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Monday, 29 September 2008

Islamic banking restrains bankruptcy

by Syed Zaid Ahmad/U.S EconoMonitor
28 Sep 08

The fall of giants in the world financial sector like Lehman Brothers in the aftermath of the US sub-prime mortgage crisis, we need to be strict about credit rating system to restrain chances of any further bankruptcy. Interestingly, since Islamic banking adheres to strict credit rating system and disallows indebted economic agents to avail more debt finance, it could save our financial and economic enterprises from bankruptcy.
Interest is strictly prohibited in Islamic banking and principles of equity finance disallow financing the indebted enterprises, the chances of bankruptcy considerably decline. Under Islamic banking since equity finance need pre-rating analysis of projects after reviewing cost yield analysis, it tends to reject the economically weaker. Islamic banking principles thus reduces the throat cut competition in financial sector to get more credit shares and tends to provide stability in the financial market.
Since principle of Islamic equity finance allows the banks to recover the assets by right of ownerships, it would be fairer on the part of financial institutions to recover assets in case of any bankruptcy or crisis, which may not be found in interest-based lending by SCBs and financial institutions because in later case the lender have no right over assets financed to debtors. Thus to strengthen the stability in financial sector and avoid chances of bankruptcy, the system of Islamic equity finance should be promoted through Islamic banking instead of raising scope for throat cut competition among banks and financial institutions by compromising lending rates to attract more credit shares.
It would be interesting in part of the financial sector reform to evaluate the credit rating system adopted by our conventional credit rating agencies and the practices adopted by Islamic bankers and financial institutions in the international financial market. It would certainly help us improvise our rating system to prevent any bankruptcy in future.

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