Islamic Finance: An Alternative to the Conventional Financial System? ∗
Md. Shafi Alam*
The purpose of this research is to analyze the problems within the Conventional Financial System and to determine the primary causes of the ongoing financial crisis, which originated from the sub-prime mortgage crisis of the United States. It also highlights that one of the major causes of these crises was the lack of adequate market discipline within the financial system. This led to excessive lending, high leverage and ultimately the crisis. Risk-sharing, along with the availability of credit for primarily the purchase of real goods and services, and restrictions on the sale of debt, short sales, excessive uncertainty (gharar), and gambling, which Islamic finance stands for, can help inject greater discipline into the system and, thereby, substantially reduce financial instability. Islamic finance has observed unprecedented growth in the last five years, but it also offers many challenges and opportunities. The fundamental issue of faith and many other reasons restrict Islamic finance from being fully implemented in non-Muslim countries. But the consistent oil-money supply from the Gulf region makes Islamic finance attractive even to non-Muslim countries. Keywords: Islamic Finance, Islamic Banking, Interest Free Banking, Shari’ah Compliant Fund (SCF), Sukuk, Takaful, Riba
The current financial crisis has affected virtually the whole world, and the effects are gradually filtering into the real sector, causing economic recession. The financial system has decidedly played an active role in the accelerated development of the world economy, particularly after the Second World War. An unending stream of financial innovations, including the revolution in information and communications technology, has played a crucial role in this development. The system is, however, now plagued by persistent crises. * Student, Master of Arts in International Commerce, Graduate School of International Studies, Korea University.
38 • Korea Review of International Studies
According to one estimate, there have been more than 100 crises over the last four decades.1 Not a single geographical area or major country has been spared the effects of these crises. Even some of the countries that have generally followed sound fiscal and monetary policies have become engulfed in these crises. The prevailing financial crisis, which started in the summer of 2007, is more severe than any other in the past, and shows no significant sign of abating, despite a coordinated bail out of three to four trillion dollars by the US, the UK, Europe and a number of other countries. It has seized-up money markets and led to a precipitous decline in property and stock values, bank failures, and a nervous anxiety about the fate of the global economy and the financial system. This has created an uneasy feeling that there is something basically wrong with the system. There is, hence, a call for a new architecture. A new architecture would demand an innovation that could help prevent the outbreak and spread of future crises or, at least, minimize their frequency and severity. Since a number of the crises generally experienced around the world are of a serious nature and have been recurring persistently, cosmetic changes in the existing system may not be sufficient. It is necessary to have an innovation that would be really effective. In view of the financial crises which have been affecting the whole world, a solution in the name of Islamic finance could be introduced. As the global economic slowdown becomes more severe and protracted, many countries will be seeking alternatives, and Islamic finance can seize these new opportunities by offering standardized Islamic finance products with prudent regulations and supervisory arrangements. The beauty of the Islamic finance lies in its balanced and integrated approach towards a development...
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