Trade of Debts Resulting from Financial Intermediation: Analysis from Shariah Perspective

Abstract

The modern financial system encourages people to incur debts to fulfill basic needs as well as spend beyond one’s wants. The core of this system is based on interest, which is the result of the financial intermediation between creditors and borrowers. Regardless of the interest element, which is prohibited in Islam, the very notion of excessive debt creation through financial intermediation and then trading the debt is a very serious matter, as it may lead to global financial crises. The study seeks to address debt trading from a Shariah perspective and address the justifications and attempts brought forward by some institutions to validate debt trading, despite its established prohibition in the Shariah. To achieve the above, the paper employs qualitative research methodology which adopts a textual analysis approach together with a review of the stands of the contemporary Fiqh bodies. The study finds that the excessive creation of debt through financial intermediation and its concentration in financial institutions poses a serious threat to the economy and carries the seeds of financial crises. Following debt creation and concentration, debt trading aggravates the situation and pushes it beyond borders, whereas Sharia through prohibiting debt trading, which is advocated thoroughly in the study, gives Islamic finance genuine immunity against financial crises.