PREVENTING THE NEXT FINANCIAL CRISIS
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Date
2015-08-24
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Publisher
UMT, Lahore
Abstract
The Capitalist system has undergone numerous crises in its history and they seem
to come one after the other. The Financial Crisis of 2007-2008 shook the whole
foundations of the International Financial architecture and raised further questions as to
what was inherently wrong with the system. Eyes turned towards the principles of Islamic
Finance to see if here lay the answer to the problems facing the financial system in place
in the world. This study has aimed to answer the question as to whether Islamic Finance
principles offer a solution to preventing Financial Crises. Initially an analysis of the
Conventional (International) and Islamic Monetary systems has been made in this study.
This study has then gone on to analyze three crises ; Black Wednesday 1992-the
currency crisis that shook Britain ; East Asian Currency Crisis and the Financial Crisis of
2007-2008.The mechanisms and the causative factors of these crises have been studied
and isolated. These causative factors have then been studied under the light of Islamic
Finance principles. In order to arrive at answers the methodology employed has been
analysis of existing literature and use has been made of podcasts of leading financial
experts. Access to experts who are at the same time well versed in knowledge of the
workings of the International Monetary System and Islamic Finance is very difficult and
limited. The study is unique in studying the Black Wednesday Currency Crisis in the
light of principles of Islamic Finance. The researcher has not come across any previous
study carrying out the above mentioned task. This study is also distinguished, from any
previous work, in analyzing these three crises from the perspective of Islamic Finance as
the contents of one thesis. The study has shown that the underlying causative factors of
the three crises are in violation of the principles of Islamic Finance. The main causative
factor behind the Currency Crises is shown to be the ability to carry out a Speculative
attack which is possible due to the facility of short sales. The study shows that short sales
are contrary to the teachings of Islamic Finance. Likewise the role of speculation in the
2007-2008 crisis is also highlighted along with the other causative factors. The study
concludes that if the causative factors isolated in the three crises, which are in violation of
the rules of Islamic Jurisprudence and still persist in the system, are removed from the
International Financial Architecture then this system would be given great stability and
the chances of a further crisis would significantly diminish.