Islamic Financial System Rescue to the Global Financial Crisis A Study on the Origin of Subprime Mortgage Crisis and rescue offered by Islamic Financial System(2010)
AbstractThe severity of the Subprime mortgage crisis has traumatised the foundations of the conventional financial system and has led to the search for cure of losses suffered and reforms against such crisis in future. During this crisis we have witnessed the impacts of irregularities done and insufficient monitoring of the complex financial products in the financial market. Standard regulations in the loan industry under conventional financial system proved to be insufficient to tackle the crisis. During the Subprime mortgage crisis, when the hot real estate markets were converting into foreclosure capitals, Islamic financial market was impervious from its impacts. This thesis focuses on the point of view of the author that the fundamentals of conventional financial system resulted in degeneration of an artificial economy, as the elements of interest, debt trading, speculation and uncertainty fuelled the voracity of the entities. Imperative doctrine and mechanism of conventional financial system is against the fundamentals on which the principles of Islamic financial system rest upon, therefore, proving them to be two alternative financial systems; we see that main features, which are prohibited in Islamic financial system, are the primary postulates of conventional financial system. As by following the principles of Islamic finance, there is no prospect for any kind of transactions involving interest, gambling and practice of speculation. Hence, the adoption of Islamic finance would have prevented the occurrence of the crisis on the first place. This system mitigates the risk at the levels of institutions in such a way that makes sure the real economic activity should be the main player, supervising the financial activity. Under Islamic financial system transactions involving interest or a commodity which are not owned or possessed can’t be transacted unless some kind of risk is born by the parties. Similarly debt is based on some real underlying asset it can’t be backed by some artificial financial arrangement. We know that interest in its nature creates artificial money supply which is not backed by real assets; as a result Interest allows the money to circulate and grow in large amount which ultimately becomes unpayable. Compounding interest, mere speculation, gambling and debt trading were the active causes of Subprime mortgage crisis. Securitisation instruments were not backed by the real assets consequently this created an economic bubble which ended up with the default of securitised debts. Unlike conventional financial system, Islamic financial system focuses more on productivity rather than credit worthiness. In the view of the author The worse part of this situation is that we are trying to fix the damage caused by the crisis on the same fragile foundations that basically caused the Subprime crisis, instead of trying to avoiding those principles and foremost causes that gave rise to these economic failures. The focus of this work is that Islamic financial system can not only be developed and used to mitigate the losses suffered as a result of Subprime mortgage crisis, but can successfully replace the conventional financial system and is capable of transmitting better economic results on longer terms.
- Islamic Financial System Rescue to the Global Financial Crisis A Study on the Origin of Subprime Mortgage Crisis and rescue offered by Islamic Financial System
Citation InformationShafaq Khan. "Islamic Financial System Rescue to the Global Financial Crisis A Study on the Origin of Subprime Mortgage Crisis and rescue offered by Islamic Financial System" (2010)
Available at: http://works.bepress.com/shafaq_khan/1/