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Submitted by tariqullah khan on
Thanks for your research paper on Islamic finance. The core differences between Islamic finance and conventional finance are in fact two - Islamic finance cannot be created without real goods and services, which is not the case with conventional lending. Second, bad debts cannot be rescheduled on the basis of market requirements. As Prof. Stiglitz (during his tenure of Chief Economist of the World Bank) used to say, since some countries are not able to repay their principal debts, it is only bad economics that we expect them to pay their interest arrears. That is actually talking half of Islamic finance. These two foundations of the Islamic banking model introduce discipline and curb speculation. Baele, L., Farooq, M. and Ongena, S. (2010), “Of Religion and Redemption: Evidence from Default on Islamic Loans.” available at http://www.istfin.eco.usi.ch/ongena-139141.pdf show that the forbearance requirement of Islamic finance introduces important deterrence and hence enhances credit assessment as compared to conventional bank lending.