Strong structure: the Islamic financial system and lessons of the recent crisis
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Over the past few decades, a consensus has emerged that expansion of credit and debt is detrimental to the stability of developing economies. For example, the IMF has advised its developing country members that in order to mitigate the risk of instability, such as occurred in the emerging markets in 1997, they should: Avoid debt-creating flows. 2. Rely mostly on foreign direct investment as external financing. 3. If they must borrow, ensure that their external debt is never larger than 25% of GDP and that their debt obligations are not bunched toward the short end of maturities. 4. Ensure that their economy is producing large enough primary surpluses to meet their debt obligations. 5. Ensure that their sovereign bonds incorporate clauses (such as majority action,initiation and engagement clauses) to make debt workouts and restructurings easier - that is, to ensure that there exist better risk-sharing mechanisms associated with their debt obligations to avoid moral hazard. 6. Ensure that domestic corporations have transparent balance sheets, follow mark-to-market accounting, and have financial structures that are biased more heavily toward equity and internal funding and are not heavily leveraged. 7. Ensure that their domestic financial institutions are regulated and supervised efficiently, are not highly leveraged, follow prudent credit policy and are highly transparent.
Finance , Financial system , Islamic , Financial crisis
Mirakhor, Abbas & Krichene, Noureddine. The Islamic financial system and lessons of the recent crisis. Business Islamica Magazine, (January 2010), pp. 74-78.
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