Introduction

The global financial community is still struggling with what the future of finance should look like since emerging from the Great Recession at the turn of this decade. Three immediate trends are discernible:

• 1. First, as excessive leverage and the shadow banking system have been identified as the major causes of instability in the financial system, policy makers and regulators are preoccupied with putting in place stringent standards and regulations to prevent another financial crisis.

• 2. Second, massive quantitative easing programmes by the central banks in the four reserve currency zones (G4 or US, Eurozone, United Kingdom and Japan) to restore financial stability and stimulate economic growth are flooding world capital markets with liquidity, thus keeping interest rates at historic lows and placing in jeopardy the viability of pension funds and individual savings because of a prolonged period of negative returns.

• 3. Third, the emerging markets are struggling with high capital inflows, rising asset prices, as well as declining commodity prices and export-led growth even as the advanced economies slow.

In the wake of deleveraging of the global banking system through new regulatory rules on banking and shadow banking (which is still evolving among the international financial community), there is a risk that the world may enter a period of synchronised recession. Developing countries will be trapped in a situation where the lending capacity of the Bretton Woods institutions is constrained due to reluctance of the advanced countries to allow the growing role of emerging markets in the world economy to be reflected in their voting power. At the same time, the advanced countries are unwilling to extend more aid due to their ongoing financial crisis and large debt overhang.

To sum up, the emerging markets have considerable room to deepen their financial systems to mobilise resources for development, although there is sufficient evidence from the experience of advanced economies that beyond a certain point, financialisation can be counterproductive. This chapter takes the position that financing development needs a ‘whole-of-system’ approach to development, and examines alternative sources of financing in the context of cultural and regional variances, including Islamic banking, and future sources of development finance.