Debt, Credit and Islamic Epistemology

Abstract

In the conventional literature it is assumed that finance is the life of modern economies and financial transactions cannot be executed without debt. The entire system is based on the rate of interest. It is assumed that without debt, the market economy cannot conduct its functions efficiently, therefore, the optimal allocation of resources is not possible. However, in general, it is also believed in the literature of sociology, anthropology, and moral economy that debt has played a negative role in increasing greed and dishonesty in societies. Historically, it is observed that most economic crises and depressions are due to excessive levels of debt. Furthermore, it is also observed that debt creates enmity between the creditor and debtor. On the other hand, Islam guides its followers that Allah (s.w.t.) has created a relationship involving debt imbued with justice. The debt market in the Islamic system promotes virtue and mitigates vice. The followers of Islam should operate in the debt market according to the design of Allah (s.w.t.) which is based on the qard al-hassan (benevolent loan). This paper discusses the debt market in the conventional and Islamic framework, the relationship between conspicuous consumption and debt, the role of qard al-hassan and further highlights the value-based aspects of debt and credit. Consequently, this study provides valuable insights regarding debt and credit in the Islamic framework, for the benefit of researchers, policy makers and the wider society.