamic heterogeneous panel techniques.

Islamic financial institutions (IFIs), which comprise a range of financial institutions including banks, non-bank finance companies, venture capital firms, insurance companies and mutual funds, have shown tremendous growth and financial performance over the last decade. IFIs were founded on certain basic principles that differentiated them from conventional financial services industry,i.e. ethics and socio-economic objectives in line with the ‘Maqasid Al-Shariah’ or objectives of the Shariah (herein refered to as the Maqasid). However, the use of conventional financial reporting and the dominant capitalist system in which the IFIs operate has resulted in the use of conventional accounting performance measurement tools, and the extent to which these institutions achieve their fundamental objectives is therefore not clear. This article proposes and tests a model of performance analysis which can evaluate whether the tremendous financial growth of this sector has been in line with the Maqasid.

The recent financial developments have given rise to a developing consensus that the Unipolar economic growth regime dominated by U.S, Japan and few European centers, is under great stress. The consensus takes into consideration the present financial stresses and strains, and theensuing uncertainty surrounding the sustainability of the unipolar regime, which has given way to a shift towards a multipolar economic setup. Scholarship has already hinted on not only better trade and investment opportunities, but also on a much more resilient global economic growth that such a shift can bring. However, there are some major obstacles that need to be overcome in order to reap fully the desired benefits of multipolarity. Continuation of debt-based financing regime (the hallmarks of which are risk transfer and risk shifting) will not necessarily allow the benefits of emerging multipolarity to accrue to the world economy. The new system can be more effective with a new regime of financing. Indications are that almost all emerging countries in Asia are actively considering risk sharing via Islamic finance as a possible alternative.

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.

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 while by 2020 the U.S and the other major European centers would amass a ratio of at least 150%, with Japan and U.K going to 300% and 200% respectively. Even more disconcerting is the projected interest rate paths on their debts which would increase from now almost 5% to 10% in all cases, and as high as 27% in U.K. 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 anaemic at best while the interest rate on debt is sure to exceed the rate of growth of global GDP for the foreseeable future. Hence, a more serious financial crisis may be in the offing and a general collapse of asset prices may occur. 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.

Evidence has been mounting that the interest-based debt financing regime is under increasing distress. Evidence also suggests that financial crises—despite the various labels assigned to them: exchange rate crisis or banking crisis—have been debt crises in essence. At present, data suggest that the debt-to-GDP ratio of the richest members of the G-20 is expected to reach the 120% mark by 2014. There is also evidence that, out of securities worth US$ 200 trillion in the global economy, no less than three-fourths 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 considering the anemic state of global economic growth. There is great uncertainty with regard to interest rates. Although policy-driven interest rates are near zero, there is no assurance that they will not rise as the risk and inflation premiums become significant. Hence, a more serious financial crisis may be in the offing and a general collapse of asset prices may occur. 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.