The Role of Interest Rate in the Last Global Financial Crisis: An Islamic Economic Perspective

Mohammad Faroug al Shboul

Abstract


This study aims to discuss the role of interest rate in the recent global financial crisis, within the context of the economic theory of Capitalism from Islamic economic perspective. The results conclude, among others, first, the existence of a considerable variation of views among the economic theories about the economic role of interest rate. Second, the economic theories’ claim that interest represents the project capital return, regardless of the financial results derived from the actual capital operation thereby increasing the degree of risk to business community that rely on loans as a part of their invested capital, leading to the accumulation of wealth in few hands, the lenders. Third, the funding system based on interest rate is the main reason for the global financial crisis, via lending expansion, future contracts, and debt trading. The study sees an urgent need to search for a system, which combines stability and productivity, where financial loans are to be covered with real assets. As an alternative to the interest based system, a solution for the financial crises and financial stability is found in the Islamic funding system for being based on profit and loss sharing principle.

Keywords


Interest rate, the global financial crisis, financing system, the Islamic economic system

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