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Islamic Banking and Finance

New Perspectives on Profit Sharing and Risk

Edited by Munawar Iqbal and David T. Llewellyn

Islamic Banking and Finance discusses Islamic financial theory and practice, and focuses on the opportunities offered by Islamic finance as an alternative method of financial intermediation. Key features of profit-sharing (as opposed to debt-based) contracts are highlighted, and the ways in which they can facilitate improved efficiency and stability of a financial system are explored.
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Chapter 11: Alternative visions of international monetary reform

M. Umer Chapra


M. Umer Chapra* 1. INTRODUCTION The international financial system has experienced a number of crises over the last two decades.1 Not a single geographical area or major country has been spared the effect of these crises. In general, the early-warning indicators such as interest rate spreads and credit ratings have proved to be ineffective in predicting the crises (BIS, 1999b, p. 56). Even the IMF was unable to foresee the crises in spite of its access to a great deal of information not available to others. Moreover, the policies it adopted after the crises came under severe criticism, in particular its rescue operations which, according to some of its critics, have only created a moral hazard that would tend to weaken market discipline in the future (Schultz et al., 1998; Meltzer, 1998). Hence there is an uneasy feeling that there is something basically wrong somewhere. This has led to a call for comprehensive reform of the international financial system to help prevent the outbreak and spread of financial crises or, at least, minimize their frequency and severity. The needed reform has come to be labelled ‘the new architecture’. There is perhaps no one who would challenge this call for a new architecture for the international financial system. However, as Andrew Crockett, General Manager of the Bank for International Settlements and Chairman of the newly created Financial Stability Forum, has rightly pointed out: ‘More than two years after the outbreak of the Asian financial crisis, and after innumerable conferences and papers...

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