Few economists would look to religion for the solution to a growing household debt problem, but Willem Buiter says Islamic finance is an unlikely future source of much needed innovation.

A traditional mortgage – which is the core offering of a traditional bank – is “poor financial design,” Citigroup’s chief economist tells The Australian Financial Review.

“Households are the last entities that should take on debt. They should take on equity-like stakes,” he says from his office overlooking New York’s Hudson River.

Households, he explains, have the least amount of collateralised wealth, which they can pledge against a loan – making them ill-suited to take on large amounts of debt.

“They have two big assets: human capital, which is not ‘collateralisable’, and the property, itself, which is illiquid and hard to realise,” he says.

The solution, he says, is an Islamic style mortgage.