What the Lehman Brothers anniversary teaches us about Islamic finance

Nine years ago this month, Lehman Brothers investment bank filed for Chapter 11 bankruptcy, triggering a global financial crisis in earnest as millions of families lost their homes, savings, and jobs. Though most of the world has since recovered from the crisis, it benefits us all to consider measures to prevent similar problems in the future. Concepts from Islamic finance can offer simple yet effective guidelines to help us avoid the worst of financial crises. With the Lehman debacle in the rearview mirror, let’s take a look at some of those ideas and how they might help in the future. Avoid debt Lehman was highly leveraged near its end; in 2007, the firm’s ratio of debt to equity was around 30:1. It was even borrowing to invest in risky mortgage-backed securities, which made it increasingly sensitive to market turbulence. Islamic finance principles call for companies to avoid excessive debt. In tough times, companies with less debt are likely to fare better because they have flexibility and fewer outstanding liabilities. Low debt keeps a company’s interest costs down and gives it more latitude to grow the business. Promote risk sharing Islamic finance practitioners don’t invest in interest-based loans generated by financial