The size of the global gross domestic product exceeds the $100 trillion mark, according to estimates by global financial institutions.
In contrast, the size of public debt exceeds or is equivalent to three times the size of the global economy, and
here lies the danger.
Among the risks of public debt is the global financial crises that countries of the world go through at different time periods, and
their effects are greatly reflected in the countries’ economies, even in varying proportions, according to the strength of each country’s economy, which is measured by the size of each country’s domestic product and the extent of each country’s ability to bear the burdens.
These crises, and I mean financial crises, therefore their risks cannot be underestimated.
According to the above, the basic rule for financing in financial crises is to adopt the interest rate imposed and controlled by central banks in accordance with their plans to address impermissible inflation with the aim of avoiding the collapse of the value of their currencies and achieving market balance.
At the peak of the economic contraction phase within the economic cycle that the world's economies periodically go through, central banks reduce interest rates with the aim of providing financial leverage capable of reviving their countries' economies, thus providing financial abundance to meet market needs.
This method followed by central banks is called (monetary easing).
Here, banks are encouraged, as a result of lowering interest rates, to raise the ceiling on their credit to the public and expand their acceptance of deposits at low interest rates.
This encourages borrowers to raise consumption, so demand increases and supply for goods and services decreases, prompting an increase in prices, which is one of the most important indicators of impermissible inflation.
Central banks are forced to address this phenomenon, I mean inflation, by raising the interest rate, which is called a policy
This measure, in turn, prompts depositors to withdraw their deposits from banks to benefit from the interest difference.
This causes the banks to lose, and they are forced to sell their bonds and sometimes their assets to meet the binding demands of depositors.
This is the main reason for the collapse of many banks in the world,
but some countries protect them from collapse through emergency lending support, and
this is what happened with a number of American banks recently.
From here we discover the extent of the damage and the painful effects of debts and their risks on banks.
This is because deposits in banks are like debts to the account of depositors who make a single donation to withdraw their deposits due to raising the interest rate, as well as in financial crises and when the exchange rate fluctuates in fragile economies.
Economists attribute the reason for the collapse of banks to the fact that they engage in debt trading and not capital development, and this phenomenon is mostly diagnosed in commercial banks.
It is clear from the above that Islamic banks develop capital through the process of sharing profits and losses,
so the effects of crises on them are lighter and less, and
their resistance to staying in the market is higher. This analysis applies in many developed countries.
Perhaps one of the reasons for the collapse of banks is the failure to enact sufficient legislation to protect the banking system, and banks do not have the ability to manage risks and service debt.
In Iraq, the situation is different, as
there is a need to reconsider the Banking Law No. 94 of 2004, given that nearly two decades have passed since a bitter experience that needs a legal amendment that is in the interest of protecting the banking sector, especially the rights of the minority and the rights of depositors.
Although there are preventive measures in the banking law, such as guardianship and bank lending, the applications and rescue packages are still really weak.
Therefore, our call to reconsider the banking law has become urgent.