Tawarruq in Capital Market

ROLE OF DEBT IN THE ECONOMY

More debt creation does not increase the net wealth of society as every addition to social wealth through it is cancelled by deduction of a similar amount of wealth owed. In both cases a redistribution of wealth in favor of the creditors is involved. Zarqa Mirakhor

In Nowadays economy Debt is one of the major mode of financing. But in order to create wealth or increase the existing one, debt can be seen as inefficient and inequitable. The creation of debt is the main argument against it efficiency. Production of wealth should not create more debt, otherwise it cannot be considered as the most efficient and genuine wealth production.

It is inequitable as it redistributes wealth in favor of suppliers of finance, irrespective of actual productivity of the finance supplied. Zarqa Mirakhor.

One important point to note, to exchange money now for more money later is fundamentally unfair due to the uncertainty that accompanies the passage of time. Money needs to be converted into goods and services before it can enter into the process of production, the source of possible additional value creation. The results of such process of production have to be reconverted into money before money can be paid back to the one who gave it in the first instance.

The main issue with debt instrument is a time issue. what happens to a debt instrument between the time it is created and the time it is extinguished on repayment. Owners of debt instruments can benefit from these instruments in a number of ways. Siddiqi, 2007

Debt instruments can be seen as different form of wealth. Securities for example, can bring in some payment over and above their repayment. These uses of debt instruments create a demand for them that increases as the economy grows and the market expands. This increasing factor explains directly the demand for debt instruments, and the creation of a debt market.

Debt instruments in debt markets, face a different degree of...