KUALA LUMPUR: The over-reliance on debt is one of a number of challenges posed by current practices that act as a serious hindrance in achieving sustainability, the Sultan of Perak, Sultan Nazrin Shah said.

He said it was necessary to first identify and understand such challenges in devising strategies to transform the model of the current financial system to one that facilitates economic growth while ensuring sustainability.

Sultan Nazrin Shah said this in his address titled 'Seeking Sustainability: Role of Islamic Finance in the Transformational Change' at the 6th SC-OCIS Roundtable on Islamic Finance, held at Ditchley Park, Oxfordshire, Saturday.

The text of his speech was made available to Bernama.

Citing the The Organisation for Economic Co-operation and Development (OECD), Sultan Nazrin Shah said "high debt levels can create vulnerabilities, which amplify and transmit macroeconomic and asset price shocks."

They also "hinder the ability of households and enterprises to smooth consumption and investment and of governments to cushion adverse shocks", he added.

He said the leveraging effect of debt exacerbates the negative impact on the financial markets and the economy during periods of downturn.

"Over-reliance on debt will likely cause severe disruptions to the market as well as to socio-economic stability and should therefore be addressed if we are to strive towards greater sustainability in the financial system.

"The concern in respect of debt supports Islam's view that debt is strongly discouraged and that an equity-based model or contract is preferred as it is consistent with the Maqasid al Shariah or objectives of Shariah," he said.

Sultan Nazrin Shah, who is also Royal Patron for Malaysia's Islamic Finance Initiative, said Islam's abhorrence of debt is premised, among others, on the likelihood that access to debt might induce a person to spend beyond his means.

"It follows then that when a person spends in accordance with his level of wealth or income, the probability of being in financial distress is significantly mitigated and he is therefore able to sustain his lifestyle.

"By extension, this line of argument can be applied to the broader financial system. Furthermore, the risk-sharing element of an equity-based contract promotes a more equitable relationship between the contracting parties that collectively becomes a more sustainable arrangement," he said. - BERNAMA