Debt and Economic Activity

Many nations, rich and poor alike, are reeling under mountains of interest-based debt. What are the effects of large and growing debts on economic activity? It is widely believed that borrowing helps the economy to grow faster. However, a number of recent studies have shown that, beyond a certain threshold, large levels of debt in fact slow down economic activity rather than stimulate it. It appears that in some countries this threshold has already been passed. Others are coming dangerously close to it. Reduced or negative rate of growth makes it harder to repay existing debts. Social unrest has taken place in a number of countries as governments channel increasing amounts of limited tax revenues towards the repayment of debt with interest to creditors. A more effective way to respond to the debt crisis is to adopt bona fide Islamic financing. In such a system there is no room for earning interest income by lending. Active participation in the real sector is required. Participation in real sector activity is rewarded by incentives in the form of profits, rents, and wages.