The global financial crisis is not unknown. The Pakistan Writer's Forum invited reputed economist Dr. M. Umer Chapra to speak on this subject on Feb. 26 at Shaheen Restaurant, Jeddah.

Chapra, author of several books, served for over 35 years as senior economic advisor at the Saudi Arabian Monetary Agency (SAMA) and has been working for the Islamic Reserach and Training Institute of the Islamic Development Bank, Jeddah, since 1999. He is also a recipient of the King Faisal Award for his contribution to Islamic economics and finance.

Dr. Chapra said the current world situation was worse than all previous ones and that the Qur'an explained these problems 1400 years ago.

Three trillion dollars have been spent but still there is no change in the world economic situation: it has led to the failure of a number of banks around the world, seized-up money markets, led to a precipitous decline in property and stock values and generated nervous anxiety about the fate of the world economy and financial system," he said.

He said the three most important causes of this crisis, already explained in Islam, were:

• Living beyond means;

• Excessive and imprudent expansion of credit over a long period and gambling;

• The main and major cause is taking loan on interest.

"In the beginning, when secularism was adopted, many Christian religious values has still held in the society – and there are many shared values between Islam and Christianity," Chapra said. "As long as those religious values were practiced, the society progressed in every walk of life."

"Islam discourages living beyond means that leads to excessive borrowing. In the US total household debt rose from $705 billion or 60 percent of disposable income to $34 trillion or 134 percent of disposable income in 2008," he added.

The main cause of this global financial crisis has however been Riba (interest).

"Islam promotes loans without interest. In Islam selling or buying based on interest is not allowed. Allah said in the Qur'an:

"Those who eat Riba (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan (Satan) leading him to insanity. That is because they say: "Trading is only like Riba (usury)," whereas Allah has permitted trading and forbidden Riba (usury). So whosoever receives an admonition from his Lord and stops eating Riba (usury) shall not be punished for the past; his case is for Allah (to judge); but whoever returns [to Riba (usury)], such are the dwellers of the Fire - they will abide therein.

Allah will destroy Riba (usury) and will give increase for Sadaqat (deeds of charity, alms, etc.) And Allah likes not the disbelievers, sinners." (Qur'an, 2:275-276)

Islam also does not allow short selling because it is stipulated clearly that "the thing which is not with you should not be sold."

"It means that not only selling anything you don't own is prohibited, but also the thing which is not in your custody," the economist explained.

Dr. Chapra said that as an alternative, Islam has the system of Zakah and Awqaf institutions to make credit accessible to people who need it. Islam also strongly urges lenders to give respite to the borrowers in case of strained circumstances (like being jobless, ill or some unforeseen incidents) and even to write off the debt if it becomes extremely difficult for the borrowers to repay. Allah said in the Qur'an:

"And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay, but if you remit it by way of charity, that is better for you if you did but know." (Qur'an, 2:280)

"In Islam, increased buying and selling depends on the productivity. If productivity is increasing, buying and selling will increase. There will be no need for short selling or unnecessary interest-based loans," he said. "Islam doesn't allow unnecessary and wasteful spending to increase saving and investment. The Prophet (peace be upon him) said while advising a person, 'Borrow less and you will live like a free person.'

Caliph Umar Bin Al-Khattab reflected the same attitude towards borrowing by saying, "Beware of debt for it may be a cause of worry in the beginning and bankruptcy in the end."

While the concepts are good for progress, Islamic finance still doesn't have much presence in the global market.

"The problem, however, is that Islamic finance is still in its infancy and commands a very small proportion of international finance. In addition, it does not genuinely reflect the ethics of Islamic teachings," Chapra said. "Credit should be used for productive investment not for speculation and gambling. The use of equity and profit and loss-sharing (PLS) is very small, even in the case of debt."

"The conditions laid down by Shariah are not being faithfully observed because of the use of legal stratagem (hiyal), partially due to a lack of proper understanding of the Maqasid Al-Shariah (Shariah objectives) behind Islamic finance, unavailability of trained personnel and the absence of a number of shared or support institutions that are required to minimize the risks associated with PLS and other modes," he explained.

"Muslim countries are trying their best to enable the Islamic financial system to gradually gain momentum to not only realize the Maqasid Al-Shariah but also to promote the health and stability of the global system," he added.