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Jakarta Post

Islamic finance offers tips to correct faulty conventional system

  • Riyadi Suparno

    The Jakarta Post

Nusa Dua, Bali   /   Sun, May 3 2009   /  01:05 pm

The current global financial crisis stems from the absence of adequate market discipline, and Islamic finance can help fix it by injecting a greater discipline into the system, an expert at the Islamic Development Bank said. Speaking at an international gathering here Saturday, Umer Chapra from the Bank's Islamic Research and Training Institute said the global financial system lacks discipline because the reward and punishment mechanism in the banking system was not working. Under current practices, banks are allowed to sell debt, transferring the risks of default to the purchasers, and use the proceeds to make more loans to increase their profits. After selling the debt, banks have no relationship with the debtors. In such a system, the banks have no incentive to make a proper assessment of the debtors in the first place, and have no interest if the debtors are ab...