Finance for development and Islamic banking

The prohibition of interest and how such a prohibition alters the entire financial system raise some issues. The role of banks and the optimal debt contract merit some examination. There are at least two models of bank-firm relationships: the Anglo-Saxon model in which secrecy between borrowers and bankers is the norm; and the German-Japanese model in which the bank and the firm are more closely linked and the success of the lender and the debtor are mutually related. Each relationship model has its strengths and weaknesses. Government borrowing has a certain role in a profit-sharing climate. Islamic banking depends on a system closer to the German-Japanese one. The adoption of an Islamic banking system has not been easy thus far. There is a need for a change in business culture before Islamic banking can fully flourish.